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FEDERAL RESERVE BANK OF SA N .FRANCISCO MONTHLY REVIEW L@iw ©f the lower . . . The thirsty and fast-growing Pacific Southwest looks beyond the Colorado for other water supplies to meet its 21st-century needs. M u n ic ip a ls and! T igh t M © ney .. . One out of every eight large state-local government units encountered borrowing difficulties during tight-money 1966. Editor: W illia m Burke October 1968 MONTHLY REVIEW Law of the Rawer hen young Carl Hayden went to Washington in 1912 to represent the even younger State of Arizona, the scattered residents of the Pacific Southwest were con cerned mainly with the task of finding ade quate water supplies for their 20th-century needs. When the 91-year-old Senator Hayden stood in the White House in September 1968 to witness the signing of the Colorado River Basin Project Act, the millions of residents of this fastest-growing section of the country were faced with the even more awesome task of meeting the water deficits of the 21st cen tury. But the new law, whose passage cli maxes a half-century of feuding over the scarce water resources of the Southwest, rep resents a big step forward in meeting the major needs of forthcoming decades. The “law of the river”— the 1968 legisla tion along with the body of statutes, com pacts, treaties, and court rulings which have accumulated over the years—highlights the overriding influence which the Western des ert exerts throughout this crucial section of the nation. In the words of one of the West’s leading historians, Walter Prescott Webb, the desert is the West’s “one unifying force— it permeates the plains, climbs to all but the highest mountain peaks, dwells continuously in the valleys, and plunges down the Pacific slope to argue with the sea.” (Harper’s, May 1957) Yet, beginning in the 1880’s, Westerners attacked the desert with the help of the tools of modern science, and again in Webb’s words: “The Government enlisted on the side of The People vs. The Desert” by build ing dams and blocking the rivers to create tiny islands in the sea of aridity. In the mean time, well-diggers continuously probed the W earth to discover every possible deposit of underground water, and when they were successful, installed pumps to bring up water for homes and irrigated plots. “And every source of water—whether from river, lake, or well—was declared to be ‘everlasting’.” Regardless of the source of water, its ma jor effect was to create a series of fertile oases. In and around each oasis, people came to build towns and cities, establish industries, and open irrigated farms. Thus the Southwest today is virtually an oasis civilization— and Los Angeles is the world’s greatest oasis of all time. Prosperous oases Precipitation data form a pattern which matches nearly all the yardsticks which we use to measure the assets of civilization. Ob viously the pattern of precipitation is rela tively low in the center of the desert region and relatively high along its rim. And the same is true, according to Webb, “of people, in c o m e s— and everything else— grow m uch faster in the Pacific Southwest Income: Annual Average Change (Percent) 0 2 4 6 8 10 193 FEDERAL RESERVE BANK bank deposits, factories, cities, horses, mules, cattle, and all farm crops.” The precipitation figures are instructive. Annual rainfall averages about 7 inches in Phoenix and 14 inches in Los Angeles, in contrast to 42 inches in New York and 60 inches in Miami. Still, precipitation isn’t everything; after all, it was New York, not Los Angeles, which had to prohibit the wash ing of cars and the watering of lawns several dry summers ago. But the Pacific Southwest has practically turned Webb’s thesis upside down, for this is a major part — indeed, the fastest-growing part — of the nation. In 1967 personal in come totaled $40 billion in Southern Califor nia (six metropolitan counties) and about $3!^ billion in Central Arizona (PhoenixTucson). These areas alone thus accounted for 7 percent of the total national economy. More important, these areas have far out paced the rest of the nation for many dec ades. Between 1929 and 1950, personal in come grew at a 7.9-percent annual average rate in Central Arizona and at a 6.6-percent rate in Southern California, in contrast to growth rates of 6.0 percent in the rest of the West and 4.4 percent in the rest of the na tion. Then, in the 1950-67 period, these fast growing areas increased their margin even more. Average annual growth rates during this most recent period were 10.3 percent for Central Arizona, 8.3 percent for Southern California, 6.4 percent for the rest of the West, and 6.0 percent for the eastern twothirds of the nation. Southern Nevada, al though of course smaller than the other Southwest areas, has grown even more phe nomenally. Precious resource If this pattern of rapid economic growth continues, the Pacific Southwest’s population can easily increase from 13 to 30 million be tween now and the year 2000, and this bur geoning population will of course exert heavy demands on water and other resources. Even OF SAN FRANCISCO today, it takes 70,000 gallons of water to produce a single ton of steel, and 500,000 gallons to irrigate a single acre of Southwest farmland. The water resources that are located com pletely within the region are already inade quate to sustain present development, so that purely regional supplies cannot, under any circumstances, be expected to sustain future growth. For example, ground-water supplies in the Southwest have been over drafted at an alarming rate over the years. Thus, unless additional water supplies from outside the region become available, the economy of the Pacific Southwest could face