Assembly oversight hearing on the funding structure and economic impacts of the Bay Delta Conservation Plan (part 1): The Administration’s Perspective

BDCP Frazier 2On February 12th, the Assembly Committee on Accountability and Administrative Review held an oversight hearing on the funding structure and economic impacts of the Bay Delta Conservation Plan.

Committee Chair Jim Frazier began by reminding that the Committee is tasked with looking at government programs of statewide significance and ensuring that those programs are efficient, effective, and a good use of the people’s money.  “As the chair of the Committee and as an Assembly member that represents a substantial portion of the Delta, I would like to raise some issues for our panel members as we move through today’s hearing,” Assemblyman Frazier began.

“When the idea of moving water around the Delta through the peripheral canals was first brought forward, the projected cost was approximately $4 billion,” he said.  “At a recent Central Valley water district meeting, the 50 year projected cost of the BDCP was estimated between $51 and $67 billion.  As a contractor for over 30 years prior to coming to the legislature, I tend to believe that the higher number is the more accurate number.  Let me make this perfectly clear.  For those of you who have not noticed, this puts an estimated cost for the BDCP and its associated Delta tunnels at the same level as the high speed rail project.”

Assemblyman Frazier expressed his concerns over the ‘ever-expanding’ costs of the BDCP, who will pay for the project, the assumptions surrounding state and federal funding, and the adequacy of the funding structure of this plan.  “Additionally, inadequate cost allocation information has water districts all over the state hiring water economists to try and help them figure out just what the cost of water will be post-BDCP,” said Mr. Frazier.  “Requiring water contractors to commit to paying for a massive state water project without giving them reasonable estimates on what the cost of water will be after construction is unreasonable at best.  I hope to hear additional information on cost allocations today.”

This hearing will be covered in four parts.  The first part will cover the first panel, which featured the Deputy Director of the Department of Water Resources Laura King Moon and ICF International’s David Zippin giving the Administration’s perspective.  The second part will cover the testimony of the Anton Favorini-Csorba from the Legislative Analyst’s Office and econmist Dr. Jeff Michael on the finances of the BDCP.  The third installment will cover Dennis Cushman with the San Diego County Water Authority and  Marguerite Patil with the Contra Costa Water District who discuss their concerns about the project.  The fourth and final part will cover Delta stakeholder views from the perspectives of Melinda Terry from the North Delta Water Agency, Larry Ruhstaller with the Delta Protection Commission, Charles Gardiner with the Delta Vision Foundation,and Bill Wells with the California Delta Chambers & Visitor’s Bureau.

Part 1: The Administration’s perspective on the BDCP

The first panel, with Laura King Moon, Chief Deputy Director of the DWR, and David Zippin, ICF International’s program manager for the BDCP, was then invited forward.  Laura King Moon began by thanking the panel for the opportunity to appear, and then read from a prepared statement:

“In preparation for this hearing, we were provided some specific questions regarding the financing of the BDCP which I am happy to answer today.  However, before we get to those questions, I want to take a few moments to step back and talk about why we are doing the BDCP and the imperative of taking action.

BDCP Laura King Moon 1While BDCP was initiated prior to the 2009 Delta Reform Act, it is key to achieving the Act’s coequal goals, those goals being the protection, restoration, and enhancement of the Delta ecosystem, and ensuring the reliability of the state’s water supply.  And as such, it seeks to invest in both, and requires success in both to be successful.

The Delta of today has experienced significant change over the past 150 years that is likely to accelerate over the next several decades.  Subsidence is affecting land within the levees, climate change is increasing water temperatures affecting runoff patterns, contributing to more extreme weather events, and causing rising sea levels.  These impacts will put increasing strain on the Delta, and will contribute to the already significant declines in native fish species.  Moreover, seismic risk may present the most significant threat to the Delta as we know it.  Simply put, the status quo is unsustainable, either from an environmental or economic perspective. 

