Lois Henry

Sunday, Aug 22 2010 12:30 PM

LOIS HENRY: Funny how it all comes back to Kern River water

By Lois Henry

I read recently that some investors in a bankrupted real estate company called LandSource Communities Development are suing for fraud.

I know, I know, doesn't mean much to you at first glance.

But in a funny "hmmm...," rather than a funny "ha ha," kind of way, this all comes back to the Kern River.

It also serves as a cautionary tale of the bad things that can befall us all when we let our precious water slip away.

OK, follow along.

LandSource, controlled by LNR Property Corp. and homebuilder Lennar Corp., had one big fat asset, the 12,000-acre Newhall Ranch tract just north of Los Angeles on which close to 21,000 homes are planned.

Around 2006, a number of entities bought in to LandSource, including CalPERS, California's largest public employee pension group, which jumped in to the tune of nearly $1 billion.

The idea was they'd slap up a sprawling mega development, people would buy the overpriced homes and everyone would walk away fat and happy.

Why they couldn't read the handwriting on the wall in 2006 is a mystery, but there you have it.

The real estate market went bust, LandSource filed for bankruptcy in 2008 and CalPERS lost every penny of that investment. CalPERS isn't part of the fraud lawsuit, by the way.

Now, of course, CalPERS is leaning on municipalities to increase their annual payments to the pension system to make up for losses incurred from both the stock and real estate markets. (The Sacramento Bee reported CalPERS lost $11 billion in its real estate portfolio in the 12 months ending April 30. Wow.)

So, Bakersfield, already strapped for cash from lower sales taxes and state funding cuts, is faced with higher pension payments to CalPERS even as it has to cut employees and scrap much needed public services.

But it might not have happened, or at least not been so bad, if Jim Nickel hadn't been able to sell 1,600 acre feet a year of Kern River water in a 30-plus-year contract to Newhall Ranch developers.

No secure water supply, no development. No development, no investment opportunity. No crummy investment, no $1 billion loss. No loss, less need for CalPERS to lean on Bakersfield.

And here's the real rub.

Nickel was only able to sell that Kern River water after the Kern County Water Agency used $10 million of taxpayer money via a state bond to do an elaborate water-rights deal with the Nickel family.

The agency bought the Nickels' so-called "Hacienda" right, which is high flow Kern River water that only comes along every four or five years. It's estimated to average 50,000 acre feet a year. Most years it's zero acre feet.

The agency gave Nickel the $10 million in taxpayer money and got 40,000 acre feet a year of high flow water, whenever that occurs.

The agency also promised to deliver 10,000 acre feet a year to Nickel every single year no matter what, plus it agreed to use its access to canals and facilities through the State Water Project to move that water around for the Nickels to anywhere they wanted to sell it.

In exchange, the agency gets 10 percent of every sale. So far, that's added up to $3.2 million for the agency and $30 million for the Nickel family since the deal was inked in 2001.

The agency did get two years of high flow water between then and now, which it mostly tucked away in water banks for future use by farmers and for exchanges with Southern California users.

Nickel had a steady supply of water that quickly attracted buyers including Newhall, which has been banking that 1,600 acre feet a year as the developers' fortunes have been in flux.

And just last year, Nickel sold 8,393 acre feet to DMB Associates, which hopes to use part of it to develop 12,000 homes on 1,400 acres of sensitive salt marshes near Redwood City.

So, we taxpayers spent a fortune for Kern River water we don't have the use of, that funded a deal to make one family very rich and trigger sprawl that blew a hole in the finances of a pension system that we're now being tapped to fill.

Like I said, funny "hmmm ..." Definitely not funny "ha ha."

Opinions expressed in this column are those of Lois Henry, not The Bakersfield Californian. Her column appears Wednesdays and Sundays. Comment at people.bakersfield.com/home/Blog/noholdsbarred, call her at 395-7373 or e-mail lhenry@bakersfield.com

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