severe strains. Most planners project regional water needs at about 23 million acre-feet annually by the year 2000— roughly 7 million more than are now utilized every year. (It takes 325,850 gallons to cover one acre of land to a depth of one foot.) By the year 2000, per haps 3 million extra acre-feet can be supplied by the rivers of Northern California and other regional sources. Still, that would leave the Pacific Southwest with an annual w ater deficit of over 3M> million acre-feet. The Colorado . .. The Colorado River Basin Project Act is designed to advance the Colorado’s already significant contribution to the solution of regional water deficits. The new law concerns the harnessing of a river which flows 1,400 miles from the Rocky Mountains of Colorado to the Gulf of California in Mexico, draining seven states along the way. The river with its tributaries drains 242,000 square miles, or roughly one-twelfth of the entire U.S. land area outside Alaska. Since the Colorado Ba sin is at the heart of the Western desert, the controlled use of the entire river system is essential to provide a basis of growth for the Pacific Southwest. Water management, specifically irrigation, is not at all new to this area. The Hohokam Indians operated irrigation canals in the October 1968 MONTHLY Phoenix area 2,000 years ago, and the pale faces followed their example by developing irrigation works in Utah in the 19th century and in California and Arizona in the early 20th century. But water management is necessary not only to bring water to the crops and cities but also to control the frequently erratic and destructive flow of the Colorado; in the winter of 1905-06, the river broke through its channel four miles below the Mexican border and for sixteen months poured its full flow into California’s Imperial Valley, destroying much property and inun dating 30,000 acres of arable land. REVIEW By 1920, the need for a regional (or even national) solution to the problems of the Colorado was painfully evident. At that point, private irrigation works were so extensive as to utilize the entire unregulated (low-water) flow of the river. Further development would have required vast expenditures beyond the reach of private firms at that time, especially in view of the difficulties created by the lim ited and erratic nature of river flows and the region’s vast distances and mountainous to pography. Consequently, the Federal Gov ernment initiated studies looking towards the construction of Hoover Dam (which some 195 FEDERAL RESERVE BANK recalcitrant Democrats still call Boulder Dam) and the states of the region hammered out the Colorado River Compact of 1922. 196 .. . and the Compact The Compact contained a formula for the distribution of Colorado River waters be tween the three Lower Basin states— Califor nia, Arizona and Nevada— and the four Up per Basin states — Utah, Colorado, New Mexico and Wyoming. (The boundary be tween the two basins was set at Lee Ferry in north-central Arizona—the point of division between the “upper” and “lower” tributaries of the river.) This inter-state agreement ap portioned in perpetuity 7.5 million acre-feet a year to each basin for its “beneficial con sumptive use,” in an attempt to insure the fast-growing Lower Basin states the supplies that they needed immediately and at the same time guarantee the slower-growing Upper Basin states the supplies that they could ex pect to need in later decades. The Compact also authorized the Lower Basin to utilize an extra 1.0 million acre-feet annually, and it stipulated that Mexico’s share should come from surplus water flows, with the two basins together making up any deficiency in Mex ican supplies. The Compact, however, could not settle the disputes among the Lower Basin states re garding their respective allocations of Colo rado River water; Arizona, in fact, refused for two decades to ratify the Compact be cause of its lack of iron-tight guarantees of access to water. But the Boulder Canyon Project Act of 1928 permitted the Compact to go into effect without Arizona’s signature, provided that all six of the other Basin states signed the agreement. At the same time, that statute required California to accept a 4.4 million acre-feet quota out of the Lower Basin’s total allocation of 7.5 million acrefeet, with 2.8 million going to Arizona and 0.3 million to Nevada— and stipulated that California and Arizona would divide equally OF SAN FR A N C ISC O any surplus unapportioned by the Compact. Yet Arizona still remained recalcitrant. Meanwhile, Mexico p ro v id e d a n o th e r problem. Throughout the 1930’s and 1940’s, more than 8 million acre-feet of water spilled unused across the international boundary every year, and Mexico wanted to establish rights to some of this water by treaty before it should become unavailable. When agree ment was reached in 1944, Mexico was guaranteed 1.5 million acre-feet delivered at the boundary every year. The treaty promised delivery of up to 1.7 million acre-feet an nually during times of surplus, but provided for a reduction in Mexico’s allocation in pro portion to the U.S. reduction during times of severe drought. Dambuilders' achievement Development of the river could not pro ceed without the construction of the facilities called for by the Boulder Canyon Project Act, and while California’s lawyers talked of “III-B Water,” “Self-Limitation Acts,” and other esoteric matters, Arizona’s Gov ernor called out the National Guard at one point to block dam construction along the river. But eventually the dam builders went to work, and constructed some of the most spectacular engineering achievements of the century. Above all, there was the massive Hoover Dam (1936), built in