CA WATER COMMISSION: Determining the public benefits of conveyance projects

The California Water Commission is in the process of assessing the state’s role in financing commands projects that could help meet the needs in a changing climate as tasked by action 19.4 in Governor Newsom’s water resilience portfolio. This work advances the portfolio’s goal of promoting statewide water resilience and reinforces the role that the Commission plays as the primary public forum for improving water management policy to assist regions in achieving climate resiliency, as stated in goal one of the Commission’s strategic plan.  The Commission is currently gathering public and expert input related to the state’s role in financing climate-resilient conveyance projects. This input will help the Commission formulate its recommendations to the administration.

At the Commission’s December meeting, a panel of experts discussed public benefits associated with conveyance projects. The panel’s objective was to provide the Commission with information about identifying public benefits based on policy priorities, providing examples of where this has been done already, and discussing methods for valuing public benefits.  The commissioners will use this information to develop a recommended list of public benefits that the state could fund and how the state could consider valuing those benefits.

The panelists were:

• • Dr. Richard McCann, co-founder and partner of M Cubed.
  • Dr. Steven Hatchett, senior principal economist with ERA Economics.
  • Dr. David Sunding, professor emeritus at the University of California at Berkeley and president of The Brattle Group.

Assistant Executive Officer Laura Jensen began with a brief overview and introduction to set the stage for the panel discussion on public benefits. The Commission’s task is to consider resilient conveyance solutions that will benefit the state and develop a white paper with recommendations for state policymakers to consider as they weigh how to finance conveyance projects. These will be high-level policy recommendations that can be adapted for future bond language or for agencies and departments tasked with rolling out bond-funded grant programs.

Ms. Jensen said that the Commission’s recommendations should answer questions like what kinds of conveyance projects will the state be considering? How will the state know if these projects promote resilience? What are the criteria that it should use to evaluate resilience? What are the project’s benefits to the public and the state of California? And what parts of the project should the state fund? Finally, how can the state use or leverage funding mechanisms to advance conveyance projects that meet resilience criteria?

She noted that the recommendations could extend beyond bond language and grant funding and include ways to promote alignment between state agencies or between the state and federal funding sources or ways to engage in policy solutions to address challenges if the Commission chooses.

“For instance, the idea of a statewide bottled water tax that came up at our last meeting, or ways to utilize existing programs like IRWM or SGMA to spur collaboration within basins and watersheds,” she said.  “The Commission won’t be recommending specific projects, and the Commission itself won’t be working to advance certain financing mechanisms. The paper that we produce our recommendations will describe the characteristics of resilient water commands, projects that meet the needs of a changing climate, the potential public benefits of such projects, and the implications of various financing options.”

The Commission has been gathering information to inform its recommendations by both soliciting public input at regional workshops and hearing from expert panels at commission meetings.  They have already held two workshops in Southern California, with 75 to 100 attending each online workshop.  The workshops included panel discussions representing diverse perspectives within the region as well as smaller breakout discussions.  Two workshops in Northern California are scheduled for January, which will follow a similar format.  The results of the workshops will be covered at the February Commission meeting.

Ms. Jensen then briefly recapped the work that has been done to date.  The Commission’s steps are first to define what a resilience conveyance project is, determine the public benefits of that project, and what financing mechanisms could be applied to advance that project.

The definition and characteristics of resilience provide the foundation for understanding how to evaluate what makes a conveyance project resilient. The definition on the slide was taken from the ecological definition of resilience, and it includes a component of transformation discussed at an earlier commission meeting. Speakers have offered that a resilient water system is accountable for the environment and humans’ needs, adaptable to all hydrologic conditions, reliable during a crisis, flexible, redundant, interconnected, and guided by science and long-term planning.

The Commission has broadly defined conveyance to include gray infrastructures such as pipes, canals, aqueducts; green infrastructure such as streams and rivers; and governance, legal, regulatory, and policy frameworks that underpin the water system.  They have also discussed the conveyance is embedded into the water system as a whole, making water conveyance projects a proxy for considering broader water management issues.

The portfolio asked the commission to consider a state role in financing conveyance projects that promote climate change resilience. So the first step is to ask, is the project resilient?  If not, the project is not advancing the state’s interest in creating a resilient water system.

