Q/A: How is the Delta Conveyance Project Financed?

In the latest Delta Conveyance Deep Dive video, we take a look at the financing mechanisms that make the project possible, both now, in the initial planning stages, and in the future if the project is approved. It might not sound like the most exciting aspect of the project but it's certainly one area where there's a lot of public interest and concern. With a project of this scale (the most recent estimate of the total cost is around $16 billion) it's not surprising that people want to know who's footing the bill. In this illuminating conversation, Department of Water Resources (DWR) senior attorney Chris Martin guides us through the backwaters of Delta Conveyance Project financing.

Moderator: Patricia Clark, Associate Governmental Program Analyst, Delta Conveyance Office at DWR.

What role does DWR play in financing the project? 

Chris Martin: DWR plays a very central role in financing the State Water Project. As the Department, we're the owner and operator of the entire State Water Project, so our responsibility is to raise revenue for the project and keep the lights on; keep it running day to day. We do that using a combination of current cash flow, debt issuances or, essentially, financing, and then the state water contractors that receive a water supply from the project reimburse the department for all of those costs. That’s true whether we're talking about construction of a new project, rehabilitation of an existing facility, or even planning for facilities.

Of course, there's no project yet - we're still in the environmental review stage, but that work also takes a lot of resources and there's other design and planning that's happening as well. So, how that work being funded? 

CM: So again, the planning work is funded with State Water Project revenue. That's the simple answer, and what that means is, it's money that is ultimately derived from the participating public water agencies that receive their water supply from the State Water Project. This case is a little bit different or a little bit more complicated, if you will - again, given the magnitude of the costs. So, we're looking at a budget over four years, of somewhere in the neighborhood of $350m just to do the environmental review and planning for this project and because of that, it's difficult to pay‑as‑you‑go. So, one of the options the department is looking at for this project is actually financing those planning costs. But even if the department were to finance the planning costs, at the end of the day, those costs are also borne by the public water agencies that participate in the project.

Recently DWR initiated a so‑called validation action which received quite a bit of press, some of it claiming that it amounts to the state giving the project a “blank check”. So, what is a validation action and is it really a blank check? 

CM: Well, no, it's not a blank check. I'll get to that in a minute. A validation action is actually kind of an unusual thing in the law, because typically courts will only entertain a lawsuit if there's actually a conflict or an argument between parties. Courts don't do what are called “advisory” judgments typically, which is where they tell you what the law could or would mean absent some dispute. Validation cases are actually an example of when an agency can go before a court and ask for a judgment absent any actual dispute, and I'll explain the reason why. 

Any investor in a project or purchaser of bonds or purchasers of stocks, any investor wants certainty that the issuer of that bond actually has the legal authority to issue the bonds and for at least the last 100 years the form that certainty takes is what's called a bond counsel opinion. That's a legal opinion issued by bond counsel that attests to the authority of the issuer, whether that's a government agency or a big corporation, and that attests to their authority to issue the debt that they're selling to the public. In this case, we believe that the statutory framework for the Department provides us with the authority to issue bonds. What we're doing with the validation action is asking the court if it agrees with our interpretation of the law and that's the simple answer for what the validation case is intended to accomplish. It's intended to answer the question, “Does the law give the Department the authority to issue debt to construct this project?”

You asked me if it's a blank check and the answer to that is “no”. The amount of debt that would be issued is not an issue before the court. Ultimately, before the Department could issue bonds for a project there has to be a budget for that project and that budget, whether we're talking about for planning or construction of the project, is reviewed not only by the Department but by the public water agencies that are participating in the planning and may ultimately participate in a project if one is approved. It's important [to understand] that each of those public water agencies has its own public board that meets in public and reviews these things and is there to look out for the interests of their local service area. 

 

Watch the full interview on YouTube.