Black Canyon, 330 miles above the Mexican border, with a res ervoir storage capacity of 27.2 million acrefeet. Then there was Parker Dam (1938), which from its location 155 miles below Hoover Dam provides a diversion point for the Colorado River aqueduct serving South ern California. There was also Davis Dam (1950), which from its location halfway between Hoover and Parker Dams regulates Hoover Dam water to conform to the down stream requirements of California and Mex ico. Within California, major installations included the 242-mile Colorado River aque- October 1968 MONTHLY REVIEW duct, which serves the household and indus trial needs of metropolitan Southern Califor nia, and the All-American Canal, an 80-mile man-made river which brings life-giving wa ters to the Imperial and Coachella Valleys. Arizona and the Court But in contrast to these impressive engi neering achievements, the legal scene re mained entangled as the decades passed. Indeed, the political negotiations throughout all of this period were just about as tumultu ous as a trip down the Colorado on a raft. Legislation was introduced early in the postwar period to obtain guaranteed water supplies for the fast-growing Central Arizona area, but this proposed Central Arizona Project ran afoul of the perennial debate over California’s Colorado River allocation. (Al though California’s basic allotment under the 1928 agreement was 4.4 million acre-feet, it was actually geared up to use 5.4 million acre-feet annually, as a consequence of con tracts negotiated with the then-Secretary of the Interior, incidentally a Californian.) Ari zona in 1952 thereupon instituted action in the Supreme Court to obtain a final adjudica tion of Lower Basin water allocations. A court-appointed special master ruled on this matter in 1960, and the Court itself handed down its final ruling in 1963. In that decision the Supreme Court im- plicitly rejected California’s “first come, first served” doctrine— the doctrine that a person using water resources has established a prior right to its use. The Court ruled that the annual allocation of Colorado River water (in acre-feet) should be 4.4 million to Cali fornia, 2.8 million to Arizona, and 0.3 mil lion to Nevada, under normal-flow condi tions. The Court also ruled that California could draw water only from the main stream, which meant that Arizona obtained sole use of the water from the Gila River, an impor tant Colorado tributary. Even so, the Court left unanswered a vital question: How to apportion Colorado River water when a normal flow is not available. It left this decision to the discretion of the Sec retary of the Interior, and Arizona thus was still left without a guaranteed supply for its proposed Central Arizona Project. The new plan . . . Several months after the Court handed down this ruling, Interior Secretary Udall an nounced a new water plan which was de signed to bring together all the elements necessary for a long-term solution of the problem. According to this Pacific Southwest Water Plan, the region’s total developed wa ter supply amounted to 16.4 million acre-feet annually, as against future requirements (year 2000) of 23.4 million acre-feet. The Ultimate Sovereign In an arid environment, men will fight for water with a truly implacable bitter ness, a bitterness beyond reason and entreaty. For if there is not enough water to meet all needs, there is really no basis for compromise: there is nothing to negotiate. Water controversies, therefore, present the ultimate in the way of irreconcilable points of view. On the other hand, nothing will weld disparate elements into a more cohesive force than a common concern over water. If men will fight over water, they will also cooperate to conserve it and the history of water controversies is that, in the long run, the rule of cooperation prevails. In an arid environment, water is the ultimate sovereign. Carey McWilliams— California: The Great Exception 197 FEDERAL 198 RESERVE BANK deficit possibly could be overcome from such sources as Northern California rivers, return flows from treated urban sources, and evaporation-and-seepage control. But the plan was even more specific on immediate require ments. The Pacific Southwest Water Plan pro vided a springboard for the debates which finally culminated in the 1968 legislation. The major elements of the Udall plan in cluded the construction of the Bridge Canyon and Marble Canyon Dams along the main stream of the Colorado River, the develop ment of the Central Arizona Project for serv ing Phoenix and Tucson, the construction of an enlarged aqueduct delivering Northern California water southward, and the eventual construction of a large desalinization plant along the California seacoast. The plan also envisioned the provision of 90,000 acre-feet of irrigation water to southern Nevada and 60,000 acre-feet of irrigation water to south ern Utah (the Dixie project), construction of the Hooker Dam in New Mexico, and various Indian irrigation projects. Financing of the plan would come from a special de velopment fund, with income deriving from water and power sales of these new projects and from revenues of the Hoover and Parker Dams at termination of their 50-year pay-out periods. . . . and the issues The debates generated by the Udall plan helped to set forth, with striking clarity, the conflicting viewpoints over the region’s longrange water needs. Arizona wanted a guar anteed supply of water for its farms and cities. Southern California wanted continued access to more water than it was guaranteed under the agreements of the 1920’s. The Upper Basin states wanted guaranteed access to the water which they would need for future development but were not yet using. Mean