The criteria that the Commission has discussed using to evaluate the resilience of a project are:

• • The institutions supporting the project show evidence of taking climate change seriously.
  • The project is designed to be robust and reliable to a range of climate conditions.
  • The project provides multiple benefits and does not unduly impact the environment, communities.
  • The project team has engaged partners and is collaborating with stakeholders, particularly those with a disproportionate need.
  • The project advances watershed-or basin-scale solutions.

Staff continues to seek feedback on these criteria from workshop attendees; so far, stakeholders at both workshops held to date feel that the criteria are either moderately or very important.  Establishing a project’s resilience will demonstrate that the project is advancing the administration’s goal of meeting California’s water needs through the 21st century. These resilient conveyance projects would benefit local water users by ensuring that they have reliable water supplies now and in the future as the climate continues to change.

The second step is to ask if these projects also benefit the larger citizenry of California.  Part of the process of determining a potential state role in financing conveyance projects is to assess what facets of a project state will pay for, which is the subject of the panel.  The objective is to provide the Commission with information on identifying public benefits based on policy priorities and methods for valuing public benefits.  The result of this panel and subsequent discussions should lead to discussing a recommended list of public benefits that the state might fund and how the state could consider valuing those benefits.

The third step will be for the Commission to broadly assess possible financing mechanisms for conveyance infrastructure, which will be the subject for panels and discussion at future meetings.

DR. RICHARD McCANN: Beneficiary Pays Principle & Water Conveyance

M Cubed has been working on water, utility, and environmental economics issues primarily in California since 1992.  The firm focuses on water resource planning and conservation evaluation; they have done work for several state agencies, such as a beneficiary pays analysis for financing levees in the Bay-Delta and supporting work for the Commission’s Water Storage Investment Program.  They also work on electricity rates, regulations, and climate change actions and adaptation.

Dr. McCann began his remarks by defining the beneficiary pays principle as a way of linking benefits to payments or financing options for particular projects.  It’s a multi-step process that begins by identifying the benefits and the beneficiaries.  Next, the project funding requirements are considered, and within that, identifying and assigning costs responsibility for that project based on the benefits accrued.  Then potential financing mechanisms are identified and matched with the beneficiaries, so the payment system is equitable and fair as well as consistent with economic efficiency. Finally, then the plausible financing mechanisms are evaluated along with the associated structures for implementing those measures.

“That’s probably the stickiest question that you’ll get to because there are a lot of different interests that are interested in the financing mechanisms,” said Dr. McCann.

So what are the benefits, and who are the beneficiaries?  Beneficiaries are entities that generally own use or control assets used for specific purposes that will benefit from a project, such as water conveyance, said Dr. McCann.  Monetary estimates can be attached to those benefits, allowing the relative values to be determined for the beneficiaries of those benefits.  There are several different economic methods to do that analysis.

Some benefits can be identified as individual or private transactions, such as a customer paying a water bill.   It’s pretty easy to determine the economic value based on what the value of that transaction was.  However, other broader public benefits are much more difficult to attach a value to, such as the public’s enjoyment of habitat or the continued existence of a species.

“Those sorts of things that are much more difficult to put a price tag on,” said Dr. McCann.  “In the Flood-MAR program, we looked at the benefits of having floodwater diversion for on-farm recharge program. The chart shows the flow of those benefits that were identified along the way and the linkages between some of these benefits they’re enjoyed from such a program. This chart is an illustration of how you can go through and identify the benefits and beneficiaries of these kinds of programs.”

The list of beneficiaries of conveyance is fairly long; the list on the slide is likely a partial list, said Dr. McCann.  But it is representative of the range of beneficiaries from local communities, water users, ecosystems, and even up to the regional and state economic level.  There are also other associated indirect benefits, such as hydropower generation.

Beneficiaries can be classified by looking at how the benefits are linked to water conveyance and how the economic relationships are traced through to those benefits.  Categories help to capture who the potential beneficiaries are and what their relationships are to those benefits.

Examples of categories are:

• • Public versus private use;
  • Whether it’s a primary benefit from water conveyance or a secondary benefit;
  • Whether the benefits are direct, extended, or peripheral; for example, water use versus the electricity system that benefits from hydropower generation, or you can have direct jobs are created by water use in a farm versus the extended or peripheral benefits to businesses that sell services to farmers;
  • Tangible and intangible benefits: The tangible benefits are readily evident and easily measured; the intangible benefits are much more difficult to measure.

