A California groundwater subbasin's probation placement could pressure the revenue and pricing power of 40 San Joaquin Valley municipal water, sewer, and utility districts. S&P Global Ratings also believes it could influence agricultural output, depress land value, raise water production costs, and ultimately force land out of agricultural use and raise household bills.
Chart 1
What's Happening
On April 16, 2024, the California State Water Resorces Control Board placed the Tulare Lake Groundwater Subbasin on probation under the decade-old Sustainable Groundwater Management Act. The 837-square mile subbasin is in the San Joaquin Valley--home to some of the largest landowners and agribusinesses in the country. We believe the board is likely to take similar action against five similarly "critically overdrafted" San Joaquin Valley basins later this year.
Chart 2
Why It Matters
We see several key risks for rated credits in the region:
Groundwater depletion can cause land to physically collapse, damaging critical infrastructure. Some places in the subbasin have sank more than a foot annually, more than almost any other area in the country. A massive sink hole has formed beneath the city of Corcoran. Elsewhere, the U.S. Bureau of Reclamation's Friant-Kern Canal has lost more than 60% of its carrying capacity and continues to sink despite $500 million in state, federal, and local improvements.
Winners and losers are unclear. Some water managers, farmers and municipalities in the affected regions took steps to reduce their water consumption and finance costly new water supplies, while others have not. A "one size fits all" penalty that limits everyone in the region uniformly fails to recognize the efforts of those who already made significant supply diversification or conservation investments. We believe they could be penalized for their good management by having to pay for other entities' deficiencies.
Longer-term influence on local jobs and economic output could be widespread. Farmland retirement and fallowing could disproportionately affect disadvantaged communities whose economies revolve around farmwork. If this impacts incomes it could soften sales, property tax collections, and school enrollments, which could lead to deteriorating local government finances.
Protecting groundwater levels can be expensive. The solution to land subsidence is either reduced groundwater consumption or bolstered recharge. Recharge requires access to an alternative water supply, of which the availability of new sources in California (and much of the west) is limited. Further, physical trades of water surpluses may be critical for long-term water resiliency, but without a robust water market, these trades are typically short term and future purchases aren't guaranteed.
What Comes Next
Probation requires:
- Installation of flow meters by July 15 for customers who pump more than 500-acre feet annually.
- Those customers must submit annual usage reports by Dec. 1.
- Unprecedented groundwater pumping fees include: $20 per acre-foot pumped and $300 annual registration.
- If deficiencies in the subbasin's plan aren't fixed in a year, the state may enact restrictions that could raise agricultural production costs, lead to fallowing, pressure local communities, and trigger rating actions on as many as 22 municipal utilities and 18 water districts.
Groundwater overpumping is not exclusive to the Central Valley. Nationwide, aquifers are in decline and other states could follow California's lead.
This report does not constitute a rating action.
| Primary Credit Analyst: | Chloe S Weil, San Francisco + 1 (415) 371 5026; chloe.weil@spglobal.com |
| Secondary Contact: | Jenny Poree, San Francisco + 1 (415) 371 5044; jenny.poree@spglobal.com |
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