The funds come from California’s $7.5 billion Proposition 1 Water Bond, approved by the voters last year.

Although it is unlikely that all of the $287.5 million will be used for water purchases to benefit the environment, the Wildlife Conservation Board and the Department of Fish and Wildlife still have yet to determine what they will do with their respective $200 million and $87.5 million bond funding allocations.

The last time California tried a pilot program of purchases of environmental water, it didn’t work out so well.

Interest adds up

Starting in 2000, state and federal water agencies purchased farm water for fish and wildlife using bond funds under a now-defunct state-federal program called CALFED. The Environmental Water Account project was aimed at improving water supply reliability and protecting the Delta ecosystem.

The project followed a major allocation by Congress in 1991: a one-time allotment of 800,000 acre-feet for salmon runs plus another 400,000 acre-feet annually for wildlife refuges without payment for the water. (See page 15). An acre-foot of water – enough to cover one acre of land to a depth of one foot – can supply two to four urban households per year, depending on whether it is a normal or drought year. That same amount can support about one-third an acre of cropland per year.

The use of general obligation bonds to buy water for the environment is controversial because actual financing costs would typically be double the principal amount once interest is included.

Calwatchdog.com spoke with Wes Strickland, a water rights attorney in California and Austin, Texas, about the results of the EWA project. Strickland said EWA was a lose-lose-lose-lose deal for every group involved:

• For environmentalists it did not allocate enough water to alleviate ecosystem stress.
• For farmers it drove up spot market water prices because of reduced supply.
• Southern California cities were thwarted from buying water to bank for dry years.
• State and federal water agencies didn’t accomplish their environmental goals even as the state ran up its budget deficit and exhausted water reserves going into a 2007-2010 court-ordered limit on water pumping.

From this failed experiment, Strickland said California should have learned to make small, incremental water purchases during rainy years to support the environment during years of drought.

$193.4 million

The state and federal taxpayer bill came to $193.4 million for the EWA project, which lasted from 2000 to 2007. More than 2 million acre-feet of water were purchased for environmental uses. (See table below.) According to the California Department of Water Resources:

• $16.8 million came from Proposition 204, a 1996-voter approved state water bond.
• $101.2 million was from Proposition 50 voter-approved state water bond.
• $50.1 million was from the state general fund in 2001.
• $25.3 million came from federal coffers.

Under the program, the government came to dominate the spot market for water.

On average, water purchases under the program made up 43 percent of all spot-market purchases of water each year. By the final year of the program, the government’s purchases comprised 87 percent of all water bought on the spot market.

The average price of water purchased over the seven years was $96 per acre-foot, without bond interest, compared with the current going price of $700 per acre-foot for water transfers from farmers.

At the lower price, the $287.5 million under Prop. 1 would be enough to purchase about 3 million acre-feet of water. As the table below shows, in 2007 California bought 477,000 acre-feet of water for fish runs, and that was deemed insufficient to help migrating fish get to the ocean.

Will there be any water to buy?

Because Lake Oroville has been drawn down below 50 percent of its storage capacity, water cannot be sold by the farmers along the Feather River, which flows into the lake.

The EWA project ended just before the Natural Resources Defense Council filed suit to protect the Delta smelt, prompting court-ordered limits on the amount of water drawn from the fish’s habitat.

Environmental Water Account Purchases, 2001 to 2007

###

Last week, President Obama dumped a bucket of cold water over his fellow Democrats in California on water policy. He’s emphasizing private investment, while they’re trying to ban it.

His Environmental Protection Agency announced on its website:

“WASHINGTON — The U.S. Environmental Protection Agency launched the Water Infrastructure and Resiliency Finance Center today to help communities across the country improve their wastewater, drinking water and stormwater systems, particularly through innovative financing and by building resilience to climate change.”

This new program emphasized private investment as part of “a government-wide effort to increase infrastructure investment and promote economic growth by creating opportunities for state and local governments and the private sector to collaborate, expand public-private partnerships, and increase the use of federal credit programs.”

However, the Proposition 1 water bond past last November by California voters specifically stipulated “the joint powers agencies described … shall not include in their membership any for‑profit corporation or any mutual water company whose shareholders and members include a for‑profit corporation or any other private entity” (Section 79759(b)).

