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<br />Colorado
<br />
<br />J. William McDonald, Director, Water Conservation Board, Department of
<br />Natural Resources, Denver, Colorado, and M BSA Director.
<br />
<br />I told Carroll I would speak first about one perse.n's perception of the problems
<br />the western states face in the area of water project financing. I do this knowing
<br />that Rodney Smith is on your program later. I think it will be useful if we first
<br />frame what the problem is because I think the states, as they speak this morning,
<br />will deal primarily with one aspect of it. Rodney will probably get at a second
<br />aspect. Hopefully, my comments will then make the discussion and question period
<br />after the lunch hour more useful to all of us_
<br />
<br />What I am going to present is a brief and cursory analysis of the water project
<br />financing problem. I don't pretend it is complete. However, I think we can make it
<br />useful and touch on enough points to set the stage.
<br />
<br />First, I think the fundamental problem the western states face is with respect
<br />to irrigation and flood control projects and water supply projects for rural
<br />communities - that is, relatively small communitie" outside of major metropolitan
<br />areas. The fundamental problem that those kinds r;; projects face is that they do not
<br />generate enough revenues to pay for themselve,.. There are two basic reasons for
<br />this. First, in the case of flood control p..:;ects, we usually don't attempt for
<br />administrative reasons, some of which are surmolC"table if there i.. a public policy
<br />decision to do so, to collect from those who are ,he beneficiaries~: a project. We
<br />don't market the outputs or the benefits of flood cJntrol projects. There are ways to
<br />do it, but typically we have not. The secor...- reason is that the value of these
<br />projects' outputs -- and this applies particularly to irrigation and rural c10mestic
<br />facilities -- is such that people are not willing to pay the total' cos~s associ :cd with
<br />such projects.
<br />
<br />What that translates into - it's the whole history of water development in the
<br />West - is that these kinds of projects (irrigation, flood control and rural domestic)
<br />cannot be financed with their own reven:.;es. They cannot be revenue bonded and, for
<br />the most part, you do not go to private capital markets to finance that kind of
<br />project. Instead, what the West has historically done is rely on the federa:
<br />government to provide financi..'lg, if not outright grants. if a user m2.kes repayment,
<br />it is not rer....~yment of the full costs or repayment is made wlthout ir.teres: or at
<br />interest rates weJJ below market rates. That represents a public: policy decision to
<br />subsidize those kinds oi projects. That public policy decision has been in place at
<br />the federal level for eight decades, dated to the creation of the Bureau oi
<br />Reclamation in 1902.
<br />
<br />In the 19&0's, I think that it has become evident to all of us that Congress is
<br />not going to appropriate the kind of sums for water projects that it has in the past.
<br />In the face of dwindling federal resources, it seems to me there are essentially two
<br />alternatives for a state: go to your own tax base or increase charges for certain
<br />project outputs above the costs that are aaributable to those outputs and pocket the
<br />difference to subsidize other project purposes. The latter alternative is illustrated by
<br />the federal hydropower program, the history of which has been to charge more to the
<br />hydropower user than that product actually costs and use the difference to repay
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