Impact Muni Bonds | June 1, 2023

Los Angeles’s $484 million bond to improve water sustainability

Anna Rautenberg

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Guest Author

Anna Rautenberg

Editor’s note: ImpactAlpha has partnered with HIP Investor to highlight upcoming bond issues with social and/or environmental significance. Disclaimer: Nothing in this post or on shall constitute an offer to sell or solicitation of an offer to buy bonds.

  • CUSIP bond identifier: 544525T40 
  • Issuer: Los Angeles Department of Water and Power
  • Impact entity rated by HIP: Los Angeles Department of Water and Power
  • Muni sector: Water
  • Closing date: June 1, 2023
  • Bond amount: $484 million
  • HIP Impact Rating: 65.1% connoting “net positive” (higher than 50 on 100-point scale)

Los Angeles bond for water sustainability

Local water supply for Los Angeles is becoming more strained, requiring the federal government to intervene on water restrictions for California-Arizona-Nevada. The Department of Water and Power of the City of Los Angeles (LA-DWP) is issuing a $484 million bond to finance capital improvements to the water system.

LA-DWP’s proceeds will be applied to fiscal years 2023-24 through 2027-28, and prioritize projects necessary to comply with: (1) increasing water quality standards, (2) upgrading the existing distribution system, including the replacement of aging infrastructure, (3) protecting existing water supplies, (4) develop new water resources, and (5) meeting other regulatory requirements.

HIP Impact Analysis

The water supply from the Colorado River has been the subject of nearly year-long negotiations between the federal government and three key stakeholder-states: California, Arizona and Nevada. The negotiations have recently concluded in an agreement to conserve a major portion of their river water supply in exchange for more than $1.2 billion in federal funds.

The consensus aims to conserve about 13% of the states’ allocation of river water over the next three years. For much of the past year, negotiations have set California against Arizona, as these states absorb the most from Lake Mead – the largest reservoir – and will have to bear the greatest burden of the cuts that the federal administration has been calling for to protect the river.

The increasing demand for water, a continuous underinvestment in infrastructure, regulatory failures, and the consequences of climate change have revealed weaknesses in the U.S. water system, which is essential in every aspect of the country’s economy.

Large amounts of water are needed for cooling purposes in power generation, technology and manufacturing sectors; plus water intensity is high in agriculture (especially almonds) and extractive industries, such as fracking, mining, and refining. Within those sectors, some amount of water is consumed and some of it can be recycled.

For example, most of water used for thermoelectric power generation, which consumes the highest proportion (41%) of U.S. water withdrawals, can be recycled; however, most of water used for irrigation, water’s second largest use (37%) is consumed and, therefore, irrevocably lost. According to the US Geological Survey, only 37.9% water in irrigation is recycled.

Overall, the U.S. water consumption amounts to 2,200 gallons per person per day, which is second highest in the world, more than doubling other heavily industrialized countries, such as the United Kingdom, Japan, or Germany. There are over 148,000 independent water systems across the U.S., of which roughly 50,000 are considered “community water systems,” defined as permanent structures operating year-round. Just 9% of those “community water systems” provide water to nearly 80% of the country, the other 91% of water systems typically serve communities under 10,000 people.

Impact assessment

Managing water resources in California requires a comprehensive approach. Aside from tightening the water supply cuts even more in the near future, due to the shrinking water supply from the Colorado River, California has been increasingly implementing new strategies to address the challenge of water scarcity.

Some of the measures include (i) mandatory water restrictions during drought periods, (ii) promotion of new technologies and water efficiency standards for appliances and fixtures (such as toilets, faucets, and showerhead), (iii) supporting research and development of innovative water technologies, such as desalination, advanced water treatment, and (iv) water-efficient irrigation systems.

More specifically, the California Department of Water’s strategy envisions creating storage space for up to 4 million acre-feet of water to capitalize on big storms and store water for dry periods, recycling the reusing at least 800,000 acre-feet of water per year by 2030, saving 500,000 acre-feet of water through more efficient water use and conservation, and making new water available by capturing stormwater and desalinating ocean water and salty water in groundwater basins. The cost of these measures amounts to roughly $8 billion, and aims to generate enough water for over 13 million households.