Although Prop. 1 was supported by some Republicans, it was placed on the ballot by the Democratic Legislature and strongly pushed by Gov. Jerry Brown.

But how long will this statewide ban on public investments hold up when the president is emphasizing just such investments at the federal level, and private water companies already receive bond funding in California?

CA already has a public-private integrated water system 

Witness the new Poseidon ocean water Desalination Project in Carlsbad. It’s financed by $840 million in bonds authorized by the State of California Pollution Control Financing Authority.

But Poseidon is a private, investor-owned company that develops water and wastewater infrastructure. For example, Wells Fargo Bank’s Municipal Bond Fund Portfolio includes Poseidon’s Carlsbad project. Poseidon will own and operate the Carlsbad Desalination Plant.

Environmentalists incorrectly claim the Kern Water Bank (which is made up of underground water) was privatized in 1995 to serve a “handful of corporate interests.” Actually, the bank is operated by the Kern Water Bank Authority. And according to the KWBA’s website FAQ:

“The Kern Water Bank is operated by the Kern Water Bank Authority, which is a public agency known as a Joint Powers Authority (JPA). The JPA includes six member entities, including several water districts, a water agency, and a mutual water company. The JPA is governed by a board of directors which oversee operation of the Kern Water Bank.” 

Yes, the KWB serves corporate farmers. But so do the Metropolitan Water District of Southern California and the East Bay Municipal Utility District serve private corporate farms and thousands of urban corporate customers.

Attorney Wes Strickland is with Jackson Walker LLP in Austin, Tex. He has pointed to California Water Code Section 78712, which reads:

“79712. (a) Eligible applicants under this division are public agencies, nonprofit organizations, public utilities, federally recognized Indian tribes, state Indian tribes listed on the Native American Heritage Commission’s California Tribal Consultation List, and mutual water companies.” 

“Public utilities” means regulated, investor-owned utilities like Pacific Gas and Electric and Southern California Edison that both run dams and hydropower projects; and such private water retailers as the California Water Service Company and the Golden State Water Company. All these are stockholder-controlled companies.

As Strickland explained:

“If public utility projects were not eligible for bond funding, it would mean that the 20 percent of California citizens who are served by pubic utilities would be paying taxes to the State of California to pay for water infrastructure for the exclusive use of the other 80 percent who are served by public agencies. The unfairness of such an outcome seems obvious.”

Additionally, the retail water provider for the city of San Jose is San Jose Water Company, a private, investor-owned water company, which is part of the Texas Water Alliance. Fifty percent of San Jose’s water supply comes from the Santa Clara Valley Water District, which originates with the state and federal water projects.

Cadiz, Inc., in the Mojave Desert, is the first private company to reverse the traditional relationship between public water wholesalers and municipal and private water retailers. Cadiz is a privately owned, common stock company that provides wholesale water to Central Valley irrigation districts, Southern California municipal water departments and private water companies.

Projects

Some dilemmas: How long can opponents continue to attack “privatization,” when the funding of such private entities already exists in California?

Will large water projects elect to undertake public-private water projects with federal and local municipal bonds and avoid bond financing from Prop. 1?  This is a plausible scenario that could be self-defeating for the $2.7 billion set aside in the Prop. 1 for water storage projects.

As Strickland summed up the situation:

“It has started to seem like every criticism of a water project or initiative leads inevitably to a claim of ‘privatization, even when as here that concept has no real application. I suspect in [the] future we will see other arguments against the California water bond, and numerous other water projects that also use the ‘privatization’ bogeyman to instill fear and loathing in the public.  I also wonder how long it will take for the ‘privatization’ argument trend to move on, and what spurious argument will replace it?”  

Those who favor public control don’t like the private involvement. And libertarians have proposed getting rid of the public part and have proposed privatizing the entire system.

Yet the fact is the state already is saturated with public-private partnerships in water, something that somehow will remain as surely as the state some day will suffer another drought.

Less than a third of California’s eligible voters cast ballots on Nov. 4….

