BDCP Officials Continue to Inaccurately Describe Their Economic Study

In recent testimony to the Delta Stewardship Council, Karla Nemeth misrepresented the economic analysis of BDCP, perpetuating confusion over what this report found.  Ms. Nemeth's statement is typical of the confusing and inaccurate descriptions of this report by various state officials, including Jerry Meral and John Laird.

According to Maven's notebook meeting summary, Ms. Nemeth explains that BDCP will stabilize water exports at a level of at least 4.7 million acre feet (MAF) annually using the high-outflow scenario.  She then describes the results of the economic analysis as follows,

“With BDCP stabilizing existing water supplies with a yield of about 4.7 MAF, our most recent economic analysis demonstrates about a $5 billion economic benefit that is mostly the result of reducing the risk of future shortages." 

Given how much the Delta Plan expounds on the subject of risk, I am kind of surprised Phil Isenberg or another member of the Delta Stewardship Council didn't interject right there to ask Ms. Nemeth if her use of the term risk was consistent with the Delta Plan, especially since she said most of the benefits come from risk reduction.  The Stewardship Council's Delta Plan goes to great lengths to define risk as probability times consequences, it even has graphics illustrating the concept.  But the BDCP Economic Analysis doesn't treat a future reduction in water exports without BDCP as a risk with a probability, it treats low probability risks as certainties with 100% probability.  

In fact, the positive result of the BDCP economic analysis is not "the result of reducing the risk of future shortages."  It is the result of comparing BDCP to an alternative that is extremely bad for the contractors and extremely good for the fish, and then having an analysis that counts the harm to water exporters and ignores the benefits to the fish.  An accurate statement from Ms. Nemeth would state, "With BDCP stabilizing water supplies with a yield of about 4.7 MAF, our most recent economic analysis demonstrates about a $5 billion economic benefit for the water contractors compared to a scenario where tougher environmental regulations reduce average exports to about 3.4 MAF by 2025."

You might think I'm nit-picking, but Ms. Nemeth's misstatement is about a $10 billion error, meaning that the difference in the value of water supply reliability in the scenario used by the Brattle Group and a risk analysis implied by Ms. Nemeth is likely to be in the neighborhood of $10 billion. 

What is the probability that by 2025, exports would be reduced below 3.5 MAF due to regulations?  While this scenario is the water contractors' worst nightmare, the probability of this occurring is very very low.  Thus, the value the Brattle Group has assigned to avoiding this outcome should be multiplied by a very low probability, which is the approach they took to valuing the reduction in earthquake risk where they multiplied the loss from a year-long earthquake outage by an assumed 2% annual probability of it occurring.

A journalist recently sent me a link that shows implementation of the State Water Board's draft flow criteria would reduce water exports to 3.7 MAF to 3.9 MAF (see Appendix B here), and most observers believe the chance that those criteria are implemented is extremely low.  Thus, it seems to me that 3.7 MAF is a reasonable lower bound for future water exports without the BDCP, and this lower bound is even higher than the 3.4 MAF the BDCP used as the basis for comparison in their Economic Analysis.  No wonder Dr. Sunding and BDCP are getting so much flak for making this ridiculous assumption.

If 3.7 MAF is a resonable lower bound on future operations, what is a reasonable upper bound?  Given the barrage of legislation and lawsuits against the current biological opinions and the ESA itself, it seems to me that a reasonable upper bound on future operation would be a return to 2000 - 2005 conditions where water exports exceeded 6 MAF per year.  At the outset of BDCP, many water contractors said their goal was to restore exports to 6.5 MAF.  Thus, I would say a probable range of future outcomes is 3.7 MAF to 6.5 MAF, and the current biological opinions are in the center of that range.

That doesn't mean that the BDCP doesn't have some regulatory risk reduction value to the water contractors.  But a proper valuation of that risk would put likely put its value in the millions, not billions of dollars.  It would be similar to the valuation of seismic risk reduction of the tunnels which the BDCP economic analysis values at around $400 million.

Speaking of economic risks, there also other important components of economic risk that the BDCP ignores, especially on the cost side.  What is the risk that the tunnels take more than 10 years to build as assumed in the analysis?  What is the risk that BDCP costs more than currently estimated?  The BDCP warns that their regulatory assurances aren't guarantees, so what is the regulatory risk that remains even with BDCP?

I remain very confident that BDCP results in a net economic loss for the water agencies' ratepayers of around $7 billion compared to the status quo.  

Stockton MSA tops the U.S. in home price appreciation according to FHFA

On page 48 of this morning's release of the FHFA home price index for the second quarter is the following list of areas with the fastest home price appreciation in the U.S. over the past 12 months.

National MSAs, 1 year home price appreciation ranking.

1. Stockton-Lodi, CA 19.40% 

2.  Phoenix-Mesa-Scottsdale, AZ 18.47% 

3.  Las Vegas-Henderson-Paradise, NV 17.59% 

4. Bend-Redmond, OR 16.73% 

5. Modesto, CA 16.01% 

6.  Sacramento--Roseville--Arden-Arcade, CA 15.45% 

7.  Vallejo-Fairfield, CA 15.42% 

8.  Reno, NV 15.09% 

9.  Madera, CA 14.78% 

10. Oakland-Hayward-Berkeley, CA 14.56%  

Of course, virtually all of these cities topped the price deprecation lists if you go a few years back.  For example, the Q4 2008 release showed Stockton at 291 out of 292 metro areas with -41% change in home values over 1 year. (Merced was last with -49% change in that release.)  Even people like me who felt local property values had dropped too far should be mildly surprised and slightly impressed to see the Stockton MSA at #1 on this list.

