Wednesday, 14 September 2016

How can a $6.5 billion farm subsidy to Central Valley farmers provide no benefit to Valley farms and the Valley economy? When it is used to subsidize the delta tunnels.

For my detailed comments on last fall’s Brattle analysis,  reported by the AP todaysee the memo I wrote that is posted on Restore the Delta’s website.  Restore the Delta surprised me late last week by sending me a copy of this report and related emails from their PRA request and asked for my thoughts.  I wrote the comments memo over the weekend, and gave them permission to distribute it with the report.

If you have followed this blog over the years, it should be obvious that I was not at all surprised by the findings that the tunnels’ are a bad deal for farmers - even if there is a enormous federal subsidy for costs allocated to the Central Valley Project.  The benefit-cost report I published last month statedIf only the benefits and costs to water exporters who would pay for the tunnels are considered the costs still exceed benefits by more than $7 billion in the most optimistic scenario.”  

The big surprise to me in the Brattle report, was that it explicitly stated the need for federal subsidies, and then openly advocated for additional state subsidies. Coming from a state consultant, that is very newsworthy, especially given 10 years of public denials that there would be any public subsidies.  In addition to the draft report RTD released today, I saw several similar drafts in the PRA documents that went back and forth between the consultants and the state last fall.  The only substantive difference I detected in these drafts was the section with the weak rationalization of state taxpayer subsidies expanded in later drafts.  So it seems pretty obvious to me that the state sponsors were pushing the consultant to find a solid argument for state taxpayer subsidies.  However, the consultant was unable to develop a compelling case despite their best efforts, because there simply isn’t one.

It is important to realize that even if there is a combined $6.5 billion in federal and state taxpayer subsidies for agriculture’s costs of the tunnels, the net benefit to farmers who would receive water from the tunnels is still zero.  Add in the negative impacts on Delta farmers, and some risks for other farmers upstream from the Delta, and the tunnels are clearly a bad deal for the overall Valley economy.  Why no net benefit?  The subsidy would not pay all of agriculture’s cost share for the tunnels - they are still responsible for $3-4 billion in direct payments for the tunnels even if the subsidy is $6.5 billion.  Thus, the billions in costs that they would still pay consumes all of any water benefits they would get from the tunnels.

The Valley economy has many, many needs.  It breaks my heart to think that anyone in government would contemplate a $6.5 billion subsidy to Valley agriculture that provides no net benefit to the Valley economy.  If such a subsidy were to happen, it would be a tragic example of ineffective and wasteful government.  If the government feels compelled to spend billions in industry subsidies in the Valley, I would suggest spending a much smaller amount to entice some other industries that would diversify the economy and create good paying jobs.  If a subsidy proposal is ever formalized, every mayor in the Valley should oppose it and offer up an alternative economic development package that is much cheaper and does more for their constituents.

Three additional comments that occurred to me this evening as I read the AP report and some reactions to it.

1.  Why did I say $6.5 billion in subsidy, when the AP and report only quotes $3.9 billion from the study?  Two reasons:  First, the $3.9 billion figure in the report is a discounted present value, so I have converted it to a $4.6 billion undiscounted value that is comparable to the estimated $16 billion construction cost.  The other $1.9 billion is the amount of additional subsidy that would be needed to get the tunnels break even for farmers, and it is the reason for the extended discussion of additional subsidies for the project.  So while the report does not assume a specific amount for state subsidies, the minimum amount of state subsidy the consultant is trying to justify is pretty clear.  The AP reporter is just being careful to quote exactly what the report said about a federal subsidy, and she also notes that agriculture still comes up short.

2.  Does Californians For Water Security have a secret financial plan for the tunnels?  CWS’s response reminds me a little of Donald Trump’s secret plan to defeat ISIS.  They said, the draft report “doesn’t account for the latest thinking on financing the project.”  So, what exactly is the latest thinking?  Please inform everyone.  What exactly is the plan?

If there was an actual finance plan for the tunnels, this “outdated report” wouldn’t be so newsworthy. Tunnel advocates have no one to blame but themselves for not putting out a financial plan after 10 years.  An information vacuum will be filled, and this is the best information available.

3.  Doug Obegi’s comments on the report are well worth reading.  He highlights some additional points that I didn’t discuss, and explains some other points in a different way that may be more understandable to some people.

About the Author

Ethan Jacob

Author & Editor

I am Ethan Jacob Executive Director of the Center for Business and Policy Research at the University of the Pacific, where I have a joint faculty appointment in the Eberhardt School of Business and the Public Policy Program in the McGeorge School of Law..

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