California's $15.7 Billion Water Project Inches Forward

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PHOENIX – The controversial $15.7 billion plan to build two giant water tunnels in California's Sacramento-San Joaquin Delta is moving closer to reality with the release of a biological assessment of the project and the beginning of hearings before the State Water Resources Control Board, even as huge financial and legal challenges loom.

The biological assessment, released Aug. 2, is hundreds of pages long, analyzing the impact the project could have on various plants and wildlife, as required by federal law in the Endangered Species Act.

The tunnel plan, dubbed the "California WaterFix," has the strong backing of Gov. Jerry Brown but faces stiff opposition from some Delta landowners and others who worry about the project's impact on farmers there as well as its environmental implications.

Water flows into the Delta between San Francisco and Sacramento from the San Joaquin and Sacramento rivers.

Pumps in the southeastern corner of the Delta pull water out to deliver it to dry Southern California. That arrangement distorts the natural flow of the Delta and leads to erratic water supplies because pumping must be slowed or halted to protect endangered species, say supporters of Brown's plan.

They say tunnels that divert water from the north side of the Delta will solve those problems, protect fish, and ensure more reliable water deliveries to Southern California.

The California Natural Resources Agency, which released the assessment, said the law requires the analysis to make seemingly negative conclusions even if they are not warranted, and that the report does not detail the benefits of the tunnel project.

"The biological assessment presents a species-by-species analysis of the project's potential effects and must make a 'likely to adversely affect' determination for each federally listed species even when the impacts are small – potential harm to one fish, for example – or nearly negligible, and notwithstanding the fact that the overall project effect to that particular species may be beneficial," the agency said in its announcement.

The biological assessment provides the basis for consultation with the National Marine Fisheries Service and U.S. Fish and Wildlife Service. If those agencies accept the state's request for consultation under the Endangered Species Act, they will then make a determination related to the project's potential jeopardy to species and may issue an opinion on the matter.

The release of the biological assessment comes soon after other developments in late July that may shape the future of the tunnel efforts.

In July the California Supreme Court ruled unanimously that California officials will not have to pay property owners to access their land to conduct preliminary testing before deciding to move forward with the plan to build tunnels.

On July 26 the State Water Resources Control Board began what is likely to be a lengthy public hearing process. The board will try to determine whether the plan would alter water flows or affect water quality such that there would be injury to any legal user of the water. The hearings kicked off with policy statements defending the tunnels.

"You will hear in coming months from those who believe our proposed project will harm other legal users of water or fish and wildlife in the Delta," California Department of Water Resources director Mark Cowin said in a statement submitted to the board. "Modeling data may be offered as evidence. As you consider these claims, I hope you will bear this in mind: models do not run water projects. Experienced human operators run water projects."

Jeffrey Michael, director of the Center for Business and Policy Research at the University of the Pacific in Stockton, Calif., said the project is a huge financial question mark that will have to overcome significant challenges and may not be economically viable at all after the environmental requirements have been met.

"You have the environmental process moving forward," Michael said, noting that the plan has already been amended due to environmental factors. "The plan is more or less eliminating all of the water supply benefits."

Michael said that he has some concerns about the ability of the local agricultural agencies to participate in a financing this large and complex. The agencies that benefit from water flowing through the tunnels are expected to finance the project.

Many of the agricultural agencies involved in the project do not have significant experience with large revenue bond issues and may not have a credit rating, he said.

"It's really hard to figure out how they have the capacity to issue billions of dollars of debt," Michael said.

One of them, Fresno-based Westlands Water District, was fined $125,000 by the Securities and Exchange Commission earlier this year after the commission found the district had misled investors about its financial condition when it issued $77 million of bonds in 2012.

Many water agencies also plan to pay part of their share of the tunnel costs with property taxes, and argue that they can levy those taxes without a new vote because the WaterFix is part of the State Water Project already authorized by California voters in 1960, said Michael.

But the Howard Jarvis Taxpayers Association and others have challenged this interpretation, and the ability of water agencies to levy property taxes to pay for the project will likely end up being decided in court.

Further, Michael said, California's brutal ongoing drought could be a factor. The heavy debt burdens resulting from the WaterFix could further strain the finances of water agencies, Michael said, and worry bondholders.

Bond investors could require some protections to ensure they are paid during a drought, such as a significant drought contingency reserve to be funded up front, higher coverage ratios, or a general taxpayer guarantee. All of these measures would increase the cost and complexity of the bond issue.

"Drought is going to be a challenge that bond investors are going to want to look at," Michael said.

And the landscape could change even further in November when Californians head to the polls.

Proposition 53, a constitutional amendment backed by wealthy Stockton farmer Dean Cortopassi, would require a referendum whenever the state wants to use revenue bonds to borrow more than $2 billion for infrastructure projects.

That could potentially block the tunnel project, or require some creative financing to skirt the new legal requirement that would be imposed if that proposition passes. Members of Gov. Jerry Brown's administration have attacked the measure, saying it is a backhanded way of trying to stop the governor's water plan.

The WaterFix does have the stated support of many water districts and business groups who submitted positive comments to the water board at the start of the hearings last month. Part two of those hearings, focusing on the environmental factors, is scheduled to begin early next year. Even if everything goes according to plan, the WaterFix is likely still years away from realization.

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