Within this broader state-wide strategy, Los Angeles Department of Water serves over 4 million residents (10% of state population) yet historically the “City of Angels” has accounted for an average of 12.5% of total water consumption in California. The 3 main sources of water for the City are the Colorado River (52%), Owens River (36%), and groundwater (11%). Historical trends show that these proportions have been shifting to less reliance from the Owens River and groundwater, and a growing reliance from the Colorado River (see figure below).

In recent years, the City has emphasized recycled water production as an important and growing source of water supply – almost $300 million in the City’s Capital Improvement Program is foreseen to be allocated for these purposes. One of the top undertakings is the 2035 Hyperion Program, which aims to recycle 100% of the water flowing through this water reclamation plant by 2035.

Moreover, the City has successfully managed to reduce per capita water use by 20% by 2017, and implements measures such as fines for water overuse and cash incentives for reducing water usage. Legislation passed in 2018 requires reduction of the indoor residential use of water to 55 gallons per capita per day by 2025 and 50 gallons per capita per day by 2030.

The City of Los Angeles has undertaken multiple measures to address the challenge of water scarcity, to improve water quality and provide more finance for water infrastructure upgrades. Given the City’s growing population, significant water consumption as a proportion of the state’s overall consumption, and its geographic vulnerability, the impact of directing more investment to finance its capital improvement program in the water sector is immense – not only at a local scale, but also for neighboring states and, therefore, for the entire economy. 

Impact measurement

HIP measures the impact of almost 50,000 water utilities and 71 combined water systems across the country through 12 material metrics aggregating into 5 impact pillars – Health, Wealth, Earth, Equality and Trust (also aligning with Environmental, Social and Governance categories).

Pillars most material to the water sector are Health (42.5%) and Earth (37.5%). These two pillars focus on measuring water pollution and quality, and environmental performance. The highest-weighted metrics are Unregulated Contaminants (an average per sample taken), Lead & Copper Exceedances, Water Withdrawal Efficiency and 10-year Water Use Efficiency.

LA-DWP receives a HIP total rating of 65%. Although at the sector’s average overall, the entity excels well above peers in the Earth and Trust pillars. This performance is driven mostly by its water withdrawal efficiency, and a 10-year water use efficiency in the top quartile, and for violations corrected.

On the other hand, LA-DWP needs to address a relatively high level of unregulated contaminants per sample, currently in the bottom quartile. This poor performance might not necessarily be the responsibility of LA-DWP only.

HIP’s research has shown that EPA’s Unregulated Contaminant Regulatory Rule has levels that are set much higher than could be safe for drinking water by people. In fact, many scientific targets aim for much lesser exposure to these contaminants. The regulations need to catch up with the science – as some contaminants can lead to cancer or liver damage.

Ripple effects

Los Angeles is the largest city in California, and the second largest in the US, with a population of 3.8 million people. LA is one of the most dynamic economies, with a fast-growing high-tech industry, Hollywood’s creative economy, strength in aerospace and advanced transportation, the largest manufacturing base in the country, and a rapidly increasing amount of venture capital investment in startups.

By “going green” – or “blue” for water – and implementing an extensive plan to improve water supply, usage, recycling and conservation, the city can produce enhanced environmental and social impacts, which also can ripple into the region’s cities and adjoining states.

This bond is a next step in making LA more sustainable with a goal of sustaining and fostering further economic growth.

“Net positive” on environmental outcomes

Los Angeles Dept of Water and Power leads on several sustainability metrics among water utilities, including actively investing in innovative solutions. This sustainability vision is officially included in its strategy, and evidenced by a higher-rated HIP Earth pillar.

As climate change increasingly impacts the City of Los Angeles, and the entire state of California, this bond has potential for net-positive environmental impact, and to enhance LA Water’s climate-change resilience and adaptation.

Anna Rautenberg is an ESG impact investing analyst at HIP Investor Ratings LLC.

HIP Investor Inc. is a state-registered investment adviser in several jurisdictions, and HIP Investor Ratings LLC is an impact-ratings firm evaluating impact and ESG on 123,000 municipal entities, 250,000 muni-bond issuances, and 12,000 corporates for equities and bonds. HIP Impact Ratings are for your information and education – and are not intended to be investment recommendations. Past performance is not indicative of future results. All investments are risky and could lose value. Please consult your investment professionals to evaluate if any investment is appropriate for you, your goals, and your risk-return-impact profile.