while, the Pacific Northwest states with their ample water supplies wanted to keep the thirsty Southwest from turning to the Colum OF SAN FR A N C ISC O bia and Snake Rivers when the Colorado supply became fully utilized. Then, too, con servationists wanted to maintain intact the original glories of the Colorado River and thus were adamantly opposed to the con struction of the proposed dams. (In its na tionwide advertising, the Sierra Club asked, “Should we flood the Sistine Chapel, so tour ists can get nearer the ceiling?” ) When these conflicting viewpoints were finally resolved, the $1.3-billion Colorado River Basin Project Act became a reality. This act authorized the long-sought Central Arizona Project — an $831-million project designed to bring water to the PhoenixTucson areas — along with several projects intended to serve the other regional interests involved. California, under the act, obtained a re duction in Central Arizona diversions when necessary in order to provide California with a guaranteed 4.4-million acre-feet of Colo rado River water. The Upper Basin states obtained five reclamation projects in Colora do and increased appropriations for Utah’s Dixie project. The Pacific Northwest obtained a ban against the study of trans-basin diver sion plans for a ten-year period, although the National Water Commission set up under the act will study all other means of meeting regional needs. Conservationists meanwhile obtained assurance from the Federal Govern ment that Central Arizona power installations would be developed through privately fi nanced thermal-generation plants rather than through dams that would flood portions of the Grand Canyon. President Johnson drew the curtain on a half-century of controversy in his comments at the September 30 bill-signing ceremony: “I have a feeling of freedom this morning when I see California and Arizona sitting there arm-in-arm smiling with each other. (Laughter) Isaiah must be proud to finally recognize that they have come to reason to gether.” October 1968 MONTHLY Jkfii®m®is§ shear© o f C o lo r a d o water will decline in the 21st century Water Supply (Million Aero-Foot) Central Arizona The centerpiece of the new legislation is the project designed to bring fast-growing Central Arizona the water which it needs to maintain its spectacular rate of growth. This area contains 1.0 million acres of farmland, along with 25 cities and towns, and their water requirements total 4.5 million acre-feet annually, or twice what is locally available on a sustained basis. Central Arizona is a major producer of specialty agricultural products — winter let tuce, vegetables, citrus, dates, melons — all of which are heavily dependent on irrigation. This irrigation-dependent agricultural econ omy should move over time in the direction of a strongly diversified industrial economy, and this transition may well ease the problem of growth, since 25 people in an industrial environment require no more water than does one acre of irrigated farmland. Central Arizona Project water is not designed to bring new lands under irrigation, but rather to supplement existing water sources. Yet, the construction of this project should permit a gradual transition towards municipal and industrial uses which will support a larger, more diversified population. REVIEW Arizona’s past growth has been based upon the mining of the ground-water accu mulated in underground basins over millions of years. Water has been pumped out much faster than it has been recharged naturally; the average depth of the water table dropped from 70 feet in 1940 to 200 feet in 1964, and may drop further to 300 feet by 1975. Moreover, not all the underground volume is available, since the poor-quality water found at lower depths requires dilution at heavy pumping costs if it is to be used at all. Altogether, depletion of this largely nonreplenishable resource amounts to about 2.5 million acre-feet a year. Central Arizona Project facilities will co ordinate Colorado River and Gila Basin water resources for both the Phoenix-Tucson centers and the agricultural areas now de pendent on severely overdrafted ground-wa ter basins. Secondary purposes include flood control, soil and wildlife conservation, sedi ment reduction, salinity control, and power generation. The major project facilities— Granite Reef, Salt Gila, and Tucson aqueducts— are de signed to convey pumped Colorado River water 450 miles to the Phoenix-Tucson areas. (Central Arizona, unlike the Imperial Valley, lies uphill from the Colorado River, so that development of this area involves substantial pumping costs.) Other major fa cilities include Orme Dam (Phoenix) and three other dams, as well as power generation and transmission lines. By function, the project will cost $358 million for irrigation purposes, $216 million for municipal and industrial uses, $95 million for power genera tion and transmission, and $42 million for water salvage and recovery. Southern California The new law’s provision for a guaranteed water supply is an essential element, but yet only one of several crucial elements, in meet ing Southern California’s rapidly growing water needs. The requirements are greatest FEDERAL 200 RESERVE BANK in Los Angeles— the nation’s second-largest metropolitan area— and in the very produc tive but very thirsty oases of the Imperial and Coachella Valleys. Los Angeles, which requires close to 500 million gallons of water every single day, gets about two-thirds of its supply from the Owens River Valley on the east slope of the Sierra, 250 miles to the north. (To the surprise of Owens Valley residents, Los Angeles agents a generation ago bought up water rights throughout the valley and let the land revert to