California Drought Spurs Bonds for 30-Mile Water Tunnels

California water agencies plan to sell the first $200 million in bonds toward a $25 billion project to bolster supplies for about 25 million people as the worst drought in a century threatens farms and cities.

Proceeds will be used to plan two tunnels, 40 feet wide and 30 miles (48 kilometers) long, to carry Sacramento River water to Southern California, home to about two-thirds of the state’s population. The tubes will replace pumps in the Sacramento-San Joaquin River Delta that risk drawing saltwater from San Francisco Bay, threatening the freshwater supply and ravaging wetlands.

The Los Angeles-based Metropolitan Water District of Southern California, known as the Met, will lead a joint authority in selling the securities as water and sewer revenue bonds are on pace to beat the entire $3.7 trillion municipal market for the first time in two years, according to S&P Dow Jones Indices. Even as the water agencies contend with drought, their bonds are a safe bet, said Howard Cure, managing director of muni research at Evercore Wealth Management LLC.

“Selling water in an area as arid as the one Met covers -- there’s not a much more essential purpose you’re going to find,” said Cure, whose New York-based firm oversees $4.9 billion.

First Securities

The Met serves 19 million people in a coastal arc beginning north of Los Angeles and extending to the Mexican border. Most of the state is experiencing “extreme” drought or worse, according to the U.S. Drought Monitor, a federal website. The 85-year-old agency plans to sell the first securities late this year or early in 2015, said Bob Muir, a spokesman.

The tunnels endorsed by Democratic Governor Jerry Brown are the biggest part of the $24.8 billion Bay Delta Conservation Plan. The tunnels would convey water under the delta from its northern reaches, south to existing canals. That would restore the fragile ecosystem in the marshlands where the state’s principal rivers meet the briny waters of the Pacific.

California water agencies spent $176 million designing and planning the tunnels and conservation projects from 2006 through June, according to the nonpartisan Legislative Analyst’s Office.

Pork Concern

Lawmakers are deadlocked over putting an $11 billion bond measure on the ballot for groundwater cleanup, water storage and ecological restoration. Critics, including state Senators Anthony Cannella and Andy Vidak, say the initiative is stuffed with “pork” and is too large to pass. Lawmakers took the measure off the ballot in 2010 and 2012 and are debating proposals for a smaller borrowing this year.

A bill sponsored by Vidak and Cannella, both Republicans representing agricultural areas in the San Joaquin Valley, would have put a $9.2 billion bond measure before voters, with less money for local projects such as watershed education facilities and removing dams. It died in a senate committee April 22.

“Our current drought has highlighted the fact that we have already taken too long to get started on rebuilding our water system, and we must take action immediately,” Cannella said in a statement after the vote.

Voters haven’t approved a water bond in California since 2006.

Growing Support

A poll by the nonpartisan Public Policy Institute of California released March 26 found that 50 percent of likely voters said they would back the $11 billion measure, up from 42 percent a year earlier, before widespread publicity including freeway signs about the drought. The telephone survey of 1,702 California adults had a margin of error of plus or minus 4.5 percentage points for likely voters.

A multibillion-dollar bond measure for water projects may be more than Californians can swallow, said Mark Pisano, who teaches public administration at the University of Southern California in Los Angeles and is the former executive director of the Southern California Association of Governments, the largest U.S. regional planning agency.

California is the most indebted U.S. state, with about $74.5 billion in general-obligation bonds as of June, up from $73.1 billion a year earlier, according to the state treasurer’s office.

“The state’s capacity to incur further G.O. indebtedness would raise serious questions about this proposal,” Pisano said by telephone. “We’re going to have to fund our infrastructure differently in the future. The taxation base is not there.”

Moving Ahead

Gary Breaux, Met’s chief financial officer, said the district and other agencies are moving ahead on engineering and designing the tunnels because their costs are being borne by local water agencies rather than a statewide bond measure.

Initial funding of $1.2 billion will be split evenly between state and federal governments, with the joint-powers agency providing $200 million to $300 million from bonds. Water and sewer muni bonds earned 5.2 percent this year through April 24, beating the 4.6 percent gain for the entire market, S&P data show.

Both the initial bond sale and any larger voter-approved issue should attract investors, particularly those avoiding bonds for pension and retiree health care costs borne by local governments, Cure said.

“Water systems are much more capital-intensive,” Cure said. “You don’t have as much of a labor component with pensions and other liabilities, so people are more comfortable with that.”

Before it's here, it's on the Bloomberg Terminal.