Bloomberg News

Texas Faces Billions in Water Costs as Drought Imperils Economy

October 14, 2011

Oct. 14 (Bloomberg) -- Allan Ritter pushed a bill to make 25 million Texans pay an extra $3.25 a year to help provide water for decades. Then, with a record drought devastating farms and ranches, the state representative’s party leaders waded in.

“We couldn’t get the votes,” said the Republican from Nederland who heads the Natural Resources Committee in the House of Representatives. Lawmakers who run the chamber sought to oblige Governor Rick Perry’s pledge not to boost taxes instead.

“You couldn’t get the votes in the House to raise revenue for anything last session,” Ritter said. Since 1996, when lawmakers mandated statewide water planning, Texans haven’t agreed on how to pay for needed work. This year, as crops withered and cattle went to early slaughter, pressure rose for action to protect the economy and sustain a surging population. Perry called on citizens to pray for rain six months after the drought began. On Nov. 8, voters will decide on letting the state carry as much as $6 billion in water-related debt.

Perry, who appoints most members of boards overseeing state agencies and local water authorities, didn’t include developing resources among his priorities for the past legislative session. He entered the race for the Republican presidential nomination in August, after lawmakers had adjourned for the year.

The governor supports the November ballot measure, said Lucy Nashed, a spokeswoman. She referred questions to the Environmental Quality Commission, where Commissioner Carlos Rubinstein said he can’t comment on bond issues.

Record Low Rainfall

The driest 12-month period in Texas since records began in 1895 may lead the Lower Colorado River Authority, which oversees water for 1.1 million people in cities such as Austin, to ask the commission to stop irrigation supplies for area farms. Texas A&M University has said the drought caused a record $5.2 billion in agricultural losses for the state’s $1.2 trillion economy.

Water managers in the district may cut some irrigation flows as soon as March. In 2009, agriculture accounted for 3.1 trillion gallons of consumption statewide, more than twice the amount used by cities, according to the Texas Water Development Board.

About $142 billion is needed for new reservoirs, treatment plants and pipelines to meet projected demand or risk annual job losses forecast to reach 1.1 million by 2060, if drought conditions affected the entire state, the water board has said. Income losses are estimated to climb to $116 billion a year and population growth to slow by 1.4 million.

Not Unexpected

“We’ve known for at least a dozen years that there would eventually be shortages,” Ronald Gertson, a rice grower near Eagle Lake, about 70 miles (113 kilometers) west of Houston, said by telephone. He won’t plant more than half of his 3,000- acre (1,215-hectares) farm next year if he can’t irrigate.

Resolving the state’s water woes will take more than money, said Robert Puente, chief executive officer of San Antonio Water Systems, which serves the city’s 1.3 million people. Control over water use is scattered among too many groups for effective long-term planning, he said. The resources are overseen by multiple agencies and hundreds of groundwater district boards, municipal water departments and river authorities.

“What we unfortunately have in Texas are some very parochial areas that are focused on taking care of their own,” said Puente, a former lawmaker who led the House Natural Resources panel. “Planning ends at your political boundary when it should look at the entire region.”

Resource Development

San Antonio and the Lower Colorado Authority agreed a decade ago on a $2 billion program for a new reservoir and other projects to expand supplies in central Texas, Puente said. Newer authority board members, appointed by Perry, voted in 2009 to end the agreement, prompting a lawsuit that remains pending.

“It’s going to take major legislative changes in water law for us to get anywhere,” said Pix Howell, a former Lower Colorado Authority board member who now owns an engineering- consulting business in Leander, an Austin suburb. “The statewide water plan is really a compilation of the desires of various regions. It’s not really Texas water planning.”

While financial and legal impediments have blocked many water projects, the drought is focusing attention on the need for action, said Kathleen White, a senior fellow at the Texas Public Policy Foundation. Less than 12 inches (30 centimeters) of rain has fallen on average statewide since last October, said John Nielsen-Gammon, the state climatologist in College Station.

“Our population is growing faster than other states, and when you are in a horrible drought like this, it makes you feel like you are hundreds of years late in addressing the issue,” said White, who once led the state environmental agency.

Local Role

“The plan was never intended to be imposed from the headquarters of the state,” White said. “The focus was that this was a private and local-sector responsibility.”

Water infrastructure projects in Texas are funded by communities and water districts through borrowing and local taxes. Since 2008, the state has spent about $1.5 billion from its general-revenue fund on such development with subsidies and deferred loans to communities, said Melanie Callahan, the water board’s interim executive administrator. In the fiscal year that ended Aug. 31, Texas used about $3.78 billion to build highways, according to the state Transportation Department in Austin.

Local control and resource rights that give priority to those with the oldest claims remain fundamental in Texas and unlikely to change, said Rubinstein, a former Brownsville city manager appointed to the environmental agency by Perry in 2009.