The BDCP Economic Impact Study

Between a family vacation and the University of the Pacific network meltdown (entering day 5 of no email), I am in both physical and virtual isolation.  I did see the press release and a few news articles about the release of the BDCP's statewide economic impact report.

A few quick thoughts.  This is not a valid benefit-cost analysis.  Without even getting into some of the deficiencies in the calculation details (e.g. overestimates future water demand, discount rate is too low, etc.), it suffers from three fatal structural flaws.  While the consultants are very capable economists, their report contains these flaws and ridiculous assumptions for the simple reason that the Delta tunnels can not be economically justified without them.  Below is my summary of the three big structural flaws.

1.  The $15 billion Delta tunnels must be subject to a separate analysis.  BDCP invalidly ties environmental restoration projects together with the tunnels into a bundle, although these conservation projects could be pursued without the tunnels. The principles of benefit-cost analysis, and the state's own guidelines are crystal clear here, the tunnels must be justified independently.  

2.  The BDCP analysis compares the project to a single ridiculous alternative, where export water supplies are cut another 25% below the current restrictions in the biological opinions.  While this might be an extreme scenario to bracket the analysis, and some environmental groups support such restrictions, it is disingenuous to portray it as the most likely outcome in the absence in the BDCP.  This is particularly true since the water contractors and the state Department of Water Resources are suing that the current biological opinions are too restrictive and unjustified by science, and they even won the last skirmish in court on this issue.  The Department of Water Resources can only argue that this is the most likely outcome if they think that the science and law supports an additional 25% cut in water exports, a position that is in direct conflict with the stance they have taken in federal court for years.  BDCP has to take this contradictory position to economically rationalize the tunnels since spending $15 billion on tunnels that don't increase water supply rather obviously doesn't make economic sense.

The EIR (environmental impact report) uses a completely different no-action alternative, a continuation of the current biological opinions, which can be justified.  Using this more realistic baseline as the basis for comparison, the tunnels fail the benefit-cost test by a wide margin.  I demonstrated this last summer, and the state's consultant, Dr. Sunding acknowledged this in response to a question at the Metropolitan Water District.

In addition to an alternative that continues current regulations, the tunnels should also be analyzed against a set of no-tunnel BDCP alternatives.  These would include options focused on seismic levee upgrades, as the Delta Protection Commission has advocated, and would include a version of the delta corridors plan which is the through-delta alternative discussed in the EIR.  These no-tunnel alternatives would be BDCP alternatives, meaning they would convey the same regulatory assurances to the contractors under the Endangered Species Act as the state's preferred project with the tunnels.  They would contain the environmental restoration elements of BDCP, so the environmental benefits of restoration would cancel each other out, and the benefit-cost analysis would focus squarely on the tunnels.

3.  The BDCP economic impact analysis does not place an economic value on the most important environmental impacts, particularly the endangered and threatened fish species that are driving the entire conflict.  This issue is critically important here, because the BDCP economic analysis uses a no-tunnel alternative that is an environmental activists dream, it is very likely to be more beneficial to the fish than the BDCP plan.  The BDCP statewide economic impact analysis makes an assumption to boost water supplies to increase water supply benefits, but does not account for the environmental cost on the other side of the ledger.

Valuing the environment is a sticky and controversial issue, but it is an issue that must be addressed.  You can't just waive your hands and ignore the economic value of recovering fish populations like this recent BDCP economic report.  In this context, I think the best approach is to define alternatives that are expected to deliver roughly equivalent environmental benefits.  Fortunately, this is possible to do for the tunnels, since the BDCP EIR analysis basically says that the tunnels alone provide no net benefit for fish relative to the current biological opinions.  In other words, ignoring the environmental effects could be justified if the current biological opinions are used as the baseline for comparison, as they are in the EIR.  Following the structure of the EIR is also highly desirable to maintain consistency across the various reports.  That is the approach that I took in the benefit-cost white paper I put out last summer.  The bottom line is that if the BDCP is going to use a baseline alternative that is more protective of fish than the tunnels, it is imperative that the value of those fisheries is explicitly included when they weigh benefits and costs.

Divergent Jobs Surveys: Household Survey Shows California Has Fully Recovered Pre-Recession Peak, but Payroll Survey Shows a Different Story

The BLS Household Survey released today reports 17.035 million employed Californians, finally exceeding its pre-recession peak of 17.023 million in January 2008. 

The BLS Payroll Survey reports, 14.612 million non-farm payroll jobs, still 600,000 jobs below its pre-recession peak of 15.213 million in July 2007.

Overall, economists view the payroll survey as more reliable due to a larger sample and its annual benchmarking to full payroll tax records.  However, they are different measures of employment (employed people versus jobs) and the household survey is more comprehensive in that it captures self-employment and agricultural work.

There are a couple of potential explanations for this divergence.  Of course, one possibility is sampling error, and one must never forget we are dealing with preliminary estimates from surveys that are subject to revision as more data becomes available.

Other explanations are a structural shift in the California economy away from payroll jobs and towards self-employment.  More people could be working as independent contractors rather than employees across a variety of different industries, and I have heard plenty of anecdotal stories to support that.  Self-employment is more common in professional services which has been one of the strongest growing sectors in California for some time.

In addition, some of the traditionally biggest sectors for self-employment are construction and finance (particularly real estate related finance), so the faster growth in the household survey could reflect the growing impact of the real estate recovery on the job market.

Interestingly, the household survey measure of employment did not decline as much as payrolls during the recession even though construction and real estate was the hardest hit sector.  That suggests that there is likely an on-going shift towards self-employment across sectors and the household survey is no getting a second boost from the real estate recovery.