“We want to start here with the question of looking at private versus public benefits and who pays for those kinds of benefits? Because that’s ultimately the question that you will want to answer,” said Dr. McCann.  “Private benefits accrue to specific entities and individuals, and they can be separately priced, for several different reasons which I won’t go into.  Private benefits are the kinds that accrue from buying gasoline or going to a restaurant. Really, the only justification for subsidizing provision of these kinds of private benefits is that the beneficiary is somehow limited in the income or assets or debt capacity that they have to have in order to gain those benefits.”

Public benefits can accrue both society-wide or within a specific geography or class of individuals. “The most common ones that you will see are environmental and ecosystem benefits and these are generally society-wide. And they’re the best candidates for state funding. There are also regional development benefits that can occur. How much state interest is there in developing a specific region, and is the region able to cover those expenses themselves? If they can cover those expenses, it’s more likely to be preferable to have those kinds of benefits paid for at the regional level.”

The slide shows some examples of how the different categories of benefits might accrue from water conveyance.   Within the private benefits categories, there are the direct primary and tangible benefits; you can measure the water that’s delivered and the economic benefits that accrue and charge a separate price for that water use.  Hydropower is an extended benefit that opens up the possibility of having electric ratepayers pay for a portion of water conveyance benefits.

For public benefits, ecosystems are the best example of a potential direct, extended and peripheral benefit from water conveyance.  There can also be intangible benefits from water conveyance, such as having regional coordination, increased reliability, and increased resilience in the water conveyance system. There might also be more tangible public benefits, such as local job creation and increased regional economic development.

The chart shows the level of analysis needed to analyze these kinds of benefits.  The first category is, can you do a quantitative analysis and determine the monetary benefits and link financing mechanisms to it?

“Monetization is basically your ability to take the benefits and turn them into financial flows of funds to your project,” said Dr. McCann.

The next category is you can quantify the benefits, but it’s much more difficult to monetize those benefits to capture funding sources.  Finally, qualitative measures of benefits are more difficult to identify the monetary benefits associated with a project. You know there are benefits, but it’s hard to put a dollar amount on it, he said.

Dr. McCann had some additional considerations for public funding. He began with the fiscal orphan concept, noting that he has a different take on it than what Ellen Hanak and the PPIC has.  “I view fiscal orphans basically as benefits that would accrue to private individuals, but there are reasons why they are not able to generate the funding in order to gain those benefits.  Examples of those are the rural communities that may not have sufficient assets or wealth within their community; flood protection; and regional collaborative management. These fiscal orphans may be more difficult as they are intangible benefits.”

There are also private benefits that accrue to budget-constrained entities, similar to what’s happening with the poor, rural communities.  There are also coordination benefits within a region where it’s just too difficult to bring together the different entities to allocate the joint benefits that accrue to them from coordination.

Dr. McCann said he views ecosystem benefits as a pure public benefit; it is a policy choice that can be made exclusive of whether it’s a fiscal orphan or not in terms of the funding, such as with the Water Storage Investment Program where identified public benefits of ecosystems were included. Other public benefits come from regional economic development opportunities, such as in a case where you expect future beneficiaries, but they haven’t arrived yet, so to develop funding, you basically need to kick start a project to improve economic development in a local region. Another example is a project that is a keystone for inter-regional reliability and resilience, but the benefits are more difficult to allocate between regions, and so the state can add the extra funds that may not be coming from the regional beneficiaries.

Dr. McCann then wrapped up with his view of what state funding criteria the Commission might want to consider.  The framework for the Water Storage Investment Program was clearly specified and structured to address those funding questions.

“There are some additional public funding criteria that you might include in that process,” he said.  “One that I think is important is greenhouse gas reduction benefits so that some of those benefits accrue without beneficiaries being clearly identified for those.”

“You want to steer away from funding private benefits to entities that have sufficient resources.  For example, electricity is a relatively rich financing source that you can identify and gain funds from.  Hydropower is a relatively inexpensive resource in the state compared to the average cost of electricity, so adding costs to hydropower will not affect its relative economics compared to other generation resources.”

“You want to fund society-wide public benefits, and ecosystems are the most obvious case for this. Then you want to consider funding or lending funds for regional benefits if those regions are resource-constrained. You want to look at funding coordination, resilience, and reliability if the interdependence between the regions is significant, and at least one of the regions is resource-constrained in terms of the funds that they can provide to those projects.”