Of those who registered to vote, little better than four in every 10 – about 42 percent – actually voted, either in person or by mail, the secretary of state reported in its Statement of the Vote….

In Los Angeles County, the most populace county with more than 5,000 voting precincts and eight million eligible voters, about 31 percent of registered voters cast ballots, the lowest participation level of any of the 58 counties. Of the L.A. voters who were eligible to cast ballots, less than a fourth went to the polls.

Part of this, I think, was due to California now being a one-party state dominated by Democrats. Gov. Jerry Brown hardly even campaigned for re-election; and even for that, he mainly talked about passing his initiatives, Proposition 1, the water bonds, and Proposition 2, the rainy-day fund. If he didn’t care about his own re-election, why should anybody else?

Democrats easily swept all statewide elections for lieutenant governor, secretary of state, treasurer, etc. The six ballot measures generated little controversy. Three won easily and three lost easily.

Turnout certainly will be higher in Nov. 2016, for the presidential election. But even there, nowadays the Democratic nominee easily wins with a 3 million-plus vote margin. The presidential candidates from both parties campaign here only troll for campaign cash.

However, numerous ballot measures are expected to be put before voters. The government-employee unions will be rallying their membership to pass several measures to gouge taxpayers even more. Taxpayers’ rights groups will be campaigning to keep taxes here slightly less preposterously unreasonable.

Otherwise, for most voters democracy in the Golden State seems about as appealing as one of First Lady Michelle Obama’s school lunches.

California’s budget picture is sort of like that old Sandy Dennis high-school movie, “Up the Down Staircase.”

Going up: Legislative Analyst Mac Taylor just reported tax receipts jumped $2 billion over projections in the fiscal 2014-15 budget the Legislature passed, and Gov. Jerry Brown signed, last June. And the state’s credit rating was bumped up to A+ by Standard & Poor’s after voters on Nov. 4 passed Proposition 2, which strengthened the state’s rainy-day fund. The last time the bond rating was increased to A+ was in 2006.

Going down: Despite the added revenue, the state has reached a limit on what it can spend, according to a new study by insurance-asset manager Conning and Company, “Municipal Credit Research: State of the States.”

Moreover, for October Conning ranked California 36th among the states on its percentage of Expenditure Burden, defined as a percentage of the burden on general fund revenues for debt, future pensions and Medicaid expenditures. That’s four ranks lower than for April.

And as CalWatchdog.com calculated, California also has the largest Expenditure Burden in terms of absolute dollars, as shown in the following table. (Expenditure Burden is the far-right column.)

States with Highest Expenditure Burden (Fourth Quarter 2014)

Pension burdens

Gov. Brown’s June budget report correctly projected the state’s “Wall of Debt” will be cut from $34.7 to $13.8 billion by the end of fiscal 2014-15 next June 30.  But this picture of the debt omits future unmet pension burdens and Medicaid spending.

Just before the election, Controller John Chiang – on Nov. 4 himself elected as the new state treasurer – released figures on pension debt that confirmed a crisis long raised by pension critics. He warned:

“The unfunded actuarial accrued liability of the state’s pension systems — or the present value of benefits earned to date that are not covered by current plan assets — shows it has steadily risen from $6.33 billion in 2003 to $198.16 billion in 2013.”

That warning was confirmed by Paul Mansour, Conning’s head of muni research. He told Bloomberg, “California is still being held back by relatively high debt and pension levels…. We are more cautious on them than the [bond] rating agencies.”

Bloomberg also reported:

“California has $87 billion of bonds paid from the general fund, more than twice as much as a decade ago, according to data from the state. Voters also approved $7.5 billion for water infrastructure bonds this month [Propositon 2]. Its $2,465 of debt per resident is the third-highest burden among the 10 most-populous U.S. states, according to a report issued last month by Treasurer Bill Lockyer. New York ranks first, with $3,204 per person. The median among all states is $1,054.”

Forecast

There’s another reason why the new $2 billion in revenue the LAO forecast doesn’t much help long-term pension and medical-expenditure burdens. Proposition 98, passed in 1988, mandated about 40 percent of any revenue – including new revenue – must go to public schools.