Unlike Stockton, Detroit targets pensions on its way to probable bankruptcy

For Stockton residents depressed about their bankrupt city, I recommend a review of Detroit's emergency managers proposal to creditors of the losses they should take to help the city avoid bankruptcy.  Detroit defaulted on its pension bonds this month, a little more than a year after Stockton first defaulted on its bonds. Other parts of Detroit's dilemma will be familiar to Stocktonians: low levels of public service, high crime, and poverty.

But the driver of Detroit's municipal distress is quite different than Stockton.  Detroit's biggest fundamental problem is unrelenting large-scale population decline, as people abandon the City for its safer, lower tax suburbs.  Stockton continues to grow, albeit much slower than in the past.  Stockton also has lower current tax rates than Detroit, and is likely to use a tax increase to help itself escape bankruptcy.  Detroit can't realistically raise taxes any higher (property tax rates are about 6 times higher than California, there is a municipal income tax, and more) as there is evidence that its high taxes are part of what has been driving residents to the suburbs.

Also different is the proposed approach to the City for financial restructuring, and this is what will demand the most headlines and has the greatest potential implication for Stockton's case.  Like Stockton, Detroit's emergency manager proposed big losses for the unsecured bonds, but is taking a dramatically different approach in proposing significant cuts to vested pension benefits, which he views as unsecured debt.  Stockton has wiped out retiree medical benefits, but is not proposing to change pensions.  It should be noted that the proposal to cut pensions in Detroit isn't coming from its elected officials or a city manager hired by an elected city council.  The Governor of Michigan appointed an emergency manager for the City, and it is the appointed emergency manager that is targeting pensions.

Michigan's state constitution protects pensions, similar to California, so I doubt Detroit's unions will go along with this pre-bankruptcy proposal and will try to defend their pensions in bankruptcy court.  Thus, Stockton may not be the nation's largest bankrupt city for much longer.

Changing the Baseline: The Biggest Problem in the New BDCP Economic Rationalization of the Tunnels

Both environmental assessments and economic assessments of proposed major infrastructure critically depend on a baseline or no-action scenario.  This scenario defines the conditions that are expected if the project is not built and is used as the basis of comparison for the projects impacts.  The same no-action scenario should be used for environmental, economic and financial feasibility assessments.  However, the latest BDCP documents use a different baseline for the economic analysis than the environmental impact report (EIR).  When analytical consistency gets in the way of rationalizing the tunnels, BDCP just switches the baseline.   

The BDCP EIR no-tunnel (i.e. no-action) scenario makes the reasonable assumption that through-Delta operations would continue under the current pumping constraints imposed by the Endangered Species Act through "biological opinions."  The EIR no-action scenario estimates average water exports at initial operations of about 4.7 million acre feet (MAF) per year at initial operations declining to 4.4 MAF towards the end of the 50 year permit.  The EIR estimates that with the tunnels, water exports would be 4.4MAF to 5.3 MAF in the "late long term", a change of between 0 MAF and 0.7 MAF per year.

In contrast, the economic analysis assumes that without BDCP, additional ESA regulations would bring even tougher restrictions on water exports between now and 2025 such that average water exports at initial operations would be 3.4 MAF to 3.9 MAF.  Thus, building the tunnels would increase water exports by between 1.3 MAF and 1.7 MAF per year compared to no action.  In other words, the economic analysis assumes that without the BDCP tunnel plan, ESA regulations would add another 20-25% cut to water supplies on top of current limits.  Never mind that no such plan has been proposed, and that the California Department of Water Resources (DWR) and the water contractors are trying to weaken the current restrictions in court.  Clearly, DWR has no sincere intention of implementing this more restrictive scenario, they are just conveniently adopting it for the economic analysis to rationalize building the tunnels.    

This switch of the no-tunnel baseline is probably the most serious of several problems with the BDCP economic analysis, and it will create some very practical headaches for the BDCP.  The fish and wildlife agencies that have to approve BDCP will certainly ask why the financial feasibility analysis depends on assumptions that are inconsistent with the EIR, and if DWR is actually proposing such restrictive operations on exports in the absence of BDCP.  The inconsistency also gives BDCP opponents another issue to use in lawsuits, and it could even undermine the water contractors case in their existing litigation over the biological opinions.

Considering all the problems the state is creating for itself with this shift in baseline, why would they do it?  Because they can't demonstrate financial feasibility without it.  Using the BDCP's own estimates of costs and benefits, I demonstrated a year ago that the tunnels can not be financially or economically justified by comparing them to the no-action scenarios of the draft EIR.  The sleight of hand with the shifting baseline is simply a clever, hidden way to bring back the "value of regulatory certainty" argument the state attempted last summer (see this blog post from last July, and this one from January where I worried that they might try this baseline shifting stunt). 

The shifting baseline creates problems for the BDCP environmental approval.  Why?  If this more restrictive baseline were used for the EIR, the tunnels would almost certainly fail the EIR analysis.  The tunnels could not be justified as a Habitat Conservation Plan (HCP) under the ESA since the no-tunnel scenario would be more protective of endangered and threatened species than the proposed tunnel project.  [See Matt Weiser's article in Sunday's Sac Bee for a discussion of how the EIR finds the tunnels are not even anticipated to benefit endangered fish species compared to current conditions (i.e. the EIR baseline).] 

In addition to the EIR, the tougher baseline assumption would create problems for a true statewide benefit-cost analysis.  The recently released economic analysis only considers the benefits and costs of the tunnels to the water contractors.  In contrast, a statewide benefit-cost analysis would include benefits and costs to the environment and to other effected parties in-Delta, upstream, and fishing.  While the baseline shift creates water supply benefits from the tunnels for the contractors, the increase in water supplies raises the tunnels' costs to the environment and these other parties.  Thus, the change in assumption that increases the tunnel's water supply benefits helps financial feasibility to the contractors, but would hurt the tunnels comprehensive benefit-cost justification. 

