US Economy

Drought will cost California $2.74 billion in 2015

A worker plows a field in Firebaugh, California.
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California's worsening drought will cause the state's economy to lose as much as $2.74 billion and nearly 21,000 total jobs this year–and ripple effects of the 4-year-old drought will likely continue through at least 2017, according to an updated study released Tuesday.

The report, authored by the University of California, Davis Center for Watershed Sciences, also revealed that direct costs to the state's agriculture economy will total $1.84 billion and 10,100 direct seasonal jobs. The $2.74 billion figure reflects the cost to all economic sectors and when multiple effects are considered.

That said, increased prices for crops will give a boost to some farmers in areas less affected by the drought and with access to groundwater, according to the authors of the study.

"Central Coast and Southern California regions benefit from slightly higher commodity prices due to decreased production in other parts of the state," the report stated.

It estimates that the 2015 drought will result in the fallowing of 542,000 irrigated acres, mostly in the state's Central Valley. A UC Davis study released in May estimated around 564,000 acres would be fallowed this year, but the update released Tuesday revised the impact "because water transfers, groundwater pumping and surface water deliveries have changed since our preliminary analysis."

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The UC Davis study sees continued economic impacts through next year and into 2017, which assumes 2015 water conditions for both years and "a slow decline in the water tables"–and it predicts the number of fallowed acres could reach nearly 550,000 by 2017.

Total crop revenue losses are projected to reach $902 million this year, and the study estimates that total gross revenue losses from crops under a continued drought will increase to nearly $940 million by 2017. Additionally, drought-related losses for the state's dairy industry are expected to reach $250 million this year and another $100 million for the livestock sector.

Increased pumping costs of about $587 million also will cut into farm incomes this year, the report stated. It estimated that groundwater pumping has been able to offset roughly 70 percent of the drought water shortage, although new regulations are going into effect that could curb the ability of farmers to rely on groundwater reserves.

Meanwhile, Fitch Ratings released a report today looking at the impact of the state's current 25 percent mandatory water cuts on water utilities and found 78 percent of utilities polled indicated that rate adjustments for Californians will be on tap in the next year or have already begun.

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Fitch said the water reductions ordered by the state in May and the "short compliance time frame" that utilities had to adjust led to "revenue challenges and heighten credit risk for California's retail water utilities. As a result of reduced water sales, many utilities will experience reduced financial margins in fiscals years 2015 and 2016."

The rating agency forecasts recovery of financial margins in fiscal 2017, even if the severe drought continues.

Fitch also said the median water rate increase next year will be around 5 percent, although it added that water rate hikes in some areas could go as high as 31 percent.

Besides rate increases, it said more than half of the utilities surveyed expect to offset lower revenues by cutting operating expenditures and 46 percent said they would use financial reserves. Fitch said 37 percent of the companies said they would divert from their planned capital spending to help offset the lost revenue and 2 percent said they would consider debt service restructuring.