As the LAO reported:

“A $4 billion reserve would mark significant progress for the state, but maintaining such a reserve in 2015-16 would mean little or no new spending commitments outside of Proposition 98, the funding formula for schools and community colleges.” 

So of that extra $2 billion, just $1.2 billion of it can be used for other spending, debt reduction or reserves — about 1 percent of an $108 billion general-fund budget.

Moreover, according to the LAO, despite the new revenue, the general-fund’s balance actually has declined due to adjustments, including “a $358 million downward adjustment relating to an allocation of state sales and use tax (SUT) to local governments to correct for past accounting issues. All told, these adjustments result in an entering fund balance of $2.2 billion, or $243 million lower than the budget’s assumptions.”

Bottom line: California’s budget problems are far from over. Every good-news story going up the stairs seems to be met by a bad-news story going down.

Prop. 1, water bonds. Winning 68-32. The $7.5 billion in water bonds will cost $15 billion to pay off. For that, only $2.5 billion will go to dams and reservoirs to help alleviate future droughts. It’s a typical California ripoff, with special interests getting the lion’s share of the money.

Prop. 2, rainy day budget fund. Winning 71-29. The Legislature always has figured out ways to grab the money in previous rainy-day funds guaranteed by initiatives. We’ll see if that happens again.

Prop. 45, giving the insurance commissioner authority over medical insurance rates. Losing, 61-39. Massive ads against it doomed the initiative.

Prop. 46, drug testing doctors. Losing 68-32. A silly regulation that would have driven doctors from their profession faster than Obamacare is.

Prop. 47, reducing penalties, mainly for drug use. Winning, 57-43. A big coalition backed it. A rare defeat for law-enforcement unions.

Prop. 48, Indian gaming compact. Losing, 63-37.

That’s the unasked question as voters head to the polls next Tuesday to decide the fate of Proposition 1, the $7.1 billion state water bond.

Earlier this month, the California Supreme Court green-lighted the state’s high-speed rail project. Although questions remain about the project’s long-term legal viability, as CalWatchdog.com reported.

But the ruling also cast a pall over other bond measures because it’s not clear how literally the exact wording of such measures must be interpreted. In a September argument to the court to stop the project, the Howard Jarvis Taxpayers Association argued, according to its website, “The current plan for high-speed rail is nearly twice as expensive as promised and the projected travel times and fairs have nearly doubled.”

In the wake of the court decision, the Jarvis President Jon Coupal brought up an new concern. He wrote on Oct. 26 that the court ruling “raises the specter that, no matter what a bond proposal promises about what will be built with the bond proceeds, those promises are meaningless. In other words, when California voters are asked to approve a bond, are they just approving debt for any purpose at all? This is the very definition of a blank check.”

As a result, he said, “the opponents of any bond proposal, at either the state or local level, need only point to High-Speed Rail to remind voters that promises in a voter approved bond proposal are meaningless and unenforceable.”

With just days to go before the election, Prop. 1 has mustered broad but probably shallow support for its massive expenditures. Although water policy has emerged as one area where legislators were able to find bipartisan ground this year, serious questions remain as to what voters will be approving with a Yes vote. And by some measures, those questions cannot even be answered until after the fact.

Spreading concern

Analysts and media reports have sounded alarms over Prop. 1’s deep ambiguity. The terms delimiting the high-speed rail project were clear and concise — although, as noted above, that didn’t matter much for the implementation.

But the language describing the scope and purpose of the water bond doesn’t even try to be precise, and is vague and uncertain from the get-go.

As the San Francisco Chronicle reported, opponents of the measure charge the bond’s language has been left vague “by design.”

The Chronicle agreed, concluding the “potential effects and implementation” of the big measure “are still hazy.”

Too late?

However, complex legal arguments are hard to press on voters, especially this lately in the election season.

Prop. 1’s bipartisan support also has muted opposition. Brown’s own re-election campaign largely has consisted of TV ads of him touting Prop. 1 and its companion, Proposition 2, the Rainy Day Budget Stabilization Act. It’s a calculated plan to emphasize his “good government” intentions, while ignoring his Republican opponent, Neel Kashkari.