I think this maneuver is a major reason why the BDCP cancelled the benefit-cost analysis and postponed the planned release of chapters 8 and 9 by a month.  It is also a sign of how the BDCP is going to increasingly desperate measures to keep their sinking project afloat. 

Additional Note 6/18:  A BDCP steering committee presentation from March 2010 describes the requirements of the Alternative to Take analysis (ch 9 of the BDCP that contained the new economic analysis).   On the last slide of the presentation, the no-action alternative is described as the existing biological opinions, consistent with the EIR approach.  This further shows that the super-restrictive water supply scenario introduced in the new chapter 9 was a last minute change to increase the economic benefits attributed to the tunnels.  Using the EIR no-action assumption, the tunnels would have a negative net benefit and be judged as financially infeasible.

Will Fresno Follow Stockton Into Bankruptcy? I Don't Think So

The City of Fresno's budget for next year assumes millions of dollars in new franchise fees from trash privatization, but these fees depend on the outcome of last week's Measure Z vote.  The Measure Z vote is very close, provisional ballots are still being counted, and the outcome won't be known until next week.

Some people have been saying that Fresno is the next Stockton, and that failure of the trash privatization measure would push it towards a bankruptcy filing.  While I am not nearly as familiar with Fresno's budget as Stockton, I don't see a Fresno bankruptcy.  There are plenty of similarities between the two cities, but Fresno's financial situation doesn't appear quite as dire as Stockton, the level of services has not been cut as low as Stockton, and there appears to be resolve in City leadership to avoid bankruptcy.

There are some obvious similarities between the two cities.  Both are in the Central Valley and have similar economic statistics, although Stockton is closer to the bay area and had a bigger housing boom and bust.  Both cities have a lot of debt for similar things like ballparks and mammoth pension bonds, but Fresno issued its pension bonds a long time ago rather than Stockton who dumped its bond revenue into CalPers at the top of the market and took a much larger financial loss on the deal.  Fresno administers its own pension plan, whereas Stockton is in CalPers, and Fresno has somewhat lower pension costs (although they use different actuarial assumptions than CalPers so it is impossible to do an apples to apples comparison of pension liabilities) and does not offer the kind of unfunded retiree healthcare benefit that Stockton did prior to its bankruptcy filing.  Here are some additional high level comparison numbers I have gathered from the two Cities' budgets and other sources (there is a bit of rounding here for simplicity).

Fresno:

Population: 500,000

General Fund Revenue: $275 mil, about $550 per capita

Police: 717 (about 1.43 per 1,000 residents)

2012 Murders: 51

Stockton:

Population: 300,000

General Fund Revenue: $160 mil, about $533 per capita

Police: 330 (about 1.1 per 1,000 residents)

2012 Murders: 71

Since both cities are spending about half of their general fund on police, the police staffing and murder statistics provide some background on the level of services.  Both cities have cut police, but Stockton's cuts have been much deeper and had a larger impact on crime.  Stockton's murder rate in the year of its bankruptcy filing spiked to double the Fresno rate as police staffing dropped to arguably the lowest level of any major American city.  Fresno police staffing is not high, but they would have to lay off about 150 more cops to get to Stockton's level, and no one is contemplating those kind of cuts regardless of the outcome of the trash privatization measure.  Stockton had more excessive employee compensation and retiree benefits, and was unable to gain significant enough restructuring without bankruptcy protection.

Through the 1990s and 2000s, Fresno was similar to Stockton but did not quite go to the same extremes.  Its costs of delivering services, primarily driven by personnel costs, remained lower than Stockton.  I am not sure if this is due to better management or its greater distance from the bay area and smaller economic boom reduced cost pressure.  I was a little surprised to see Fresno had slightly more general fund revenue per capita, they might receive more sales tax since they are a regional service center and more isolated from alternative shopping opportunities.    

Fresno certainly has severe financial problems, and that City may well have to endure one more round of painful budget cuts to fully stabilize its budget.  I expect it will go that route rather than a bankruptcy filing. 

However, it should be noted that an escalating public safety emergency is what made additional cuts unacceptable in Stockton and made the bankruptcy filing inevitable.  Similarly, the bankruptcy outlook for Fresno could change if conditions, both financial and non-financial, change.

New BDCP Documents Say Taxpayers May Subsidize the Delta Tunnels Due to Uncertainty Over Tunnel Impacts

The newly released BDCP documents contain the following passage labeled as a "Note to Readers".  (chapter 8, page 80).  (6/7 note:  Some readers are having a hard time deciphering this language and its significance.  This is all new language to the BDCP cost documents, and shows that the BDCP wants to change its financing assumptions to increase public subsidy of the water contractors and shift costs from agricultural to urban water users if they can get approval.  None of it shows up on the glossy BDCP handouts for the media.  Emphasis below added by me.)

Note to reader: Details of the financing and repayment described in this section from the Authorized Entities and other sources are still being determined through on‐going discussion between the state and federal governments and between the government, the state and federal water contractors and other interests. Issues still under discussion include aligning the financing and repayment responsibilities with the “beneficiary pays” principle, among other related issues.

