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California’s Brown Negotiates $7.2 Billion Drought Bond Deal

10:15AM Aug 13, 2014
Drought in California field

Governor Jerry Brown and California Democratic lawmakers enlisted business support of a $7.2 billion plan composed mostly of new bonds for water storage and delivery to drought-stricken cities and farms.

Brown, a 76-year-old Democrat, was joined today by the heads of the California Farm Bureau, the state Chamber of Commerce and California Alliance for Jobs in urging legislators to put the bond measure on the November ballot.

At least two-thirds of the assembly and the senate must agree by the end of tomorrow if the $6.995 billion in new debt is to go before voters. The remaining $200 million would come from previous sales. The money would finance projects to store, recycle and deliver water to population centers in Southern California and to protect against floods.

"Water is the lifeblood of the California economy," Allan Zaremberg, chief executive officer of the state Chamber of Commerce, said in a statement released by Brown’s office. "We need our elected leaders to come together to find the right balance between addressing our water crisis and reining in debt."

More than 80 percent of California is in extreme drought, according to the federal U.S. Drought Monitor. Three years of below-normal precipitation have reduced 10 of the 12 major reservoirs to less than half their capacity, according to state Water Resources Department data. Communities from San Diego to the Oregon border are restricting lawn watering, car washing and whether restaurants serve water to patrons.

Compromise Plan

The $7.2 billion plan is a compromise between the governor and lawmakers. Brown had previously urged legislators to limit the spending to $6 billion, saying it was what the state could afford.

Whittled down from an $11.1 billion package awaiting a vote since 2010, the proposal includes measures to fund reservoirs and restore the Sacramento-San Joaquin delta ecosystem.

"Governor Brown and the legislature have worked hard to revise the water bond to provide sufficient funds for water storage and other priority issues," U.S. Senator Dianne Feinstein, a Democrat, said yesterday in a statement. "I hope members of the legislature act quickly to place it on the ballot and I will do all I can to help get it passed this November."

The biggest allotment in the package would devote $2.5 billion to storage, such as dams and reservoirs. Senate Republicans argued for $3 billion in storage projects, and Brown last week proposed $2 billion.

‘Critical’ Supply

"We will not settle for a water bond that doesn’t provide a critical and sustainable water supply," Senator Andy Vidak, a Hanford Republican, said in an Aug. 8 statement from the Republican caucus in the upper chamber.

The agreement with Brown would replace a proposal developed in 2009 by lawmakers and then-Governor Arnold Schwarzenegger. Brown called the 2009 measure "pork-laden" and said it would add $750 million a year to the state’s $8 billion annual debt service.

California’s borrowing costs for general-obligation bonds have dropped this year as a recovering economy lifts revenue above Brown’s projections. Taxes and fees collected in July came in 4.5 percent above expectations, Controller John Chiang said yesterday.

The extra yield that buyers demand to own 10-year California debt rather than top-rated securities narrowed to 0.22 percentage point this month, the smallest since at least the start of 2013, according to data compiled by Bloomberg.