DR. STEPHEN HATCHETT:  Lessons learned from the Water Storage Investment Program

Dr. Stephen Hatchett is an economist with ERA Economics with close to 40 years of experience in large-scale and small-scale water projects.  He has done work estimating benefits and cost allocation, including work with the Water Commission on the Water Storage Investment Program.

So what are public benefits? How are they defined and characterized? And what are some options for thinking about how to how to fund public benefits of conveyance projects?  Water conveyance projects, like water storage projects, can provide multiple benefits, both public and non-public, to different groups of beneficiaries, he said.

Traditional ideas of public benefits include ecosystem restoration or enhancement and certain aspects of flood control that benefit nature. Other ways of determining a public benefit are defining them in a statute, as the Water Storage Investment Program did.  The five categories of public benefits were defined in the statute, and then the Commission and staff had to figure out what those meant and what the breadth and the limits on those would be for public funding.  However, there isn’t a statute yet to determine public benefits for conveyance projects; that’s part of what the Commission will be making recommendations to the legislature on.

“Public benefits can be defined based on broad public preference,” he said.  “The legislature and voters routinely do this, whenever they make decisions about how to use public money, there’s some part of that decision that it’s a public benefit that the money is going to.”

A related issue that often comes up is that a public benefit or a benefit, in general, is measured relative to some baseline condition. “How you think about that, whether it’s a benefit, it’s compensation for a past harm or mitigation for a future harm; it’s something you need to think about in terms of whether it’s something that the state broadly ought to fund,” he said.  “That’s an issue that often comes up, particularly with large water projects, and conveyance would be one of those.”

Dr. Hatchett then proposed a general definition of public benefits as water-related benefits that don’t accrue to a well-defined group of people from whom you can clearly assign those benefits and recover the costs.

The opposite of that is the private or non-public benefits; he prefers the term “non-public benefits” because some of them can be thought of as public just on a smaller geographic scale, to which you can assign costs.  Non-public benefits are those that you can define as a group of people or entities that are beneficiaries, and you can assign them costs and recover costs from them.

Public benefits can have both public and non-public aspects. Dr. Hatchett said that there aren’t that many cases of pure public benefits out there, except some ecosystem improvement benefits that could easily be argued should be assigned to the state as a whole. With other categories such as flood control, water quality improvements, or recreation, there are often both public and non-public aspects that can weigh into your decision about defining what portion of those might be publicly funded.

“Many kinds of projects often provide multiple benefits,” he said.  “As part of that, the construction costs associated with these projects can serve most if not all of those multiple benefits. You start out with a joint cost problem – how do you decide which of the project would be easy if every piece of the project cost could be directly assigned to one of the multiple benefits? That’s usually not the case, so you have to go through a process of defining how these joint costs get shared.”

Dr. Hatchett said there are several ways to provide state funding. One is the process that was followed in the Water Storage Investment Program, which is to go through defining the benefits eligible for public funding, quantifying those benefits, and then allocating funding to pay for those public benefits; it’s a very methodical process.  Another approach is the cost-share approach, such as the Army Corps of Engineers uses, where if a project meets certain qualifications, it qualifies for a cost-share. It can vary over the years, depending on funding and other factors.

Another example of a cost-share approach at the state level are grant programs, such as the Integrated Regional Water Management Program, that require a cost-share be provided by the local partner.   That cost share can apply both to public benefits and non-public benefits, depending on the particular round of grant funding guidelines.

Finally, low-interest loans are often used, but Dr. Hatchett said not that he knows of public benefits, but certainly for non-public benefits. The State Revolving Funds for clean water and drinking water are great examples of low-interest loans, but the challenge for public benefits is the revolving fund needs money coming back in, so there needs to be a revenue-generating mechanism, which is often difficult to do for public benefits.

Dr. Hatchett then turned to the Water Storage Investment Program that was defined in chapter eight of Proposition 1, which the voters passed in 2014.  The benefits that were eligible for funding were ecosystem, water quality, flood control, emergency response, and recreation.  He noted that most of those are traditionally thought of as having significant public benefit aspects, except perhaps for emergency response at the local level.

“Generally, I would say local municipal agencies build emergency water supplies at least to a certain level into their local planning and their local rate and cost recovery,” he said.  “Nevertheless, that was that was one of the public benefits included.”