The decision tree process that is part of the of the new north Delta water conveyance facility (CM1) will determine the level of fall and spring outflow provided by BDCP for delta smelt and longfin smelt, respectively, at initial operations. The decision tree process is designed to address the scientific uncertainty surrounding these parameters. Because each branch of the decision tree has different water supply implications, there is uncertainty in the water supply provided by BDCP. To offset this uncertainty, the state and federal governments may consider additional investments in BDCP consistent with the “beneficiary pays” principle. As is typical of projects of this nature and scope, the final financial arrangements may require appropriate approvals, contractual arrangements, and additional legislative authority. If adopted, these additional investments will be incorporated into the public draft BDCP and may modify the funding assumptions presented here.

It is difficult to interpret this language, but two things are clear.  First, the water contractors want the government to pick up more of the BDCP cost that is currently allocated to them, and are trying to use uncertainty as a justification.  Second, the costs of the tunnels may not be allocated among contractors proportional to the water received, directly contradicting the public statements of the Metropolitan Water District and opening the door to the urban subsidy of agricultural water.  This would be a major change, but is not unexpected to me or anyone else who long ago realized that the tunnel financing assumptions simply wouldn't work. 

The notion that the decision tree construct requires a public subsidy to the water contractors is ridiculous.  The decision tree does not reduce water supply over what would be approved without it.  As I recall, the decision tree concept, which creates a structure to postpone water supply decisions to the future, was created last year because environmental concerns about BDCP were resulting in water supplies that were too low for the contractors.  It is hoped that the decision tree structure will be acceptable to environmental regulators today, and postpone water supply decisions to a later date when water contractors hope for a better outcome.  I don't know that there is a scientific reason to expect a better outcome, but the framework certainly gives the water contractors a lot of leverage to apply political pressure on regulators to approve higher water supplies in the future. In other words, the decision tree itself is a creation to benefit the water contractors, and it is a poor justification for a public subsidy.  The decision tree creates the possibility of higher water supplies in the future, postpones the tough environmental decisions to the future, and puts enormous pressure on future environmental regulators to approve higher water supplies after the tunnels have been built and tens of billions of dollars have been spent and borrowed.

In the interest of transparency, it seems the government officials should disclose exactly what has been proposed and is being considered.  Without this information, it is fair to speculate.  I fear that the subsidy funds will not be appropriated in the near term since budgets are tight, and thus the subsidy funds will be triggered in some way if the decision tree leads to a low water supply outcome.  A budget trigger like that is enormously effective in applying political pressure to a regulatory decision.  The incentives in the decision tree framework are bad enough as it is, we don't need to make it worse.

June 6 Note:  I also found it interesting that this new subsidy language is inserted in a document that also purports to demonstrate that the tunnels create great economic benefits (don't believe it).  A few pages after this note about new subsidies, BDCP says tunnel financing isn't a concern because the total costs are low relative total personal income in the region.  If the tunnels are such a great deal for the water agencies, why the call for a subsidy?

New BDCP Economic Studies Use Outdated Growth Forecasts to Project an Artificial Water Shortage

There are so many problems in the cost and economic reports released last week by the BDCP, it is hard to know where to begin.  From the messages in my in-box, I am not alone in identifying some of the more serious errors in the analysis that exaggerate water supply benefits to justify the tunnels.

Some of the serious problems people are talking about include 1) a large, poorly justified shift in the No BDCP water supply scenario that is inconsistent with the Environmental Impact Report and other BDCP documents that allows them to claim higher economic benefits, 2) ignoring 1 million acre feet of alternative water supply development identified in local water plans of southern California water agencies and assuming high costs for alternative supplies, 3) ignoring the conservation targets and regional self-sufficiency requirements of the 2009 Water Package and the Delta Stewardship Council's Delta Plan, and 4) some new language (see page 8-80) that says the state and federal government are considering picking up more of the costs currently allocated to the water contractors.

This post isn't about those issues, it is about the inaccurate population and economic growth assumptions in the BDCP report that is inflating the estimated urban benefits of BDCP.  To understand its significance, you have to realize that shortages from the estimated levels of urban water demand are driving the vast majority of the economic benefits BDCP is calculating.  So it is critically important to estimate urban water demand with best and most current information.

Specifically, for Los Angeles, Orange, Riverside, San Bernadino and Ventura Counties, the growth projections used in BDCP are taken from their 2007 Regional Transportation Plan, and in San Diego it is based on "Series 11" from 2006.  Both of these projections are out of date and have been replaced by the local planning agencies with much lower growth projections that incorporate the results of the 2010 census.  Likewise, the California Department of Finance released updated projections for these counties in 2012 and again earlier this year in 2013 that are the official estimates used for state planning and are now driving housing and transportation planning at the county level.  The 2050 DOF population projections for California are about 15% lower (51 million instead of 60 million) than the projections commonly used a decade ago that are still being used by the BDCP.

The BDCP sources only project population to 2035, but the BDCP study appears to extrapolate similar growth rates beyond this point.  In 2035, they estimate population of 28.04 million residents in these 6 key urban counties, whereas the state's updated official projection from DOF estimates 25.25 million residents.  In other words, official updated growth estimates find 2.8 million fewer water demanders in 2035 than BDCP assumes, about 10% lower.  BDCP study doesn't give an exact number for 2050, but it appears that the overestimate grows to at least 15% similar to the old state projections from a decade ago.  I won't detail it here, but the economic projections show commercial and industrial demand is also about 15% too high.

So what does the new BDCP say about growing urban water demand and the level of shortages?

In the agencies receiving SWP supplies, urban demand is projected to be 5.64 MAF in 2025 (the year CM1 would become operational) and is estimated to grow to 6.18 MAF by 2050. (chapter 8, page 102)

This estimate is 15% too high due to the aggressive forecast, adjusting it would bring 2050 urban water demand to 5.25 MAF (million acre feet), a decrease of 0.93 MAF from BDCP's 2050 estimate.  The BDCP study states 2012 urban demand is 5.1 MAF, so this adjusted demand growth to 5.25 MAF would reflect very slow growth over the next 40 years and be a better fit to observed water demand over the past 20 years.  

