Taxes & Spending

California’s bullet train slowed by fresh uncertainties

California’s bullet train slowed by fresh uncertainties

This article originally appeared on heartland.org

Barely recovered from the damaging effects of the Sacramento Court ruling late last year denying the California High Speed Rail Authority access to Prop 1A bond funding, the bullet train project has had to face fresh challenges.

First came the news that Congress has zeroed out any funds for high-speed rail in the FY 2014 omnibus appropriation bill, the fourth straight year no new monies have been provided. This put to rest any lingering hopes of a future resumption of congressional funding for the California bullet train. But it has not deterred the California High Speed Rail Authority from officially expressing a hope for federal subsidies.

“We believe that it is reasonable for the federal government to continue investing in intercity and high-speed passenger rail systems, like California,” Authority Chairman Dan Richard stated in his recent congressional testimony.

Next came a House Subcommittee on Railroads hearing on “The Challenges Facing California High Speed Rail.” Committee Chairman Rep. Jeff Denham (R-CA) wanted “straightforward answers to straightforward questions,” as he put it in his opening statement. Specifically, how was the Authority going to match the $2.25 billion the federal government has provided to the project, now that the court has foreclosed the possibility of using Proposition 1A bond funds? And where would the remaining funds to complete the entire 300-mile initial operating segment (IOS) come from?

Cap-and-Trade Funds for State Match

Richard had some straightforward though not necessarily satisfying (to Denham) answers. Governor Jerry Brown (D), Richard said, has sent a letter to the Federal Railroad Administration reaffirming the state’s commitment to honor California’s obligation to match the federal spending. The matching money would come from the state’s cap-and-trade pollution trading funds.

Richard confessed he could not predict whether the state legislature would approve the use of cap-and-trade funds for the project. Even if those funds were to be approved, they would not become available by the April 1 deadline when the state must start matching the federal grant. The chairman did not elaborate how the Authority would handle its obligation, come April 1. (However, in the governor’s proposed new budget there is a provision to advance $29 million to keep the project moving. The loan, which would come from the state transportation account, could presumably be used as a first down payment in the required matching funds).

Nor did Richard mention the strong opposition by environmental groups, notably the Sierra Club.

“The problem with taking that money and applying it to high-speed rail,” said Kathryn Phillips, head of California’s Sierra Club, “is that we don’t anticipate that we’re going to get the benefits of reductions in greenhouse gas emissions in the short term. . . . It is irresponsible to not apply that money to those programs that will get you greenhouse gas emission reductions now.”

Other critics alleged the HSR project does not meet the legal test that it would result in reductions of greenhouse gas emission that are “real, quantifiable, verifiable and enforceable” as the law requires. Editorial opinion of some California newspapers (San Jose Mercury News, U-T San Diego) echoed these criticisms. Even the Los Angeles Times, a steadfast supporter of the project, expressed some doubts (“Yet the delays, the rising cost, the judge’s ruling and the waning public support should give pause to even the strongest advocates. Can the rail authority line up a financing plan? Is the project still viable? We hope the answer is yes. But the state shouldn’t spend a dime of cap-and-trade money on it until we know for sure.”)

New Definition of ‘Usable Segment’

Richard did not address the court ruling requiring the Authority to identify sources of funds and show completed environmental clearances for the entire 300-mile Initial Operating Segment extending from Merced to San Fernando Valley. Instead, Richard testified that the Authority’s revised funding plan will consider the 130-mile construction section from Merced to north of Bakersfield to be the new “usable segment.”

By connecting to existing Amtrak service at Bakersfield, the chairman said, this stretch will have operational utility, hence it will qualify as a “usable segment” within the meaning of Proposition 1A. The judicial rulings pertaining to the longer 300-mile stretch from Merced to San Fernando Valley are thus no longer relevant in his opinion.

But longtime critic, attorney Michael Brady, does not see this as a meaningful solution. The re-defined Merced-to-Bakersfield usable segment will be conventional rail only, he told us, whereas Proposition 1A requires that a “usable segment” be electrified, with all the attributes of a genuine high-speed rail system. Moreover, Proposition 1A says a usable segment must function without an operating subsidy and must have adequate ridership. The Authority’s redefined usable segment will flunk both tests, Brady said.

“Hooking it up to an existing Amtrak line will not get them out of these requirements,” he said.

Dubious Long-Term Funding

As for long-term funding, a precise funding plan for the entire system is not possible, Richard testified. However, the governor’s budget proposal “establishes an ongoing state commitment of cap-and-trade proceeds to the project.” The measure includes an initial $58 million for planning and $191 million for construction and right-of-way acquisition in the first phase of the project. Once the line to San Fernando Valley (Palmdale) has been completed and operational, the opportunity for private investment will be “greatly increased,” according to Richard.

“This is an internationally proven investment model and is common to almost all recent high-speed rail projects in the world, where capital investment begins with the public sector and then becomes shared with the private sector” to pay for further expansion, Richard testified. As an example, he cited high-speed rail systems in France, Spain and The Netherlands, which, he said, attracted private investment once ridership was established.

However, the parallel is not quite correct. True, European high-speed rail systems were able to attract private-sector interest after the EU opened up cross-border rail passenger services to competition in 2009 . But the public-private partnerships took the form of running private high-speed rail services on publicly owned rail infrastructure—they did not involve private capital contributions to expand the physical facilities of the high-speed rail networks.

Despite Richard’s reassuring statements, the prospect for future private investment in the California HSR project remains very much an open question.

Federal Rail Administration Position

At the hearing, the Federal Railroad Administration and its deputy administrator, Karen Hedlund also came in for sharp questioning. Denham wanted to know, Why has the agency not suspended reimbursements until the High Speed Rail Authority presents a viable plan to identify a new source of the required state match? Given so much uncertainty around the project, why wouldn’t FRA take the prudent step to hold off spending more taxpayer dollars until they are satisfied that California has remedied these legal setbacks?

Hedlund chose not to respond directly to the his questions. Instead, she stated that “at this time,” the Authority was not in violation of the grant agreement. However, she conceded that should California fail to match the federal grants as required by the funding agreement (i.e. beginning April 1), the government could collect the owed matching funds by withholding other federal grants. Denham followed this up by introducing a bill, with the support of every member of the state’s Republican delegation, to suspend federal spending on high-speed rail “until sufficient non-federal funds are available.”

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