For the last 10 or 20 years, we’ve been trying to fix all the damage we’ve collectively done to the Delta’s ecosystem with a single switch on the pumps.  It doesn’t make sense, it’s not working and it’s going to get worse unless we do something different.  It would be frankly irresponsible for both the ecosystem for which we are stewards as well as to the rate payers of all the affected water agencies to continue business as usual.  The BDCP and associated actions represent the best hope for the change needed to achieve the state’s policy of coequal goals and lead to a sustainable future for the Delta.

“Now I will address the questions from the Committee. 

“First is, how will water user contracts ensure construction costs are covered?

“BDCP construction costs will be financed through the sale of revenue bondsState Water Project water supply contracts have provisions for billing SWP water contractors for SWP facility charges and revenue bond debt service.  Current contract provisions could be used to bill SWP water contractors for debt service incurred for construction, but more likely a contract amendment will be agreed upon by SWP water contractors that will have special provisions designed to cover costs of the BDCP, including debt service. 

“The SWP water supply contracts include provisions which provide protection against any future SWP contractor defaults, and require contractors to make payments, regardless of water deliveries.  If a contractor is unable to raise sufficient funds by other means, the water supply contracts require each contractor to levy on all property in the contractor’s territory not exempt from taxation a tax or assessment sufficient to cover costs under the water supply contracts.

Second question, what additional costs are expected for ongoing maintenance and operations and how will those be funded? 

BDCP Meeting 1“Operations and maintenance costs of the new water conveyance facility in the Delta are included in the BDCP cost estimates.  These O&M costs are estimated to be $1.5 billion in today’s dollars.  Spread over the 40 year operational period of the facility during the BDCP permit term, this is about 36 million per year in O&M costs. 

“Third, what is the projected bond debt service required to support the project?

“The annual debt service on the bonds issued to build the new water conveyance facility would average approximately $1.1 billion from 2021 through 2055.

“Fourth, given the uncertainty of state and federal funding for the project, what contingency funding plan does the administration foresee in order to fill this funding gap?

“The Delta is an ecosystem of national significance.  Consistent with the ‘beneficiary pays’ principle and in recognition of public benefits associated with environmental restoration of this important region, the plan assumes that a state and federal investment is necessary and will be available.  This public contribution is further justified by the fact that there are stressors contributing to the decline of the Delta ecosystem that are unrelated to the operations of the State Water Project and the federal Central Valley Project.  Public funding for programs of this nature is consistent with other large scale restoration efforts that involve large ecosystems of national significance, such as the Lower Colorado River, Platte River, Chesapeake Bay, Great Lakes, and the Florida Everglades.  It is for this reason that BDCP relies on state and federal funding for a large portion of the habitat restoration. 

“We understand that this state and federal funding is uncertain.  However, both the state and federal governments have a history of funding similar efforts in California and other parts of the country as described above.  For example, water bonds have passed in California by consistently large margins over 25 years.  Similarly, the federal government has been funding habitat restoration efforts through the California Bay Delta Restoration Appropriations for many years.  These appropriations are expected to continue.

“Further, BDCP is a 50 year plan.  It’s reasonable to expect federal and state investments in this time period.

“In the event of shortfalls in state or federal funding, BDCP has the ability to adjust resources to remain in compliance with its permits and continue to meet its biological goals and objectives.  If this is not possible with the remaining funding, the water contractors may voluntarily make up the shortfall.  If shortfalls remain, then the permittees will confer will the state and federal fish and wildlife agencies to possibly reduce the scope of the plan and its regulatory assurances in proportion to those funding shortfalls.  This may require a formal permit amendment that would be approved by the state and federal fish and wildlife agencies.

“Fifth, significant costs for the long term maintenance of the State Water Project resulting from an aging infrastructure, subsidence damage, and in some cases, replacement of sections of the canal are expected in the near future.  How have these costs and the impact to water rate payers been factored into the additional costs of BDCP?

“BDCP would modernize and improve only the portion of the State Water Project within the Delta.  Therefore, the costs of BDCP presented in the draft plan only include the costs associated with the State Water Project in the Delta.  However, DWR provides in Bulletin 132 an annual forecast of all known projected costs and charges to each contractor through the end of the project repayment period of 2035.  These projections currently do not include BDCP expenditures, but these would be included if and when the project is authorized.  The SWP water contractors are aware of the projected SWP charges in Bulletin 132, and consider these costs when reviewing the projected BDCP costs provided in Chapter 8 of BDCP.