The latest PPIC poll, taken a week ago, showed Prop. 1 spouting a high lead, 56 percent to 32 percent. It showed the proposition tied among Republicans, 43-43. But it enjoyed hefty support among Democrats, 68-20, and Independents, 56-23.

According to Ballotpedia, the Yes on Prop. 1 campaign has raised $13 million and spent almost all of it. The No on Prop. 1 campaign has raised only $89,100.

Future bonds

Where the Supreme Court decision on high-speed rail could come into effect is with future bond campaigns. Bonds usually pass. But in recent years two bonds have failed:

• 2000: Proposition 16, $220 million for crime labs.
• 2006: Proposition 81, $600 million for libraries.

Indeed, even Prop. 1A, the 2008 rail bond, passed with just 52.7 percent of the vote, 47.3 percent against. It’s unlikely it could pass today.

Prop. 1, after all, started out as a $11 billion water bond that twice was postponed by the Legislature, in 2010 and 2012, due to fears voters would drown it.

And all that happened before the Supreme Court certified that bond language is meaningless.

The most immediate consequence of the deal will be seen on the ballot itself, where a more ambitious 2009 initiative will be swapped out. That measure exceeded $11 billion. It was loaded, as the Desert Sun observed, with “unrelated pork” that “squeaked” the deal through in Sacramento — but caused its postponement on the ballot two separate times.

Political stars align

The embarrassing experience led Brown to propose a “no pork, no frills” bond measure that wouldn’t top $6 billion. In a public letter, Brown slammed the old measure as an irresponsible effort that would impose “enormous costs … $750 million a year for 30 years,” at the expense of “schools, health care and public safety.” What’s more, Brown warned, California’s annual expenditures for bond debt service already approached $8 billion from the general fund.

Often, when legislators balk at a no-pork proposal, they secure special deals as the price of their vote. In this instance, however, legislators representing rural districts — where state Republicans still maintain some clout — negotiated for additional funds specifically targeted at voters’ own water priorities. The price tag on those objectives raised the total bond amount by $1.5 billion above Brown’s number, to $7.5 billion. In a bid to cement his election-year reputation as a Democrat capable of transcending partisanship to tackle big projects, Brown swallowed the increases, and the deal was sealed.

A round of political celebrations

Leading Democrats took the opportunity to cast the compromise as a measure of their own party’s future ambitions. “If we can get water done in California with its history,” said state Senate President Pro Tem Darrell Steinberg, D-Sacramento, “we can get just about anything else done, and we will.”

Not to be left out, rural California legislators celebrated the deal. State Sen. Tom Berryman, R-Modesto, took to the Modesto Bee to praise central state lawmakers for “sticking together” with farm bureaus and agriculture groups. The resulting leverage, Berryman wrote, led to key Central Valley objectives like the protection of water rights, watersheds and so-called “cross-connectivity,” a feature of interconnected water infrastructure that allows resources to be directed to especially drought-stricken areas.

What’s more, rural legislators increased the amount Brown had offered for water storage. From an initial $2 billion, that number rose to $2.7 billion. The higher number was 36 percent of the total bond, as Berryman underscored. Republicans had pushed to guarantee that storage projects would be funded well enough to weather any unfavorable budgetary or political changes in Sacramento.

Lingering questions

Speaking for many in Sacramento, Assemblyman Adam Gray, D-Merced, said the deal “lays a foundation to meet California’s water needs and gives us the resources we need to ensure our dire drought conditions do not repeat themselves in the future.” Nevertheless, Prop. 1 hasn’t appeased every interest group. Faced with falling aquifer levels brought on by California’s historic drought, some legislators and activists have demanded that attention be turned to groundwater regulation. 

With the legislative season drawing to a close, however, little momentum has built up for the two current bills that would address groundwater. The state Senate and the Assembly each has an option — SB 1168, advanced by Fran Pavley, D-Agoura Hills; and AB 1739, from Assemblyman Roger Dickinson, D-Sacramento. The bills essentially are identical.

The biggest damper on the bond victory, however, has little to do with Sacramento politics. Voters will have to consider the big cash outlays of Prop. 1 at a time when California has precious little water to go around.