He noted that they are not necessarily limited to or have to include those particular public benefits in this instance for water conveyance.  However, he noted that those benefits resulted from many months of discussion and negotiation among legislators and interest groups, so it perhaps provides some guidance as to what can pass muster at the legislative and voter level.

Dr. Hatchett acknowledged that the Water Storage Investment Program was challenging for all concerned.  It was a lengthy and complicated process to go through the quantification of benefits and the allocation of costs, and the determination of eligible funding required by the statute. It was a challenge to develop a comprehensive methodology to quantify benefits and translate those physical benefits into monetary values.

“We were trying to balance through very clean rigid methods for estimating benefits, versus putting enough flexibility in to recognize that we were we were going to be getting projects of all sorts from all over the state and not locking into methods for determining what the state funding could be that didn’t recognize that kind of variability,” he said.  “It’s a challenge for the water storage program projects and going forward for conveyance projects, on identifying how to cover ongoing operation and maintenance costs, and assuring that public benefits are provided out into the future over the life of the project.”

Bond funding has been the usual way of funding large scale water projects, and short of any new funding mechanisms that might emerge, that will probably continue.  He noted that state bonds are not legally allowed to pay for operations and maintenance, which presents a challenge, especially for projects that are heavily weighted toward operational changes, as opposed to large upfront costs.

Dr. Hatchett noted that resiliency itself is a desirable feature if not a benefit eligible for public funding for these projects.  “In the Water Storage Investment Program, the way we handled that was we developed several climate scenarios, including extreme climate scenarios, and each project had to analyze how their project would respond under those extreme conditions out into the future.”

The Water Storage Investment Program projects had to include all of the relevant costs associated with providing the benefits that the state would be funding. “That’s important because if we’re thinking about isolating conveyance projects, you need to be careful that you’re not double-counting the benefits of water supply because there’s going to be some source of that supply that could be a groundwater recharge project or a surface storage project or recycled water and the conveyance is a mechanism to get it distributed in a different or a more extensive geographic way. We have to think about ways of quantifying that additional benefit of the conveyance that doesn’t double count the value of the water produced at the source.”

Dr. Hatchett then gave his ideas for identifying a statewide public benefit that the state might consider paying for.  A public benefit would accrue to the state and its citizens as a whole by the very nature of the benefit.  As an example, ecosystem improvements are broadly beneficial across the state.

“Another criterion that could be considered a public benefit if there appears to be no cost-effective way to restrict the benefits only to a subgroup, but that can help pay for them,” he said.  “The third consideration would be the orphan projects, where the benefit has been difficult to finance and even though the project can be shown, broadly speaking to have a net benefit, it’s been difficult to finance for various reasons, or that the significant number of the beneficiaries are simply unable, based on their economic condition, to pay their share of the costs.”

He said that to identify public benefits, the legislature and voters determine what they think is in the public interest.  An example is the recent passage of the Human Right to Water, which brings in the state interest and a potentially publicly-funded benefit for providing safe drinking water to communities that otherwise could not afford it; certain aspects of flood protection would also fall into that category.

“We also want a conveyance project that, on the whole, looks like a good idea,” said Mr. Hatchett.  “You would first start with a project that looks like it provides a net benefit, and when considering all the monetized and non-monetized benefits and costs, it looks like a good idea. Then we need to think about what is the public interest in that project.”

Finally, there are the intangible public benefits, such as regional collaboration, economic stimulus, and community enhancement. He said they are worthy public goals, so when thinking about how much public funding is warranted, some things to consider are, can the benefit be clearly and consistently defined? Can it be quantified? It’s going to be generally difficult to quantify monetarily in the same way you monetize a benefit of providing a water supply or providing a recreational experience.  For an intangible public benefit such as community enhancement or economic stimulus, is a conveyance project the right way to think about providing that kind of broad public benefit instead of other ways of doing it?

“If the answers to these questions aren’t clear, but the state still sees an interest, rather than try to quantify them and calculate how much of the state’s interest there is, you can treat them as other criteria that go into the overall ranking and scoring of projects within a within a competitive decision process,” he said.  “So in other words, you don’t help use them to calculate the dollar amount of the state funding, but they’re part of the overall decision process for choosing a project to fund.”