“And last, California faces a drought of uncertain duration.  How would a prolonged drought affect revenue from the project, and how does the Administration expect to address the problem?

“The State Water Project has successfully managed through past droughts without impacting the financial integrity of the system.  We have a drought management task force involving multiple state agencies and the State Water Project is following protocols established in the 2010 California Drought Contingency Plan.  A decrease in water deliveries from low hydrological conditions will result in a decrease in power generation, but also a decrease in energy demand and corresponding power charges.  As a result, both the revenues and the expenditures will decrease during the duration of the drought.  All other charges related to fixed costs will remain and the water supply contracts contain strong provisions to protect against any future contractor default.”

And that concludes my statement.  I’m happy to answer any questions … “

Discussion

BDCP Salas 1Assemblyman Rudy Salas asked it if was unusual for a 50-year project of this magnitude not to have all of the financial issues resolved at this time?

At this time, it is not unusual,” replied Ms. King Moon.  “We expect that as we move forward, we will have all of those issues resolved to the point where the public water agencies that will be paying for the costs will have the information that they need to issue the financing to support the project.”

Mr. Salas asked how much of the levee projects in the last ten years were paid for by agencies?

Perhaps 25%, so the levees typically are heavily subsidized by the state and federal governments,” said Ms. King Moon.

Assemblymember Olsen asked about the Delta counties and what assurances they have when it comes to water quality, quantity, mitigation, and land use decision making?

With regard to water quality, there are commitments in the environmental impact statement,” replied Ms. King Moon, acknowledging there were concerns with some of the modeling and they were working with the Delta interests to resolve those questions.  “We expect that those commitments that are articulated in the environmental impact statement will have to be supported by enforceable agreements in order that the assurances would be provided and that those water quality standards would be met.  They would also be enforceable ultimately through the state water quality control plan process.”

And how would that impact local land use decision making?” asked Ms. Olsen.

We’re trying to do everything we can to minimize the impacts of the tunnel construction,” replied Ms. King Moon.  “We’re working very closely with affected land owners.  We’ve already changed the project footprint quite a bit.  With regard to the habitat restoration which is throughout the Delta, we are talking with the counties, each county individually, about a number of ways that they can be engaged to help approach the habitat restoration in a way that is consistent with their existing HCPs and also with their other land use plans.  So we’re going to continue to work on how exactly that would be memorialized, but we are engaged with them very directly on the ground planning with already going on with all the counties.”

BDCP Olsen 2Ms. Olsen asked about how the plan will deal with the impacts of habitat restoration to the counties.

The plan includes full payment, or property tax revenue replacement,” said David Zippin.  “It is funded in the plan and would come from a variety of sources but it would be paid as soon as land was acquired from willing sellers, from private landowners, and then that property tax to local districts, whether it’s special districts or the county, would continue.”

What are the assurances built into the plan that those payments would occur?” asked Ms. Olsen.  “Counties worried that payments won’t be made.”

We anticipate that those assurances would be part of the agreements with each individual county to ensure that those payments do happen as part of this plan,” replied Mr. Zippin.

Typically those funds have come in the past from the general fund,” said Ms. Moon, “so with the public water agencies supporting the costs of this plan, there would be another backstop if the general funds were not available.”

Which is understandable, but the frustrating thing about that is that we’re holding water agencies to a higher standard than the state itself,” said Ms. Olsen.

Water rights is an important issue,” said Assemblymember Joan Buchanan.  “How do we assure people who have pre-1914 water rights that they are going to be honored?

There’s nothing in BDCP that touches those water rights,” replied Ms. King Moon.  “All those water rights will still be honored.  Nothing will change that.  We have been meticulous in BDCP not to affect upstream water rights.  All of the operational changes only affect the projects and the water agencies that are involved in BDCP.