So how does this demand decrease of 0.93 MAF from using a realistic growth forecast compare to their projected urban water shortage with the inflated forecast?  The BDCP report states.

By 2025, without BDCP shortages in the urban agencies receiving SWP deliveries are predicted to be 0.50 MAF on average. By 2050, these mean shortages are projected to be 0.84 MAF. The BDCP would mitigate these losses by lessening the frequency and magnitude of water supply shortages. 

 In summary, the BDCP is projecting urban water supply shortages without BDCP of 0.84 MAF.  However, they are exaggerating urban water demand in 2050 by 0.93 maf through the use of aggressive growth forecasts that are 15% higher than the state's official planning forecasts.  In other words, the future urban water supply shortages the BDCP predicts are unlikely to exist.

And it should be noted, these shortage calculation don't even account for the over 1 MAF of new alternative supplies the San Diego County Water Authority has identified in local planning documents that BDCP is ignoring, not to mention the underestimate of conservation.  Urban water demand is not growing now and is unlikely to grow significantly in the future.

The most irritating thing to me is that the consultants and the local water agencies know they are using very high projections.  Their staff knows they conflict directly with the projections being used in financial, housing and growth projections in state and local governments throughout the state.  And the Metropolitan Water District knows its sales are not increasing. 

June 5 Postscript:  If there is no shortage as defined by the BDCP study, that does not mean the water does not have value to urban users.  But the value of water supplied through the tunnels would be much less without a shortage situation.  The BDCP study places the value of water that reduces these urban shortages at a whopping $1,204 to $1,414 per acre foot in 2012 dollars.  If that value were much under $1,000 af, the net benefits of the tunnels would be negative even with all the other pro-tunnel assumptions in the report.

Delta Levee Innovations

Since working on the Economic Sustainability Plan with Dr. Pyke, I have been promoting "fat" seismically resistant levees for the Delta as a cost-effective solution to the Delta problem.  Now UC-Berkeley engineers are developing even more creative solutions for seismically resilient levees. 

Check out this new article from Innovations, the UC-B Engineering newsletter.

In the basement of Davis Hall, Hamed Hamedifar (Ph.D.’12 CEE) is rattling scale models of levees on a shake table, subjecting them to vibrations replicating the magnitude 6.9 El Centro earthquake of 1940. Hamedifar is designing a plate pile system, rectangular plates affixed to three-yard beams, to bolster the strength of levees in places like the California Delta...For one of his research projects, Hamedifar borrowed a technique of using plate piles to prevent landslides that was invented by Richard Short, a geoengineering lecturer at the college and Hamidifar’s mentor, and adapted it for embankments and levees. “It is a very reliable method—cost-effective, environmentally friendly and proven to work,” says Hamedifar...Hamedifar estimates that stabilizing levees with plate piles will save time and money...The average plate pile installation would require 10 days from permitting to finished product, and would cost less than $1 million...In repeated tests, levees with the plate piles showed no deformation post-shaking. Without the plate piles, the levees failed, dropping three to four feet. “It is an exact model of what we are doing but scaling it down for levees,” said Short. “There is a lot of science to scaling it down and doing those tests. The uniqueness is the seismic stability.”

$1 million per mile!  Wow, that suggests you could seismically reinforce the Delta levees for under $1 billion, even cheaper than the $2-4 billion we estimated in the DPC economic sustainability plan.

You would think DWR would be jumping for joy.  Maybe not.  Check out this passage from a UC-B alumni association blog on the same topic.

“Richard Short and I made presentations to both the California Department of Water Resources and the U.S. Army Corps of Engineers,” Hamedifar says. “We asked for feedback, but they had no complaints, couldn’t point out any flaws in the technology. But it was clear they weren’t interested—they were obviously determined to focus on another solution.” That kind of tunnel (or Twin Tunnels) vision probably won’t resolve the Delta’s dilemma, Hamedifar says.
“It’s always risky to push just one solution for an engineering problem like this, especially if the idea being pushed isn’t demonstrably better than other ideas,” he says. “It’s likely you’ll need a multitude of approaches, not just one. The Tunnels will involve huge fiscal and environmental costs, and they’ll take years to complete. Our approach is cheap and effective, and it can be done quickly. We think it at least deserves a fair hearing.”

Sounds familiar. 

Regardless of your preferred technology towards a more seismically resilient Delta (I still like the wide crown benefits of fat levees where there is room), it is worth mentioning yet again that seismic levee upgrades have not only lower costs than the tunnels, but higher benefits.  They will save lives!  And they will protect critical energy, transportation, and local water infrastructure.  They will protect property and agriculture.  And yes, they will also protect export water supplies from catastrophic failure. 

The state should be dedicating its resources to developing levee technology and alternative water supply technology, instead of the twin tunnels.  These technological solutions help everyone, and many have potential applications to solve problems around the world.

BDCP is a failure.  It's time for fresh thinking and innovation.

Friday News: Stockton to consider taxes for the November ballot, Kings are Sold, and Unemployment is down to 9%

I guess it is a good thing that the release of our next economic forecast was delayed until next week. I have a lot of editing ahead of me this weekend.

In what I thought could be a potentially newsworthy passage, I had written that the City should move forward now to put a general tax increase before voters in November, even if negotiations with the creditors are still on-going.  I had heard and thought that the City Manager and bankruptcy counsel felt that any request for a tax increase had to come later, after a plan of adjustment were approved.  I disagreed, and thought they should move ahead with taxes as soon as bankruptcy eligibility was confirmed, and voters could be assured that if they voted for taxes it wouldn't just be swallowed up by unsustainable employee contracts (the likely outcome if taxes were approved prior to 2012).  The Mayor pushing his competing Safe Streets tax initiative for the November ballot only increases the urgency.