desert; to nobody’s surprise, the local residents thereupon dynamited the Ange lenos’ waterworks.) Another one-fifth of Los Angeles’ supply comes from local wells, and roughly one-sixth from the Colorado River 250 miles to the east. The Colorado supply is transmitted through the major adqueduct which taps the Colorado River at Parker Dam and is then distributed by the six-county Metropolitan Water District. Nonetheless, the municipal needs of Los Angeles and other cities, as well as the irri gation needs of the Imperial and Coachella Valleys, led Southern California a decade ago to spearhead the drive for a California Wa ter Plan. The region’s requirements became even more obvious when California, which was already using more than its Colorado River allotment, was faced with the possibil ity of a substantial cutback in that allotment under terms of the 1963 Supreme Court decision. Thus a note of urgency was injected into the development of the state-wide proj ect. North to South The $2.5-billion California Water Plan is designed to transport water 740 miles from far Northern California, which accounts for 70 percent of the state’s precipitation, to Central and Southern California, which ac count for 77 percent of the state’s total water usage of roughly 25 million acre-feet a year. When completed in the 1970’s, the project will harness the state’s largest untamed OF SAN F R A N C ISC O stream, the Feather River, a tributary of the Sacramento. It will impound 3.5 million acre-feet of water behind 770-foot-tall Oroville Dam, the largest earth-filled dam in the world. It will transmit water into the Sacra mento and Delta areas and therefrom by aqueduct to Southern California and the San Joaquin Valley. Acceptance of this mammoth project was spurred by 1955’s disastrous floods—which caused the deaths of 65 people and $200 million in damages in the Sacramento Valley — and by the expected loss of Colorado River water under the Supreme Court decision. But other factors were involved as well. Central Valley agricultural communities were threat ening to outgrow even the massive facilities developed under the Central Valley Project of the 1930’s, centering around the Shasta and Friant Dams and a 350-mile network of canals. But in particular, the rapid growth of the Southern California economy seemed destined to require ever-larger supplies of water beyond those already available within that region. Upon completion, the California Water Plan will include 20 dams, 24 pumping plants, 8 power plants, and 691 miles of aqueduct and canals. (The largest pumping system ever designed will pump Northern California water across the Tehachapi Moun tains to Southern California.) The water de veloped under this plan— 4.2 million acrefeet annually— should reach the San Joaquin area in 1968, Los Angeles in 1971, and San Bernardino-Riverside in 1972. F in a n c in g costs originally were scheduled to be covered by the $ 1.75-billion bond issue authorized by California’s voters in 1960, but project costs are now estimated at $2.5 billion and are still rising. Sources: the Colorado Since the Pacific Southwest’s ongoing proj ects ensure its water supplies only until about 1990, regional planners must look ahead to October 1968 MONTHLY the water sources of the next century— which include not only the river of the Southwest but also the many rivers of other areas and perhaps even the Pacific Ocean. Attention initially should center on the much-disputed Colorado, a river which has generated more acre-feet of legal documents than of water over the years. A half-century’s wrangling over the law of the river results from the fact that the supply of Colorado River water is severely limited in relation to other resources of the region, and especially in relation to the continuous expansion of demand on the part of the rapidly growing Southwest. The imbalance is traceable to a national population which is ever growing— and ever shifting southwestward— and to the increasing water needs of families with higher living standards and farms and factories with more complex pro duction processes. On the supply side, water planners are con cerned because the river’s recent flow has fallen considerably short of the amount ap portioned by the negotiators of the Colorado River Compact back in 1922. At least several Congressional studies have pointed to a con sistent downtrend in the river’s flow and to the absence of the heavy flows which charac terized the period of a half-century ago. The Colorado basin’s yield is measured by the “virgin” or “estimated undepleted” flow at Lee Ferry (Arizona), which marks the boundary between the Upper and Lower Basins. The negotiators of the 1922 Compact assumed, on the basis of average flows since 1896, that 16.8 million acre-feet would be available for apportionment between the Up per and Lower Basin states and exportation to Mexico. Yet the average virgin flow during the 1922-67 period has measured out to only 13.7 million acre-feet, and the flow over the last decade has averaged only 12.1 million acre-feet. Moreover, annual flows have varied widely since 1896 between 5.6 million and 24.0 million acre-feet. REVIEW C©S©red®Ds average flow drops over the past half-cenfury Stream Flow (Million Acre-Feet) 20 r - 1896 1922 1930 1940 1950 I960 According to the House Interior and In sular Affairs Committee, the Lower Basin faces a serious water deficiency, and even the Upper Basin faces the prospect of eventual depletion of its now-abundant supplies. In creased demands on the part of the Lower Colorado states can now be met in part from the still-unused supplies which the Compact apportioned to the Upper Basin states. Yet, as those states develop, they will use more