Ms. Buchanan references the variety of different cost estimates for the project, and asks who will be on the hook if it does turn out to be a $67 billion project? Since high speed rail costs are growing, how can people believe your $25 billion number?  I’ve seen many different costs for this project – I’m not sure theirs are correct but I’m not sure yours are either, she says.

I’d like to separate out the different pieces of the tunnel costs versus the rest of the project,” said Ms. King Moon.  “With regard to the tunnel costs, the concerns about the costs growing over time, we completely get that.  We’re very concerned about that as well.  We have studied every single infrastructure project that is comparable in this country and outside of the country, and we’re looking at all of those issues.  We have a 37% cost contingency in our cost estimate, so we’re already being very conservative … “

Our state doesn’t have a very good track record on that,” countered Ms. Buchanan.

There are a lot of reasons why that happens,” said Ms. Moon. “We are studying very closely all the different factors that led to the overruns in that situation in terms of management, in terms of bidding and contracting processes, all of those different things can contribute to that.

BDCP Buchanan 1Ms. Buchanan questions why the contractors are paying only for the tunnels, and not the costs of the entire project.  “You can’t have the tunnels without everything that goes with that and to put the state on the hook for that and then put the state on the hook for any overruns, it just seems to me that when we’re trying to live within our means and payoff our wall of debt, that beneficiaries should be paying for that,” she said.

The mitigation costs for the impacts of the construction and operation of the tunnels are paid for by the contractors,” responded Mr. Zippin.  “There’s an additional $900 million identified in the conservation plan that would go towards protection and restoration of habitat, construction and operation of some other stressors, conservation measures as we call them …

$900 million for all the land you’re going to require and all the restoration … ?,” asked Ms. Buchanan.

No, that’s not what I said,” said Mr. Zippin. “They are paying for the mitigation of the impacts of the facility.  The Bay Delta Conservation Plan goes well beyond mitigation needs.  Because it’s a Natural Communities Conservation Plan, our goal is ecosystem restoration so we have much broader goals than just mitigating the impacts of the water operations or the construction, and that portion of the plan is paid for by the state and federal governments.”

Ms. Olsen seeks more clarification on pre-1914 water rights, stating that she understands that the plan says it won’t affect those water rights, but how would that work, practically?  “Because the fact is today there isn’t enough water in the Delta,” she said.  “We have salt intrusion and other sorts of problems partly because we don’t have enough water in there, and now we’re going to convey more water out of the Delta without storing more water above the Delta to be able to convey and so how , in practicality, are we not going to be touching pre-1914 water rights?”

We’re not conveying more water out of the Delta with this facility; we’re conveying it more reliably,” said Ms. King Moon.  “It’s up to the State Water Board to protect all the pre-1914 water rights and they will continue to do that.  That is where that decision will be made as to any kind of effect that it would have on the water rights, but there wouldn’t be any effect whatsoever from BDCP.  We don’t do anything to them, and the only entity that has any authority over those rights is the State Water Resources Control Board.”

But there will be more capacity to ship more water, correct?” asked Chair Jim Frazier.

There will be additional diversion points, but the total capacity to move the water anywhere is the same,” explained Ms. King Moon.  “We can’t move any more than is in the canals, and we won’t be able to increase that capacity by having the new diversion point.  Reality is that we’ll be taking more water at the northern diversion points, and much, much less water at the southern diversion points.  The total will be roughly the same.”

BDCP Olsen MoonThe current conveyance system is only used at 40% capacity,” said Ms. Olsen.  “The purpose of the tunnels project is to be able to convey more water from the north part of the state in the Delta to the south part of the state.  So how can DWR and BDCP say with any sense of credibility that more water will not be conveyed through the tunnel than is conveyed today through the conveyance system that is already operating at only 40%?

“It’s the same amount of northern water, it’s just that more of it will be conveyed from points further north in the Delta than in the southern Delta,” replied Ms. King Moon.  “It’s the same volume of water that’s going to be moved.  It’s just that some of it, a good fraction of it, will be taken at a diversion point in the Delta, south of Sacramento, not all the way down …

So a year like this, that would mean zero,” said Ms. Olsen.

We would be taking no water in a year like this,” said Ms. King Moon.

