FEMA's dam denial may have implications beyond California
A federal agency’s denial of $306 million in funding for repairs to California's Oroville Dam may have larger ramifications for state and local governments with aging infrastructure.
The Federal Emergency Management Agency told the California Department of Water Resources on March 7 that it won't grant the full reimbursement requested for repairs to the dam, because the state had failed to property maintain it.
That decision “signals increased pressure on state and local governments to repair or replace aging infrastructure prior to failure, since they cannot assume the federal government will cover disaster-related costs attributable to deferred maintenance,” Moody’s Investors Service analysts said in a March 20 report.
The ratings agency said the decision is credit negative for the DWR, and also for the 29 water contractors that receive water from DWR’s State Water Project and serve 70% of the state’s water customers.
Concerns over rising water levels forced the evacuation of 188,000 people downstream of the dam in February 2017 after days of heavy rain caused damage to the dam’s main relief valve, a 3,000 foot concrete spillway.
DWR secured an $800 million line of credit through two commercial paper sales in May 2017 to help cover the costs.
FEMA determined that the state should have addressed preexisting structural problems on the dam’s upper spillway before it failed. The federal agency typically pays for 75% of repair costs in such situations, but declined to do so. Instead, it will reimburse $333 million of the $639 million requested by the state.
“Barring a successful appeal, DWR will have to absorb the repair costs, which would negatively impact its reserves and liquidity,” Moody’s analysts wrote.
The state water agency could also elect to pass repair costs on to the contractors and ultimately their ratepayers, which analysts said may result in higher than previously planned rate increases.
“We appreciate the hard work and commitment of FEMA staff, however are disappointed in some of their initial interpretations regarding cost eligibility,” said Joel Ledesma, DWR Deputy Director of the State Water Project at the time of the decision. “We believe all costs should be eligible for federal reimbursement.”
DWR plans to appeal FEMA’s denial, but the process could take 18 months, according to Moody's. In the meantime, Moody’s said, DWR has incorporated the costs of financing approximately $42 million in Oroville repairs into its calendar-year 2019 water charges to contractors.
If the appeal is denied, DWR “will either have to increase water charges in the upcoming years, defer other maintenance projects or increase the utilization of its commercial paper program,” Moody's analysts wrote.
“FEMA’s decision increases the urgency among localities to improve aging infrastructure before it fails in a natural disaster,” they wrote.