Well, this afternoon the Stockton Record posted this.

Stockton's proposed budget includes call for tax hike

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By The Record

May 17, 2013 3:48 PM

STOCKTON — The city could ask voters as soon as November to raise taxes to pay back some debts suspended in bankruptcy and bolster Stockton's fight on crime.

 

I am happy to see this development, and even happier that it isn't appearing the day after the Record runs a story in which I suggest it. I would urge the Council to move ahead now with some sort of tax initiative. If the details about the bankruptcy plan of adjustment are still too murky to support a long-run general tax initiative, then they should offer a very short-run tax for public safety as a substitute or compromise with the Mayor's plan.

In Sacramento, the Kings prevailing with the NBA and the Maloofs quickly selling to the Sacramento group is another pleasant surprise. While there are some legitimate concerns with the arena deal, overall, this is another positive development.

And the California unemployment rate dropped all the way to 9% today. This was a good day. A great way to start the weekend. Time to open a bottle of wine.

[Some minor content and formatting edits were made Sunday upon rereading this mess. I confess I had already opened the wine when I wrote it.]

May Revise Budget Forecast

A lot of people are surprised at the pessimistic tone of the economic and revenue forecast in the revised budget released today.  I don't think the actual economic outlook has declined, it is just that the Governor is backing away from the relatively optimistic forecast they assumed for the January budget release.  Using a slightly optimistic forecast in January allowed them to declare that the 2013 budget was balanced with much fanfare in the local, state and national press about California's comeback and the Governor's success.

This is what I wrote in January when the Governor's original budget was released.

"People most often ask me about the economic and revenue forecast in the budget. I think it is a little optimistic, but not unreasonable, and it is important to note that their forecast optimistically assumed the 2% payroll tax cut would be extended for 2013. That assumption obviously turned out to be wrong, and will have an effect on future forecasts for the May revision. My initial estimate is that revenues are probably going to be $1-2 billion less than their projections, a little larger than the budget's reserve."

In other words, I thought the January budget actually had a slight deficit that was being covered up by a moderately optimistic forecast.  The May revised budget released today has $1.2 billion less spending for 2013-14 than the Governor's January proposal, in line with the $1-2 billion deficit I predicted in January.   Also, the budget decrease for 2013-14 isn't quite as bad as it looks, because spending in the current year increases with the shift of capital gains revenue forward.

The wild card is the extent to which capital gains were accelerated.  It should be noted that the Federal Government just announced a significant downward revision in the current year Federal budget deficit, but like California, it is largely attributed to a one time increase in capital gains income as investors accelerated capital gains into 2012 before taxes increased.  So California is not alone in viewing these income tax revenues as a one-time phenomena.

Some updated thoughts on the Sacramento Kings' Deal

The news broke yesterday that the prospective new Sacramento Kings' owners agreed to give up their revenue sharing benefits when a new arena is built.

The precedent of that concession seems huge for the NBA, as this revenue sharing agreement was one of the key issues in the 2011 NBA lockout, and was a big deal for the players association.  The report I read said the NBA negotiated this with the group making the bid to keep the team in Sacramento that it just didn't come out of the blue.  While the initial reaction is that it is a vote of confidence in the Sacramento market by Vivek Ranadive and his ownership group, and it is, it also seems like it could be a back door way for the NBA owners to try to take apart pieces of the 2011 collective bargaining agreement that they don't like.  I would be interested to know if the players association has a point of view on this development.

I have also taken another look at the arena deal as some more details have been trickling out on the envisioned financing structure (i.e. interest only 8 years on the parking bond) and I wasn't aware of the value of the billboards given away and some other terms.  It is still better than last year's deal, but I think my initial estimate of a $4-8 million annual toll on Sacramento's general fund was too low, and it is probably more like $8-12 million.  The city does get some benefit for that investment, and it is a close call on whether it is worth it to the city.

Which Public Workers Are Most Overpaid In California Compared to National Norms? Water Utilities or Public Safety

There has been a lot of talk in California water about the inability of the State Water Project (SWP) to compete with the salaries paid by local water utilities.  The problem for SWP is real, and I agree that with the Delta Stewardship Council that it is a threat to water supply reliability.  But some comparative wage data gives a little different perspective to the problem, and has implications for other statewide water reliability issues as ratepayers will soon be asked for large rate increases to pay for the Delta tunnels and other grandiose projects pushed by local water agencies.

Are State Water Project wages too low, or are local water utility wages too high?

The data below comes from the Census of Employment and Wages, a full nationwide census of wages by industry compiled from tax filings by the Bureau of Labor and Statistics.  It doesn't include employer paid benefits, like pensions.

In the private sector, the average job in California pays 13.6% more than the average job in the U.S.  That is mostly driven by the huge salaries in the state's tech and entertainment industries, wages are pretty equal to the U.S. for most ordinary jobs.

State government jobs in California pay an average of 26.5% more than the U.S. state government average.  Within local government, there are really interesting differences across sectors.

Local government education (K-14 schools) average wages are 10.7% higher in California than the U.S. average.  Teachers are about the only public workers in California whose salaries are in line with national norms and the local private sector.  Except California has some of the highest student-teacher ratios in the country.  School funding in CA is pathetic, and a serious long-run economic problem.  The average public utility salary in California is almost double the average public school salary.  You don't see that level of disparity in the rest of the U.S., and it is these kind of cost differences and spending priorities that are hurting the state's long-run competitiveness.