DR. DAVID SUNDING:  Public benefits of infrastructure projects

Dr. David Sunding with the Brattle Group started with the question of how conveyance projects promote economic stimulus.  There are two ways that can happen:

The first is that conveyance projects can improve and stabilize the water supply. “Water is an input into the economy and is used by virtually every sector,” he said.  “The better water supply stimulates economic activity and creates benefits both to direct users in the urban and agricultural sectors. But improved water supply through conveyance projects, storage, or other mechanisms can also create indirect benefits to the region and the state.”

The second type of general benefit from conveyance projects is that the construction of the project itself creates economic stimulus in the form of construction jobs, engineering and design activities, and ongoing operations that require labor and other inputs.  However, he noted that funding the project through bonds, higher taxes, or water rate increases reduces household spending and creates a drag on the economy.

Dr. Sunding then dove into the stimulus benefits of the construction activity itself, noting that this is a subject that economists have thought about quite a bit.  “In general, when it comes to evaluating projects, what I can tell the Commission is that economics has a lot to say about both the benefits of improved water supply and the benefits of construction activity itself.  Economists have spent decades studying agricultural and urban water demand meaning roughly the amount of money that direct users would be willing to pay for an amount of supply or a more stable supply.  These demand relationships are frequently used and can be used to value the direct benefits to water users.”

The benefits of construction activity are analyzed using models that track input-output relationships that track one sector’s usage of goods and services provided by other sectors.   He said many examples of applications of models like this that apply to water supply and conveyance projects.

Dr. Sunding noted that there are many examples of projects that generate regional benefits from construction and operation that are roughly equal to costs, which is why politicians and policymakers on both sides of the aisle love infrastructure spending that’s financed by the public.

“Think of it like a forced transaction, where the ratepayers or taxpayers who are doing the funding have reduced household income through water rate increases or increased taxes,” he said.  “That means they’re able to buy less French cheese or Chinese-made toys or money at the local dry cleaner or whatever it is they would have spent their money on. That spending is substituted for spending on construction.  If you look at it from the perspective of the state as a whole and their reductions and gains from a forced spending program like that, so you look at employment or household income or other measures of economic well-being, and construction spending can actually be a net positive. And again, this is why politicians are so interested in infrastructure spending. So it’s important to keep this in mind when we think about public evaluation of water infrastructure projects like conveyance.”

Next, Dr. Sunding addressed how conveyance projects maximize economic benefits and how project proponents can measure or account for economic benefits.  Often, when economists or others look at categories of benefits from the project, the project is already configured, so it is a fixed project, so there is a baseline condition with no project, and an altered condition with the project, and the two outcomes are compared.  However, where the project configuration is changeable, we can choose the project’s specification that results in the highest level of benefits, either aggregate benefits, net benefits, benefits to a particular group, or however you’d like to analyze it.

Project benefits to the water users can result from more economic activity, more home construction or business generation; in the agricultural sector, more acres cultivated or higher value crops cultivated; those are all the factors that go into water demand.

“But the other factor that I’d like to highlight when it comes to something like conveyance projects is reliability,” said Dr. Sunding.  “So if the conveyance project results in a condition where the reliability of the water supply is improved or the ability to deliver water in in dry years – if that can reduce shortage losses, then that’s its own category of benefit.   Essentially the way economists think about shortage loss is it’s the amount of money that water users would be willing to pay to avoid a shortage of a given magnitude and duration. The technical term that economists use for that is consumer or producer surplus.”

Dr. Sunding said the reliability benefits of conveyance can be very real. As an academic, he’s done quite a bit of work with the California Resources Agency, DWR, and urban agencies like Metropolitan Water District and the San Francisco Public Utilities Commission, which involved figuring out methods for valuing the cost of shortage or the benefits of reliability.

“There are many cases in Southern California and in the Bay Area where residential customers – who in some ways have the lowest willingness to pay for water, would pay upwards of $5000-$10,000 per acre-foot to avoid a shortage of something in the five to 10% range as we’ve seen in the recent past,” he said.  “So the shortage benefits, they can be quite real.”

The indirect economic benefits from enhanced water supplies can be calculated using very standard economic models. Some are more complicated than others, but he said fundamentally, they all do the same thing: they capture the relationship between levels of economic activity, employment value-added, and labor income. So both the direct and indirect benefits to society can be calculated in a pretty straightforward way. However, the less tangible benefits, such as economic stimulus, community enhancement, watershed or basin-scale collaboration and governance – clearly, some of these are more difficult and might even reach beyond the field of economics.