and more of their apportionment and ulti mately none of their surplus water will be available for the use of the Lower Basin. The 1.2 million acre-feet scheduled for al location to the Central Arizona Project should continue to be available until about 1995. (But even that amount makes up for only about half of the area’s present overdraft on its water supplies.) Thereafter, Arizona’s supply will diminish as the guaranteed claims of California and the Upper Basin states take precedence. Consequently, in the House Committee’s view, all possible means of increasing the Pacific Southwest’s supplies must be inves tigated as the 21st century approaches, since the Colorado River by itself cannot meet the future requirements of all the areas depend FEDERAL RESERVE BANK ent on it, either by the standards of the Com pact apportionment or by the terms of the Mexican treaty. The Committee in 1968, like Secretary Udall five years ago, concluded that future demands could be met from the sparkling waters of the Northwest as well as the desalted waters of the Pacific Ocean. Sources: the Columbia The covetous glances of the Southwest are directed primarily toward the Columbia River, which boasts ten times the flow of the Colorado River, but Idaho’s Snake River and Northern California’s Eel and Trinity Rivers are other likely candidates. One suggested project, developed by a California-based en gineer, would extract 13 million acre-feet of Columbia River water at The Dalles Dam, lift it 5,000 feet over the mountains and thence transport it 1,200 miles by aqueduct to Hoover Dam. The $ 11-billion plan would double the water supplies of the Pacific Southwest— and would undoubtedly cause apoplexy among Northwestern legislators. The thirsty Southwest’s search for water helped to push through Congress this year’s compromise legislation, whereby California agreed to support the Central Arizona Proj ect and Arizona agreed to support Califor nia’s demand for a guaranteed supply of OF SAN FR A N C ISC O Colorado River water. The search has also contributed to an increasingly forthright stand on the part of many Southwest legisla tors. Writing in the San Diego Law Review (1967), California’s Senator Kuchel argued: “As an increasingly thirsty Pacific South west becomes a vast megalopolitan complex, this area is compelled to look, perhaps afar, for a new water supply to slake its thirst. That water supply could be as far away as the Yukon River, or as near as the Eel. And, in deed, the supply could be the mighty Colum bia River. If an area has surplus water — surplus to both its present and future re quirements— and if another area is parched and unable to grow because of a water short age, this nation has a solemn duty to study, scientifically and with the utmost care, the problem of efficiently utilizing its water re sources.” The Northwest has heard speeches of this type for the last several decades, but still re mains unimpressed. Residents of that area claim that vast quantities of water—perhaps as much as 12 million acre-feet annually— may yet be needed to irrigate the arid areas of East-Central Washington and Oregon, and they fear that any depletion of the Columbia could, among other hazards, cripple the cru- Water for London Bridge? 202 When the City of London sold its fallen-down London Bridge to an Arizona developer for $2.4 million, it failed to send along any Thames River water for the rebuilt bridge to span. This oversight was discovered recently when Federal and state authorities refused to supply any water for the channel which the developer planned to build for the bridge at its site near Lake Havasu, the man-made lake formed behind Parker Dam on the Arizona-California border. London Bridge—not to be confused with the more postcardy-looking Tower Bridge— now lies in rocky ruin in downtown Lake Havasu City (population 4,000), but it is scheduled to be re-assembled soon at a $3.6-million cost as a centerpiece to a Tudor-style tourist village. But the bridge has already proved to be a tourist attraction, even without water to span, and it has managed to triple the real-estate sales pace in this desert community. October 1968 MONTHLY cial salmon industry. Moreover, they ask, as the Portland Oregonian asked back in 1948, “Why should not the people come to the water, instead of the water being transported to the people?” At any rate, the Northwest supported the 1968 legislation only with the understanding that a 10-year moratorium be imposed on studies of trans-basin diversion. After a decade’s time, that region may have a better idea of its own long-term requirements as well as the possibilities inherent in other forms of water supply. Sources: the Pacific Atomic-power water desalinization plants may provide one answer—perhaps the major answer— to the 21st century’s water needs. Needless to say, plenty of salt water is avail able, covering as it does three-quarters of the surface of the globe. The problem of desalinization is not scien tific but economic; over the past fifteen years, production costs have dropped from $4 to $1 per thousand gallons, but this is still almost ten times the average cost of fresh water. Even so, desalted-water capacity doubles every 2 to 3 years, so that it may reach 20 billion gallons daily within the next two de cades. In relation to the nation’s daily re quirements of perhaps 600 billion gallons two decades hence, that may be only a drop in the bucket, but in terms of the Southwest’s sharply rising needs and restricted supplies, that may well be a godsend. Desalinization efforts recently have cen tered around the development of a Southern California plant scheduled to produce as much as 150 million gallons a day of fresh water. (That