The Delta Tunnels Proposal: Built On A House Of Cards. An Open Letter to Governor Brown

March 16, 2016 The Honorable Edmund G. Brown Jr. Governor of California c/o State Capitol, Suite 1173 Sacramento, CA 95814 (mailed and faxed)

The Delta Tunnels Proposal: Built On A House Of Cards An Open Letter to Governor Brown

Dear Governor Brown,

It’s time to detach your legacy from the Delta Tunnels proposal. It’s time to face the reality that this plan is falling apart.

Let me explain why.

Put simply, after ten years of trying, the Delta Tunnels still do not have a credible finance plan. There is little reason to think that another ten years would create one.

The New York Times, Los Angeles Times, Wall Street Journaland even the International Business Times, have all reported the news that the Westlands Water District, the major financial partner of the proposed Delta Tunnels, engaged in “Enron-style” accounting in order to fool the bond market. Westlands knowingly overstated revenue in order to secure a $77 million loan in 2012.

Beginning in the 2010 drought, Westlands reclassified reserves as revenue in order to hide that it could not meet the debt service ratio required of prior bond issuances, and then falsely claimed that they had indeed met that ratio over the five-year period prior to the 2012 bond issuance to investors. The SEC fined Westlands and its leaders a total of $195,000, a rare occurrence for municipal bond agencies, and Moody’s placed Westlands and their neighbors, the San Luis Mendota Water Authority, on negative credit watch.

The other big financial players in the Delta Tunnels proposal, Metropolitan Water District of Southern California (Met) and the Santa Clara Valley Water District, are reviewing data from CA WaterFix, the newest name for the Delta Tunnels proposal, that includes Westlands as a major contributor.

If Westlands relied on fraud for the down payment on the tunnels, how can they be trusted to be honest when they need to come up with more than $3 billion to fund their share? Met and Santa Clara would be wise to reconsider long-term agreements with a water district with a rap sheet. Without this dubious partner, they must think through how and where to make up Westlands’ contribution to the plan.

After ten years and $250 million, we still do not have a Tunnels financing plan or operating plan that can pass the test with environmental agencies. Until there is an honest and independently-vetted financing plan and science proving that Bay-Delta communities and endangered species will be protected, the Delta Tunnels permit process underway should be tabled.

Westlands – An Untrustworthy Partner

Throughout the ten-year history of the Delta Tunnels proposal, Westlands indicated to the greater water community that they would be a major beneficiary, paying for the lion’s share of the 40 percent of the Federal contractor contribution for the Delta Tunnels. But the California WaterFix has never released a detailed finance plan showing exactly how the tunnels will actually be funded and by whom. Also, it’s still not known how much each urban water agency under the Metropolitan Water District or Santa Clara Valley Water Districts would pay for their fair share to the project. Will retail water agencies have the ability to opt out of the plan? What happens to financing if they do?

For argument sake, let’s assume that Westlands planned on paying the full forty percent contribution of the $15-billion-dollar plan, or $6 billion. How could they have possibly repaid their cost share of the project if the debt load would be almost 78 times greater than the debt they were carrying in 2010? Even if they were only intending to pay half of the forty percent, they could not afford $3 billion.

After all, it’s not like Westlands could count on receiving more water from the Delta Tunnels project. In fact, the CA WaterFix was recently caught engaging in its own creative water accounting practices. As Dr. Jeff Michael, Director of the Center for Business and Policy Research, Eberhardt School of Business, University of the Pacific, wrote on his Valley Economy Blog:

They [WaterFix] create a website full of deceptive numbers with eye-catching graphics and giant bold numbers saying it will increase water diversions and storage, and then buried in a complex paragraph at the bottom of the page you find a sentence that says that the tunnels don't actually increase water supplies.

“Unbelievable” declares Dr. Michael, incredulously.

But magical thinking has never deterred Westlands (or California WaterFix) leadership. Westlands General Manager, Tom Birmingham, willingly participated in Restore the Delta’s documentary, Over Troubled Waters in 2009 and told the film crew that even with current demand and existing storage, there was enough water to meet every demand in the state of California. To follow Westlands’ logic, there is enough water in the system for Westlands to receive its full share, that is until the 2010 drought when Westlands did not receive needed water deliveries to repay their bond debt.

It’s not just irrigation districts that assume the water will be there. Urban water districts are building their futures on this same house of cards, and without greater water yields, the Delta Tunnels do not pencil out for them either.

