Gary Zimmerman: Candidates must understand NID’s financials
Thank you for the recent article on the League of Women Voters Forum for the upcoming Nevada Irrigation District Board of Directors Election. As The Union article notes, the candidates presented very different views on NID’s need to do feasibility studies first before spending on major projects, in their evaluations of present and future financial conditions, and on NID’s ability to borrow in the bond market.
I think it will cost you and I, the $25,000 NID water customers, a huge amount of money if NID goes forward with a proposed dam with a $1 billion price tag. That $1 billion averages out to $40,000 per customer in additional water costs over several decades. Why so much? Construction costs for the dam are estimated to be around $500 million. And financing the dam over several decades might cost another $500 million. Then, one should ask, does NID even have the ability to borrow that amount, as candidates Miller and Johansen imply?
Why didn’t NID study the feasibility of the proposed 275-foot high dam on the Bear River, before promoting it and spending millions buying property for it, while NID runs operating budget deficits and runs down its financial reserves? These are the kinds of irresponsible NID financial decisions that could burden NID water users and taxpayers for decades.
As an economist who has reviewed many of NID’s financial documents, including budgets and borrowing capacity, and presented my analysis to the NID Board, I would like to comment on several assertions made by the candidates.
First, as Karen Hull and John Norton have indicated, NID has been depleting its financial reserves for a number of years by running budget deficits in its water operations, and paying by taking reserves from its hydroelectric operations. As they are correct to point out, that is not a successful long-term business strategy for NID.
The cost of the proposed Centennial Dam is another critical point of discussion, with important implications for the NID water users who would pay the bill. Candidates Karen Hull (Division 3) and John Norton (Division 5) understand the cost to water users of a $1 billion price tag for the proposed dam, a figure that I consider to be a conservative estimate.
Hull and Norton are correct. Yet long-time Division 3 Director Scott Miller and Division 5 Candidate Rick Johansen claimed in the Forum that the proposed dam would only cost around $500 million, because interest rates are “low.” Miller and Johansen cannot be correct unless NID can borrow hundreds of millions of dollars for free — NID’s own staff recently used a more realistic 4% interest rate in their estimates. Or do Miller and Johansen expect to get the cash-strapped state or federal government to pay the $492 million in construction costs, that were estimated by State of California economists in 2018 when they rejected an NID application for state funding? As economists often note, there are “no free lunches” and neither will there be free financing for NID’s proposed dam.
Candidates Karen Hull and John Norton also have raised important concerns about NID’s total borrowing capacity. To protect its water operations NID must borrow sizeable sums to finance planned ongoing acquisitions, like the Drum-Spaulding System from PG&E, to finance necessary infrastructure upgrades and repairs, or to borrow in the event of an emergency. Can NID borrow to fund these necessary investments, which could exceed $100 million, and then borrow another $500 million to finance the dam proposal without exceeding its borrowing limits? Miller and Johansen fail to recognize this important financial limitation facing the District. NID’s borrowing capacity, much like mine and yours, is tied to its ability to repay.
Fortunately, Hull and Norton understand that adding another $500 million or more in borrowings for the proposed dam would significantly lower NID’s current bond rating and NID’s ability to borrow hundreds of millions of dollars. Even with massive water rate increases some dam proponents favor, NID’s annual revenues would not be enough to make the interest payments on $500 million in dam bonds.
It is clear to this NID water customer and economist that Karen Hull and John Norton have a much better understanding of the Nevada Irrigation District’s financial situation and limitations than their opponents. Vote for Karen Hull and John Norton in this upcoming election.
Gary Zimmerman, a retired Federal Reserve senior economist, is currently a visiting professor in Vienna, Austria, who teaches economics and finance. He has a home in Nevada City.
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Is that how I wanted to spend my birthday? Yes and no. The original plan was to take a weekend trip to the coast for a few days of relaxation.