So if that’s the case, what are the tunnels doing to solve our water supply and water reliability problem in the state of California?” asked Ms. Olsen.

Last year, if we had the tunnels in place, we would have had 800,000+ acre-feet more in San Luis Reservoir than we do today,” said Ms. King Moon.  “That’s how the tunnels would make a difference.”

Would that solve or address our water shortage challenge this year?” asked Ms. Olsen.

It would help, yes,” said Ms. Moon.  “It’s a lot of water.  But it would not solve it, not by itself.  We’re not claiming that BDCP solves all of the state’s water problems, so if that’s your point, I totally agree with you.”

Mr. Frazier referenced Ms. Moon’s statement about what would happen if the state and federal funding did not come through.  “If you’re not able to find a replacement fund, I’m getting that you’re looking at you will be forced to scale back on the Delta habitat restoration,” he said.  “There’s going to be a tipping point somewhere where you won’t be able to fund it and you’ll have to make sure the project’s made whole.  Who’s the scapegoat?”

BDCP Zippin 1That’s a possible outcome,” said Mr. Zippin.  “The NCCP is a voluntary way to comply with the state’s Endangered Species Act, so that would be one avenue we would consider.  There are other funding sources; there are federal and state grants that are designed specifically for habitat restoration so that’s actually one area where at least initially, we have alternative sources that already exist.  And we think we’ll be very competitive for those state and federal grants.”

Mr. Frazier stated he did appreciate that, but he cited Congressmember Matsui’s letter to Governor Brown, warning him that the feeling amongst the Congressional delegation is that funding from the federal government would not be possible, creating a $4.4 billion funding gap for this project.

Mr. Zippin said the figure for federal funding is currently estimated at $3.5 billion, but that amount over 50 years is consistent with what the federal government has been providing over the years for similar actions.

And with sequestration, and all the things that have been going on lately, the unreliable money that comes to California now based on what is real, based on what is projected, we’ve got a crystal ball approach here,” said Mr. Frazier.

Mr. Frazier asks about how the costs are determined with being only at 10% design, and Ms. King Moon replies that the figures include a contingency of 37% because they are in the early stages of design.  Mr. Frazier notes that cost overruns could exceed that, and referencing the enormous cost overruns on the Bay Bridge, he asks if this is a realistic approach.

Mr. Zippin said that engineers say this is a level 3 cost estimate which is consistent with a 10% level of design and has a recommended range of cost contingencies of +30% to -10%.  “So we’re well within that, and in fact, we’re even more conservative than that,” he said.  “Some of our cost categories have a 50% contingency, so for those cost items we have less certainty on, we actually do have a greater contingency built in.”

Ms. King Moon said that they are concerned about these same issues and have been studying carefully what factors have led to cost escalations in the past, acknowledging she didn’t have any answers today.  “Big projects are difficult to manage, but we are studying all those other projects very carefully around the world and we are putting together some proposals for how this will be managed in a way that we’ll avoid those costs overruns.  Something that we are very worried about and the public agencies that will be paying for this are keeping a close watch on that.”

Mr. Frazier asked that since $257 million has already been invested, is it ‘darn the torpedoes, full speed ahead’ no matter what the cost?

BDCP Laura King Moon 2No, that’s not the attitude,” said Ms. King Moon.  “This water is still reasonably costed and priced relative to many other options in the state.  We know that the water agencies are going to look very hard at the water supply levels come out of this project to determine individually whether or not they want to participate.  But we believe that this project is going to come in at reasonable costs and we believe we must move forward, and that’s the Administration’s position.”

Mr. Frazier asked about the ability for contractors to opt out of the BDCP, and what would the effect of that be?

If some contractors did not want to participate, other contractor’s, potentially costs would go up and their water supplies associated with the project would go up so it would balance itself out in that regard,” replied Ms. King Moon.

So opting out undermines the ability to finance the project, has the administration made it clear to the contractors that opting out is not an option for them?” asked Mr. Frazier.

We have not made anything like that clear,” replied Ms. King Moon.

And with that, the first panel was concluded.

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