Santa Clara Valley Water District Faces a Big Decision

A recent revenue bond prospectus released by Santa Clara Valley Water District (SCVWD), presents a glowing summary of the District’s financial strength. Indeed, SCVWD exists in one of the wealthiest regions of the country, or the world. Their ratepayers can afford to invest in the district’s future. However, digging deeper into the details several items should give their ratepayers and investors pause.

The District’s 2016 prospectus states up front that “no reserve fund has been created or will be funded with respect to the 2016 bonds” it describes. This means that the District feels it needs no emergency fund set aside to repay the bonds, apparently heedless of future problems that may arise or to support its own debt coverage ratio (similar to Westlands’ 2010 problem).

While the prospectus does reflect the District’s recent drought experience of lower supplies and reduced water sales in 2013 and 2014, it proceeds to project deliveries and sales for the water it draws from both the Central Valley Project and the State Water Project from 2017 through 2020 as much higher than recent allocations. California is not yet out of its current drought. And no one knows if we are headed into more dry years. SCVWD’s prospectus does not show investors any sensitivity analysis about how its net revenues perform if water deliveries and sales to retail water agencies remain reduced due to conservation. The question a reasonably informed investor reading this prospectus would want answered is: How much would deliveries and sales have to fall before the District’s debt service ratio fails to meet SEC accounting standards?

Buried in footnote 14 (pages 67-68) next to “Future Debt Issuances,” it is revealed that the District intends to seek out a lot of commercial paper and “long-term debt issuances” cumulating to over $900 million by fiscal year 2020. Plus, the District’s credit rating was recently downgraded slightly, and at least one Board member was not even fully aware of the downgrade because it was noted in the CEO’s report, rather than on the agenda.

Climate change modeling shows that Sierra snowpack will decrease markedly from historic levels in the future. This will decrease water in the Sacramento River which is the source water for the tunnels. This is the source water upon which water districts likes Santa Clara Valley are building their bond offerings. They premise their financial stability on decreasing future water supplies.

Metropolitan Water District Grasping at Straws

Metropolitan Water District faces even higher financial stakes in relation to the Delta Tunnels. Just twenty-four hours before the SEC announced its fine of Westlands Water District, tunnels proponent, Met’s General Manager, Jeff Kightlinger pushed through a vote for Met to purchase five islands in the Delta. He told the media that these islands will serve as a possible construction staging site for the project. Two of the islands are in the direct path of the tunnels, eliminating eminent domain concerns. However, they come with a price tag of roughly $200 million to be paid by Met customers.

As Met receives about half of the water normally carried through the State Water Project, one can estimate that their contribution for the tunnels would have been $3.5 billion. But now with Westlands out of the picture, one cannot help but ask how much ratepayer and parcel tax funding are they willing to foist on their customers in order to move forward? Will Met contribute $7 billion to build the Delta Tunnels? And who will be their financial partners? Staff at the Santa Clara Valley Water District reported to their board in February that Santa Clara Valley’s contribution to the tunnels would be between $500 million and $1 billion. That would still leave the project significantly underfunded.

Time for a Better Solution

That brings us to you Governor Brown. You seem to have grown quiet regarding the Delta Tunnels over the last sixty days, much in the same way you grew quiet over the Porter Ranch gas leak crisis.

Isn’t it time to develop a Plan B for water management for California?

It’s a shame you latched on to the Delta Tunnels as a legacy project when younger water leaders from think tanks, NGOs, and within government agencies want to begin work on a myriad of smaller projects that will capture rain, recycle water, restore groundwater, and generally adapt California to the reality of our changing climate. These water efficiency and supply projects will cost less, make more water, and create good permanent jobs throughout the state.

Governor Brown, it is time to admit the Delta Tunnels proposal is as unstable as a house of cards. The reality of climate, population and decisions regarding sustainability simply do not match up with your desire to build one big project. If you must continue the process of pushing forward with the Delta Tunnels, the proposal must be vetted by independent experts to show the real costs and risks to taxpayers and urban water districts.

Sadly, that analysis will show that the $15.5 billion Delta Tunnels proposal is as leaky as the water mains supplying water to Los Angeles and the Bay Area that desperately need our investment now.

Yours in service,

Barbara Barrigan-Parrilla Executive Director Restore the Delta