The content on this website is intended for investment professionals and institutional asset owners. Individual retail investors should consult with their financial advisers before using any of the content contained on this website. Breckinridge uses cookies to improve user experience. By using our website, you consent to our cookies in accordance with our cookie policy. By clicking “I Agree” and accessing this website, you represent and warrant that you are agreeing to the above statements. In addition, you have read, understood and agree to the terms and conditions of this website.


Perspective published on February 17, 2017

From Drought to Flood: Assessing Risks in California

It was only nine months ago that Gov. Jerry Brown prohibited Californians from hosing off their sidewalks and required them to use shut-off nozzles when washing their cars.1 Those were just two of the many directives issued by the state during an epic, six-year drought that led to mandatory water restrictions and emergency rate surcharges by local water agencies. But in recent weeks, the state has been whipsawed by rains that have shifted concerns in some regions from drought to flooding. Specifically, Northern California is on pace for its wettest winter ever (Figure 1), with year-to-date rainfall already far above the record average for a full water year.2

The biggest headline out of the recent rainfall comes from Lake Oroville (Figure 2), a large reservoir and dam in the foothills of the Sierra Nevada. The lake feeds California’s State Water Project, the state’s primary north-to-south water conveyance system. Last week, the dam’s main spillway – the concrete chute designed to handle overflow from the dam – incurred significant damage because of winter storms and flooding.3 Water eventually spilled over the dam’s main spillway into its Plan B, an emergency spillway, but state officials soon observed severe erosion along that, too, and feared it might collapse, sending a massive rush of water into the Feather River watershed and nearby communities. The dam, at 770 feet the tallest in the U.S., holds back the Lake Oroville reservoir, which contains 1.15 trillion gallons of water.4

For safety reasons, the state on February 12 issued an evacuation order to nearby towns. The order impacted almost 200,000 people living in portions of Butte, Yuba and Sutter counties. Estimates for the cost of repairing the main spillway run as much as $200 million.5 The evacuation order has since been lifted, lake levels have dropped and the state continues to shore up the erosion on the emergency spillway.

From a municipal bond perspective, we do not expect any bond defaults for any related high-grade municipal bond issuers. Still, the situation must remain closely monitored. Key thoughts are:

  • Future rains may force the state to again utilize the emergency spillway to drain water from the lake, raising risks.
  • If flooding occurs, damage to property and regional infrastructure is likely. However, the long-term impacts may be moderate because we expect rebuilding/repairs to begin quickly with the support of emergency aid from the state and federal governments.
  • Nonetheless, we do not anticipate related defaults because bonds often carry strong security features, such as unlimited property tax pledges, with state constitutional protections. Additionally, high-grade municipal issuers typically maintain sufficient financial resources to manage through short-term budget pressures.
  • Local governments have a long history of honoring debt obligations after natural disasters. The experience of New Orleans following the devastation wreaked by Hurricane Katrina in August 2005 underscores municipal credit resilience. A combination of strong local oversight, federal and state help and a solid financial position kept the city current on its debt service.

In general, substantial rain/snowfall so far this winter has contributed to well above average snowpack levels6 and replenished reservoirs that have eased drought conditions considerably in California. That said, hydrological conditions vary dramatically across the state. About 450 miles from Lake Oroville, Santa Barbara County’s Lake Cachuma has much lower water levels, and drought and water scarcity remain significant concerns in the Santa Barbara area (Figure 2).

What’s Next for California Water Utilities

In the near term, we will be watching to see whether California utilities modify their behaviors now that water supplies are being replenished across the state. We will look favorably on utilities that continue to promote sensible water conservation while making investments in sustainable water supplies and key infrastructure upgrades.

We will look less favorably on California utilities that are experiencing weak financial performance coupled with stiff community opposition to rate adjustments. This is because we are seeing increasing evidence that some water and sewer rate payers are tiring of chronic rate hikes. Therefore, municipal investors should not assume that rate payers will always be willing to fund essential services through higher rates for issuers in areas that are under water duress (such as Oxnard, California).

Climate Change

Extreme hydrological swings – years of drought followed by periods of heavy rains that cause severe flooding and/or mudslides – are actually typical in California. But looking long term, climate change could make these swings even more intense over the next few decades. As a result, long-term planning in California must accommodate both drought- and flood-resilient infrastructure.

Overall, despite years of drought, we believe the majority of water utilities in California remain well capitalized from a financial perspective. We will continue to monitor Lake Oroville and California weather conditions carefully.


[1] Executive Department, State of California, Executive Order B-37-16, May 9, 2016.
[2] In reports that deal with surface water supply, a “water year" is defined as the 12-month period of October 1 for any given year through September 30 of the following year. The water year is designated by the calendar year in which it ends. So for example, the “1983” water year is the year ending September 30, 1983. Source: U.S. Department of the Interior, U.S. Geological Survey.
[3] Note: The dam itself remains structurally sound. Only the spillway and emergency spillway are structurally impaired.
[4] State of California, Department of Water Resources, as of February 15, 2017.
[5] Dale Kasler and Peter Hecht, “As emergency spillway flows, state says repairs to crippled Oroville Dam could run $200 million,” The Sacramento Bee, February 11, 2017, accessed February 16, 2017,
[6] Snowpack levels, or snow water equivalence (measured in inches), is the depth of water that theoretically would result if the entire snowpack melted instantaneously. Source: California Department of Water Resources.

DISCLAIMER: The material in this document is prepared for our clients and other interested parties and contains the opinions of Breckinridge Capital Advisors. Nothing in this document should be construed or relied upon as legal or financial advice. Any specific securities or portfolio characteristics listed above are for illustrative purposes and example only. They may not reflect actual investments in a client portfolio. All investments involve risk – including loss of principal. An investor should consult with an investment professional before making any investment decisions. This document may contain material directly taken from unaffiliated third party sources, including but not limited to federal and various state & local government documents, official financial reports, academic articles, and other public materials. If third party material is included, it is believed to be accurate, and reliable. However, none of the third party information should be relied upon without independent verification. All information contained in this document is current as of the date(s) indicated, and is subject to change without notice. No assurance can be given that any forward looking statements or estimates will prove accurate or profitable.