“If a city in Texas is running out of water, it’s because that city didn’t plan effectively,” he said.

Waterless August Day

In Kemp, about 50 miles southeast of Dallas, 16 major breaks in city water lines occurred in July and August, as pipes as much as 60 or 70 years old shifted in parched soil. The leaks drained the community’s two storage towers, forcing an Aug. 7 shutdown that left 1,150 residents to rely on bottled drinking water for more than 24 hours during repairs.

Kemp needs to spend as much as $50 million to update pipes, valves, tanks and a treatment plant, Mayor Donald Kile said in an interview. The city hasn’t budgeted for repairs and is seeking state grants to cover the most urgent work.

“We just don’t have the revenue income that the bigger cities do” to pay for new pipes and equipment, Kile said. “If we have another summer like we did this summer, we could be right back up against the wall again.”

Next month’s ballot measure to expand the water board’s bonding authority is backed by business and municipal groups that support increased investment to develop water resources. White’s policy foundation, a nonprofit organization closely aligned with Perry, opposes the measure because it doesn’t put a time limit on the borrowing it permits.

Forecast Needs

The water board, which forecast the state’s population to climb 82 percent to 46.3 million by 2060, estimates 562 infrastructure projects are needed to ensure adequate water supplies in the next 50 years, according to a draft report released last month.

While the state faces $20 billion in economic losses from the drought, mainly in agriculture, those effects have been mitigated by growth in other segments, said Ray Perryman, an economic forecaster and former Baylor University professor in Waco. The state is the biggest U.S. producer of cattle, cotton and hay, and supplies 7 percent of the nation’s rice.

“The drought is a significant drag, but at present it is being offset by other factors,” he said, citing an almost 21 percent gain in population from 2000 to 2010, the fourth-biggest jump among U.S. states. Nevada, Arizona and Idaho grew at a greater rate, according to U.S. Census Bureau figures.

Credits Unaffected

Credit ratings of water utilities haven’t been affected by the drought because they had “normal or above-normal supply sources” as dry conditions set in, Fitch Ratings said Oct. 12.

“Negative ratings pressures could emerge if the drought continues into 2012, forcing water utilities to escalate conservation measures and negatively affecting financial performance,” Doug Scott, a Fitch managing director in Austin, said in a statement.

Municipalities across Texas are taking steps to conserve water. Austin and San Antonio have restricted everything from watering lawns to using ornamental fountains and charity car washes. Austin said last month it plans to raise water and sewer rates for next year by 5.1 percent. Fort Worth and Houston are limiting outdoor water use.

Known as Proposition 2, the water board bond measure asks voters to give the agency the authority to loan out as much as $6 billion and to use repayments to finance new borrowing up to that amount. The board currently lends based on a $4.23 billion one-time authorization that has less than $1 billion remaining.

Financing Drain

“We are running out of authority to be able to assist entities,” the board’s Callahan said. Some communities that borrow through the board can get better terms, based on the state’s top Aaa credit rating from Moody’s Investors Service. Callahan said the savings on rates paid by debt issuers have been as much as 1.84 percentage points.

“It will be good for issuers to have that state backing,” said Doug Benton, a bond analyst at Cavanal Hill Investment Management Inc. in Dallas. Municipal borrowing in Texas and other states has slumped this year after federal economic- stimulus subsidies on such debt ended in 2010, he said.

A 10-year Palestine, Texas, waterworks bond maturing in July 2014 and rated A by Standard & Poor’s sold at a yield of 2.12 percent on Sept. 22, Benton said. By comparison, a water board bond maturing in August 2014 and rated AA+ by S&P, one step higher, had a yield of 0.45 percent in a Sept. 8 sale, according to data compiled by Bloomberg.

Lack of Funding

Water infrastructure has been underfunded in Texas, said Mike Howe, the executive director of the Austin-based state unit of the American Water Works Association, a nonprofit industry organization located in Denver.

Ritter, the Nederland Republican, will try again to get his bill to impose a statewide water fee passed in 2013, when the Legislature is set to reconvene, he said. The revenue would be used for water projects. The measure also would shift money from a state fund that helps low-income residents pay utility bills. He predicts support will build the longer the drought lasts.

That could be another year or more, according to Nielsen- Gammon, the state climatologist. He cited long-range forecasts tied to global weather patterns.

“The drought has absolutely helped people recognize the need,” said Heather Harward, who heads H2O4Texas, an Austin- based advocacy group pushing for passage of the measure. “This is the most important issue facing the state.”

--Editors: Ted Bunker, Pete Young.

To contact the reporters on this story: David Mildenberg in Austin at dmildenberg@bloomberg.net; Whitney McFerron in Chicago at wmcferron1@bloomberg.net.

To contact the editors responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net; Steve Stroth at sstroth@bloomberg.net.


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