By Paul Rogers
POSTED: 12/26/2013 05:16:14 AM PST | UPDATED: 20 DAYS AGO
For more than a year, Gov. Jerry Brown’s administration has been describing his plan to build two massive water tunnels through the Delta as a $25 billion project.
That would rank it as one of the largest public works plans in California history.
But when factoring in long-term financing costs, the price tag actually ranges from $51 billion to $67 billion, according to new figures that emerged last month.
While there’s nothing unusual about long-term debt to finance big projects, the new numbers suggest for the first time that the interest payments for the controversial water tunnels could be even more expensive than many traditional projects financed by bonds.
And since the water project relies on a higher percentage of financing than Brown’s other legacy project — high-speed rail — critics and supporters alike are questioning if California can afford the cost.
“The numbers are big. There is sticker shock,” said Jason Peltier, chief deputy general manager of the Westlands Water District, an agency in Fresno that provides water to farmers. “We keep going back to our policy people and saying ‘Yes, this is tough to look at, but consider your other scenarios. How much more groundwater can we pump?’ That kind of thing.”
The Brown administration has yet to provide a detailed breakdown of the overall 30-year cost of the project, even in a 34,000-page report on the tunnels it released last month.
The new cost figures were presented at a Westlands district board meeting last month by a Westlands staff member and a Citigroup bond consultant.
Mark Cowin, director of the state Department of Water Resources, confirmed the estimates are accurate.
“The assumptions they’ve made are reasonable,” he said. “But financing is confusing. There isn’t any doubt about it. It’s hard to relay information that the public understands. We need to be clear that if you add up the total debt service, that’s a different type of calculation than the capital cost estimate. I would hope those two types of estimates aren’t confused.”
The new details are significant for three reasons:
The overall cost for the tunnels is politically sensitive. State voters will be asked to approve a water bond to pay for parts of it in November, and polls have shown that the more government projects cost, the less likely voters are to support them. Water agencies around the state would sell bonds to pay for much of it also, and the higher the borrowing costs, the higher they will have to raise water rates on the public.
Many large public projects are funded with money from bonds. But the tunnels project would rely on bond borrowing to cover a huge percent of its costs: roughly 85 percent. By comparison, the financial plan for Brown’s other major project, high-speed rail, relies on state bonds for only 12 percent of its funding — $8 billion of the $68 billion price tag — with the rest, he hopes, to come from Congress, private companies and others.
A general rule for government bonds is that they double the cost of projects once interest is paid. But the borrowing costs for the tunnel project could cause its construction costs to more than triple, according to Westlands’ estimates. They include inflation, potential delays from lawsuits and techniques that water agencies could use in which they pay no interest or principal for the first few years, increasing the overall cost.
Financing charges are familiar to anyone buying a house or car. The interest costs help determine the monthly payments.
“You want to ultimately know what the total cost will be, in order to evaluate the cost-effectiveness of the tunnels project versus other alternatives,” said attorney Doug Obegi, with the Natural Resources Defense Council in San Francisco. “Financing and debt service costs are significant. Ratepayers ultimately pay them.”
Critics say the state has deliberately tried to keep the grand total from the public as it tries to build political support for what is expected to be the biggest water battle in California in a generation.
“I think they are nervous about the total cost,” said Steve Kasower, a Sacramento economist who worked for the state Department of Water Resources from 1977 to 1985. “They have a reticence to put out a number because they feel people are going to get upset because it looks too expensive.”
The Westlands presentation looked at three scenarios. Each considered bonds issued for 30 years at 5 percent interest. They pegged the cost to build the tunnels at $18 billion, and overall cost with financing at $42 billion to $58 billion.
When the $9 billion more in wetlands restoration, monitoring and other costs are included, the grand total is $51 billion to $67 billion.
Brown’s plan is to build two tunnels, each 40 feet in diameter, running 35 miles under the Delta, and to restore 147,000 acres of wetlands and other habitat.
Supporters say the tunnels would make it easier to move water south without grinding up salmon, smelt and other fish in giant pumps at Tracy, which has caused federal officials in recent years to limit pumping. Environmentalists and Delta politicians call the project a water grab that could result in even more water being taken from the Delta. They say too many costs remain a mystery.
“We’re going to have to add a lot more detail to our finance plan,” Cowin acknowledged.
Asked when those details will be forthcoming, Cowin said he doesn’t know, because the state expects 70 percent of the project to be paid by water agencies — from the Santa Clara Valley Water District to farm water districts like Westlands to the powerful Metropolitan Water District in Los Angeles, who would issue revenue bonds — and they haven’t yet committed.
Cowin said he hopes the water agencies will agree to fund construction, and that state voters and Congress will pay for restoration so work can begin in 2017. Environmentalists say more water recycling, conservation and other measures are preferable. But Cowin said not building the project also comes with a price in future shortages.
“What are the costs if we don’t do it?” he said.
Paul Rogers covers resources and environmental issues. Contact him at 408-920-5045. Follow him at Twitter.com/PaulRogersSJMN.