Can California afford a new water bond?

150 150 Mark Pisano

(photo credit: Ben Bunch)

As lawmakers begin the work of recrafting the state water bond—a long-delayed effort to pay for billions of dollars in needed upgrades to the state’s decades-old water system—they have been praised in some quarters for trying to do things differently than in the past.

And rightfully so. With legislative leaders aiming to put a water measure on the 2014 ballot, a trimmed-down version of the bond was unveiled this week in the Senate. The Assembly’s Committee on Water, Parks, and Wildlife, meanwhile, has developed a set of principles for an updated bond that would clearly define its goals—and make the measure much more accountable to voters by prohibiting the types of earmarks that turned public opinion against it. The committee has also posted online all of the comments it has received on these principles, including a letter I submitted on behalf of the Southwest Megaregion Alliance, a group that promotes fiscally sustainable infrastructure.                                                                        
These are important first steps toward bringing transparency to California’s notoriously murky water debates.

But before this debate goes any further, one vitally important issue must be addressed. While the Senate’s initial water bill and the Assembly’s principles are tackling many of the water challenges facing the state, they don’t deal with the critical underlying question: Does the fiscal capacity of the state’s general obligation structure have the ability to support additional demands?

In other words, can California afford this?

Long term liabilities

The water bond has been pulled from the ballot twice since it was first drawn up in 2009, largely because its then-$11 billion price tag was viewed as unlikely to pass in the midst of the economic and fiscal crises caused by the Great Recession.

While lawmakers clearly feel that the improving economy will make voters more likely to approve this new spending, California’s long term liabilities—and the state’s ability to support additional responsibilities—still have not been addressed.

A looming fiscal crisis continues to hover over California, one driven by the state’s changing demographics, and we are only now beginning to understand its implications. After spending my career at the Southern California Association of Governments, my own work at USC’s Sol Price School of Public Policy finds that the aging of California’s population and the reduction in the working age population will reduce the growth of income across the state by 14 percent this decade. That will climb to a 19 percent reduction in the next decade.

Shrinking income growth will mean a shrinking pool of tax revenues. According to my research, growth in taxes paid by individuals to state and local government will decline by 20 percent this decade and 34 percent next decade. These reductions will slow the state’s economic recovery and will affect the future revenue of California’s governments, particularly at the state level. When coupled with unfunded long term health and pension commitments, this could mean several more decades of fiscal stress.

Before California makes billions of dollars in commitments to investing in its water system—or the upgrades the state also must make to its transportation or education sectors—these long term considerations must be assessed.

A potential solution

As one of the co-leads of the Economic Summit’s Infrastructure Action Team, I am working with experts from across the state to develop a policy agenda that will address this challenge. The Assembly’s principles, by offering a comprehensive framework for addressing water issues in the state, are a good starting point.

Of particular interest is the Assembly’s principle of addressing the “increased regional self-reliance and diversification for water supply.” By moving more responsibility for infrastructure, as well as financing flexibility, to the regional level, this approach could offer the beginnings of an answer to the question, ‘How are we going to pay for this?’

The way lawmakers have proposed going about this, however, still needs work. The principles’ proposed instrument for increasing self-reliance, for example, the Integrated Regional Water Planning Process (IRWP), is not without its imperfections. A recent study by the Center for Sustainable Cities at USC noted that the IRWP has contributed valuable planning information, but this regional approach has also suffered from a lack of coordination, management, and implementation. 

To accelerate the goal of self-reliance, other improvements in regional institutions—and, just as importantly, in water pricing—could be made. (Some of my research on this subject was recently summarized here.) The principle of users pay for their beneficial uses will be an important strategy not only for increased accountability, but also for creating an environment in which local and regional investments are better integrated and more beneficial uses and dollars are brought into the investment mix. 

By combining flood, water quality, open space, habitat and water supply payment schedules, new financing structures may also be developed that can help ease the pressure on the state’s budget. The potential multiple benefits of investments in local supply measures could simultaneously reduce water demands (including those on the Delta) and reduce energy use and emissions. The state should develop a mechanism for calculating these multiple benefits in order to prioritize its priorities for spending.

As the debate over the water bond continues to gain steam in Sacramento—and with hearings in both the Senate and Assembly this week, it most certainly will—these ideas should be part of the conversation. California’s long term fiscal health depends on it. 


Mark Pisano

All stories by: Mark Pisano