amount would equal 168,000 acre-feet a year.) This joint public-private venture carried a price tag of $444 million when first announced last year ( albeit on the basis of 1965 cost estimates), but when more recent estimates suggested an ultimate cost of $765 million, the project was sent back to the drawing board. REVIEW The original project plan called for three Southern California utilities to supply nu clear-generating units to the Metropolitan Water District, receiving in return entitle ment to 1.5 million kilowatts of power, and for the MWD to construct “flash evaporator” desalting facilities on a 40-acre man-made island off the coast of Orange County. The plant’s initial desalting capacity would be 50 million gallons a day, and this would be in creased over a period of five years to 150 million gallons a day— enough to meet the water needs of a city of one million popula tion. The project’s ballooning cost estimates were based upon steep increases in the costs of labor, materials, nuclear reactor units and nuclear steam-supply units, along with the extra costs involved in providing earthquake protection to the plant site on man-made Bolsa Island. (Present cost-cutting efforts center around an attempt to resite the plant on the mainland.) As a consequence, the costs of desalinization are now estimated at 35 cents a thousand gallons instead of the 22cent figure originally expected. In contrast, future supplies of Northern California water should cost Southern California users 22 cents a thousand gallons at the completion of the California Water Plan, while Colorado River water costs them only 11 cents today. To obtain their 21st-century water sup plies, the teeming millions of the Pacific Southwest may have to seed the clouds, re claim waste water, pump water out of the Pacific, or transport it across far-distant mountain ranges. But supplies now seem as sured for the rest of the 20th century, thanks to the successful resolution of such major projects as the California Water Plan and the Colorado River Basin Project. The law of the river now holds sway even as the desert sun beats down on the fertile oases and on the mighty Colorado, trickling to the sea. William Burke FEDERAL RESERVE BANK OF SAN F R A N C !S CO itofeipals aeidl Tight Utoe^ ny state or local government that needs long-term financing is liable to encoun ter difficulties during a tight-money period such as 1966. In such periods, commercial banks— the primary investors in municipal securities— can be expected to liquidate their holdings in order to meet burgeoning loan de mand, thus depressing the prices and raising the market yields on these investments. As interest rates climb, debt-servicing costs on new bond issues rise concurrently. If in terest rates soar high enough, they may ex ceed statutory, constitutional or referendaimposed ceilings, thereby precluding or at least postponing the flotation of a proposed bond issue. Consequently, governments may find them selves hard pressed to sell their offerings at the required volume whenever credit condi tions tighten. And to the extent that an in tended bond offering is either reduced in size, temporarily postponed, or abandoned en tirely, state and local governments may be forced to cancel contract awards and to cur tail planned capital spending. Deferral or re duction in new borrowings need not cause immediate cutbacks in capital expenditures, but some ultimate decline in spending levels is likely to ensue. To determine the impact of tight money on the borrowing and spending of state and local governments, the Federal Reserve Sys tem recently conducted a survey which fo cused on the 1966 borrowing experience of large state-local governmental units through out the nation. (The survey included all states, counties with over 250,000 in popula tion, municipalities with over 50,000 in popu A 204 lation, school districts with over 25,000 in enrollment, and other special districts with over $5 million of debt outstanding.) This article highlights the experience of Twelfth District units and compares their perform ance with that of governmental units else where. In general, monetary restraint did serve as a check on the borrowing plans of large gov ernmental units during 1966, as roughly one out of every eight units (in the West as else where) encountered some form of difficulty in borrowing. Although high interest rates were to some extent instrumental in forcing Twelfth District units to cut back, postpone and/or cancel their bond issues, other factors were also involved— such as voter defeats of proposed bond offerings. But despite financ ing problems, credit restrictions apparently did not endure long enough or with enough sustained severity to cause any serious cur tailment of capital outlays or contract awards. @n©°©igfafh of all state-local units had trouble borrowing in 1966 232 Units Toelfth District T5I Units Other U.S. October 1968 MONTHLY Difficulty for one of eight In this District, only 103 of 232 units re sponding (44 percent) reported that they had had long-term borrowing plans for 1966; the remaining 129 reported no borrowing in tentions. Thirty of the would-be borrowers (13 percent of the overall total) encountered borrowing difficulties during the year, while 73 units (31 percent) carried out their fi nancing plans as originally intended. Of those encountering difficulties, 7 either reduced the amount of the prospective issue or postponed it until later in the year, 9 at first postponed the issue but then postponed it again to 1967 or else cancelled it completely, and the other 14 from the very outset decided to postpone the issue to 1967 or to abandon their borrow ing plans completely. The 103 units with financing plans