Other than teachers, California local government workers make enormous salaries compared to their national counterparts.  While the high salaries of police and firefighters are well-known, the premiums earned in the public water sector in California are even higher.

Local government safety and utility workers in California both earn wages that are 37% higher than the U.S. average.  If you drill down to water utilities (NAICS code 22131), the wage premium paid to public California water agency employees baloons to 44% more than the U.S. average.  California skews the U.S. average higher too, so if you  take California out of the U.S. data and compare us to the other 49 states, the gap rises to around 60%.

That's right, local water agencies in California are paying higher wages relative to national norms than the state's notoriously well-compensated police and firefighters.   By many accounts, the Metropolitan Water District pays the highest wages and is driving the statewide wage inflation.

Some think the solution to the State Water Project employee retention problem is for it to break away from DWR/state, and become more like Metropolitan.  Looking at the wage data, one wonders whether we should be looking equally at solutions that focus on controlling local water utility costs/wages rather than increasing the costs/wages of the state water project.  Rather than making the SWP more like Metropolitan and independent from the state, maybe we need to bring Metropolitan under the control of the state legislature. The Legislative Analysts Office (LAO) and others have been arguing for years to bring DWR more under the purview of the legislature, not less.

Even if there is no action, there could be some ratepayer revolts brewing for the local water agencies that put downward pressure on the salary gap and indirectly help DWR's retention problem.

Postscript 1:  Some links   if you want to look up the wage data for yourself.
http://www.bls.gov/cew/ew11table9.pdf,  http://www.bls.gov/cew/#databases

Postscript 2:  New story in the LA Times about salaries at one of the largest local water utilities becoming a major political issue.  Salaries rising sharply as their customers incomes fall, and the union is financially backing one of the mayoral candidates and asking for more raises.
http://www.latimes.com/local/lanow/la-me-ln-dwp-pay-20130507,0,1472728.story

Postscript 3: I see Jon Ortiz wrote about this issue in today's Sac Bee.  Despite what I wrote above, I agree that their is some logic in transferring the State Water Project to the contractors, it might help with this employee retention issue and eliminate some of the conflicting incentives and mission for DWR.  Nevertheless, I think this discussion would be improved with some discussion of trends in local water agency salaries and costs and whether this is a temporary or long-term phenomena.  The economics of these local water agencies is changing, and they are going to have increasing conflicts with ratepayers as they try to push through hefty rate increases in the coming years, and it is a safe bet that these salaries will become an increasing issue with ratepayers and harder to justify to their boards.  Some of the current salary gap reflects an unsustainable trend in California local water agency salaries that in many cases kept rising through the recession while other public and private workers saw their salaries decline.  Police and fire compensation is under pressure due to a local government financial crisis that has yet to hit water agencies in the same way... yet.  Nothing like the bond debt for a $15 billion Delta tunnel project that doesn't yield any new water supply to bring on a future financial crisis for some of these local water agencies.

New PPIC Survey Makes A Strong Case for a No-Tunnel BDCP Alternative

The latest PPIC Delta report includes the results of an interesting survey of scientists and stakeholders on options to improve the Delta ecosystem. 

Looking at the key table of findings (table 2, page 14), the tunnels are down in the bottom right of the PPIC table, low potential impact for fish, low scientific consensus, and high cost.  It is the worse possible outcome in this ranking (upper left quadrant is best, lower right is worst).  Nevertheless, the PPIC calls the BDCP "promising" even though it is completely focused on the lowest ranking, most controversial option, and unnecessarily ties many of the more valuable, less costly, and less controversial habitat measures into a package with the tunnels.

As I have stated repeatedly, the ESA does not require the tunnels!  The state can and should develop strong no-tunnel options for the BDCP.

Although the tunnels fared terribly in their survey, the PPIC does not highlight that conclusion.  Instead they offer reasons they think the tunnels are better than they look in this ranking.  For instance, they talk about how the measures interact with one another, but they do so in a biased way - pointing out how the tunnels might support some measures while omitting how they work against other measures.  For example, on page 14, they state "If managed for conservation objectives, a tunnel could facilitate more variable flow patterns (#20) and reduce entrainment (#16)—two actions scientists consider quite promising."

What is the offsetting factor that they leave out?  The tunnels conflict strongly with the strategy of reduced exports (#17) which was also one of the highest ranking options for effectivness.  Their study finds that reducing exports has both higher environmental benefits and lower costs than the tunnels, thus I find it strange that they keep advocating the tunnels over reduced export strategies.  It is clear that exports will not be reduced with the tunnels, and will likely be increased from current levels.

Two other quick observations from the new PPIC report:

1.  Water exporters received, by far, the lowest grade for scientific knowledge of any of the stakeholder groups.  They even got a negative score for 2 out of 3 categories!  At least the Delta folks got a passing grade.  Table 7 from this supporting report has the results.

2.  The cost of the tunnels are only $$$!  Why did they use these 3 cost ranges with symbols? , $, under $10m annually, $$, 10m - $99m annually, and $$$, is $100m or more.  Why didn't they put numbers for the estimated cost ranges in the table?  And if they are going to use symbols, they must have a consistent meaning.  This is the kind of PR garbage that professors routinely mock in the first week of statistics.  It makes it look like the cost of the tunnels are not that high, even though they are orders of magnitude higher than measures that received the same symbolic rating.  It is reminiscent of the early BDCP screening studies I criticized for their biased, pro-tunnel analysis.  See this old post, "Would BDCP staff accept dots instead of dollars in their paychecks?" 

If a $ equals an annual cost of $10 million, then the cost of the tunnels is not $$$, but ranges from approximately

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ to
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$