“One perspective on these types of problems that is particularly important is the question of economic stimulus in disadvantaged communities, particularly in parts of Los Angeles, Riverside, San Bernardino, and Imperial counties, and particularly on the western side and the southern parts of the San Joaquin Valley, which contain many of the state’s poorest communities,” Dr. Sunding said.

He has taken a detailed look at these questions through his recent work for the San Joaquin Valley Blueprint effort.  “It’s hard to believe that in California, which has so much economic power and wealth that there are census tracts and neighborhoods where three-quarters of families live below the state poverty line. Those families tend to be concentrated in agricultural work, but certainly not entirely. So with respect to agriculture, these questions become really important.”

For economic stimulus effects in disadvantaged communities, the state has actually developed an important new tool called Cal EnviroScreen, which is the state’s environmental justice screening tool.   “It has a lot of uses, particularly for specifically looking at the environmental justice implications of different types of environmental policies,” Dr. Sunding said.  “It’s also quite a good resource for getting at the question of how does a particular economic intervention impact disadvantaged communities in different parts of the state.  We’ve shown how it can be applied to look at the economic impact of or the distributional impact of policies that affect agriculture.”

So what are the public benefits to state taxpayers that may justify state financing of conveyance projects? Dr. Sunding noted that water infrastructure projects that enhance economic activity also increase state and local tax revenues in the form of sales taxes, income taxes, property taxes, and some employment taxes.

An example of a policy that impacts state and local tax revenues is the groundwater pumping limitations due to implementation of SGMA, which are ultimately caused by finite water groundwater resources in the San Joaquin Valley. SGMA implementation is projected to reduce state and local tax revenue by over $500 million per year.

“So just from a dollars and cents perspective from state and local governments, projects to mitigate these impacts generate incremental tax revenues in the sense that they avoid those losses,” Dr. Sunding said.  “This creates a business case for state and local cost-sharing of projects that keep the economy in the valley and in another critically overdrafted basins functioning.  The logic here is similar to the tax increment financing that occurs in other parts of the economy.”

Dr. Sunding also noted that there’s a line of thought in economics that says that if you have a water infrastructure project that’s going to benefit direct water users, whether it’s in farms or cities, there’s a line of thought in economics that says that indirect or community benefits shouldn’t be counted in a cost-benefit analysis.

“That thinking rests on the idea that the economy is competitive and enters an equilibrium,” he said.  “To put it bluntly, the way a lot of economists approach this question is if people lose their jobs in farming due to a lack of water supply, then no big deal, those workers can be costlessly redeployed in other parts of the economy. And therefore those impacts and those costs shouldn’t be part of an analysis of public investments to stabilize water supplies.”

“Some of my worst days as an economist have been spent listening to that since I think that line of thinking that indirect or community benefits don’t count or shouldn’t count is a very simplistic view of the world,” Dr. Sunding said.  “There are obviously huge economic and social costs of unemployment in any sector of the economy, and that’s especially true in agriculture where the workforce is at the bottom end of the socioeconomic spectrum. In many cases, there may be no in-state jobs available to people that that are affected.  Losing jobs in agriculture or other parts of the economy may lead to out-migration or worse, a condition of chronic unemployment, which has its own attendant increases in social safety net spending that can definitely be a result.”

“It’s worth remembering big public infrastructure projects that we rely on today, like Central Valley Project or the State Water Project weren’t built just for the farmers and the urban water users who directly use the water,” he continued.  “The Central Valley Project, in particular, was a community development effort, for the obvious reason that a big water infrastructure project like the CVP provides a lot of economic uplift beyond just the people who are directly using the water.”

There’s also an idea expressed frequently by economists that if there are regional economic developments in a public investment, those cost shares should be paid for by residents of that same region. “While I get the logic in that economists generally don’t love cross-subsidies between one part of the economy and another, I do have to say as someone who’s worked in government and worked with government agencies quite a bit, that way lies madness.  We are one state, and if every policy has to get evaluated through the lens of ‘you benefited from that one so you should pay for it, you over there benefited from another project, you should pay for that’ – it’s going to be very hard to make decisions. Better to minimize that kind of thinking and focus instead on aggregate benefits would be my view on that.”