in tended to issue $1,531 million of bond offer ings during 1966. (Here as elsewhere, onethird of the total volume was scheduled for educational facilities; Twelfth District units also planned to float a comparable amount for water-sewerage-utility purposes, while elsewhere the calendar of offerings was heavy with highway issues.) The actual volume of fered totaled $ 1,202 million — 22 percent short of the planned amount. The shortfall amounted to $303 million in abandoned or long-postponed offerings— that is, postponed Origins! financing pious centered around educational facilities Percent of Total Volume of Offerings REVIEW beyond 1966—plus $27 million in reductions from intended volume. Additionally, $42 million of offerings was postponed during 1966, but this amount was offered at a later date during the year and was thus included in the $1,202 million actually borrowed. In aggregate, $372 million of planned offerings — almost one-fourth of the total—became involved in borrowing difficulties during the year. Elsewhere in the nation, the tight-money impact was not quite so strong as it was in the West. During 1966, 389 of 751 units responding in other districts planned to en gage in long-term borrowing, amounting to $6,034 million. Altogether, 12 percent of all units (as against 13 percent in the West) en countered financing problems, and 40 per cent (as against 31 percent in the West) car ried out their financing plans as originally intended. In these districts, the actual vol ume of offerings was 17 percent less than the volume planned, as against the 22-percent shortfall in the Twelfth District. Impact of high rates At the same time, high interest rates ex erted a considerably smaller influence on financing decisions of Western units than on those of other would-be borrowers. Only 35 percent of the Twelfth District volume which underwent financing troubles was attributable to excessive interest rates, while 90 percent of the comparable volume in all other dis tricts was explained by this factor. Thus, at least by the interest-rate yardstick, monetary restraint affected the borrowing plans of other districts somewhat more than it af fected Twelfth District plans. Long-term postponements or abandon ments constituted the vast bulk of borrowing setbacks— 82 percent of District volume and 70 percent of total volume elsewhere. Eleven of the 23 District units in that category named interest rate reasons as the primary cause of long-term postponement or aban- 205 FEDERAL RESERVE BANK in te re s t-ra te difficulties cited, but less in W est than elsewhere Percent of Total Volume OF SAN F R A N C ISC O factors. Moreover, very little impact was felt, either here or elsewhere, by such factors as underwriting delays, construction cost in creases, unanticipated increases in revenues and/or unanticipated reductions in current expenditures, and court proceedings (such as injunctions against bond offerings). Im p act on capital sp e n d in g donment, and 45 of the 63 other units in that predicament named that factor. In other areas, most decisions to abandon or postpone indefinitely were taken because market in terest rates were expected to decline later on. In the Twelfth District, some decisions were made on that basis, but other interest-rate factors were considered even more important —for instance, interest rates exceeding statu tory limits or contributing to extremely high debt-servicing costs. In addition, other factors besides adverse credit-market conditions hampered the bor rowing plans of Twelfth District govern ments. Bond-referendum difficulties, primar ily voter revolts, accounted for almost onefourth of the total volume of postponements, reductions and abandonments. Another onethird of volume was attributed to the catch all category of “other reasons”— reasons of a highly individualized nature which were un related to credit-market phenomena. The volume of offerings in the rest of the nation, however, was affected almost exclusively by credit conditions, and hardly at all by other Borrowing setbacks understandably had some impact on planned capital spending, but the impact was greater when measured by the number of units affected than by the dol lar volume of reductions. During 1966, 30 percent of the District units with altered plans (as against 19 percent of such units elsewhere) actually postponed or cancelled contract awards or reduced their capital out lays. Yet these curtailments amounted to only 6 percent of the total dollar volume of bor rowing involved in financing difficulties in the District. A number of expedients were utilized by those District governments which, despite fi nancing problems, were able to carry out their capital spending as scheduled. Six of the 21 units involved simply drew down their liquid assets. Three other units had a suffi cient backlog of funds on hand from previous bond sales, another three had not yet put out their contracts for bid, another three felt that their spending plans could be left unaltered because of the small dollar volume or brief timespan involved in their altered borrowing plans, and so on. Of course, all the adjust ments made by these units to finance their capital-spending plans were only temporary stopgaps; had credit stringency persisted longer than it in fact did, capital expenditures undoubtedly would have suffered a greater impact. Karen Kidder Publication Staff: R. Mansfield, Artist; Karen Rusk, Editorial Assistant. Single and group subscriptions to the M onthly Review are available on request from the Admin istrative Service Department, Federal Reserve Bank of San Francisco, 400 Sansome Street, San Francisco, California 94120
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