Archive for February, 2010

Legal Review of the High-Speed Rail Authority’s Revised Business Plan and Compliance with AB 3034

Monday, February 1st, 2010

INTRODUCTION

 

            The purpose of this document is to provide a demonstration of merely some of the myriad ways in which the California High-Speed Rail Authority’s (“CHSRA’s”) revised business plan fails to comply with AB 3034. The CHSRA is required to demonstrate compliance with AB 3034 to proceed with the project, and both the “Peer Review Committee” established by AB 3034 and the Senate Transportation and Housing Budget Sub-Committee are committees responsible for ensuring compliance with AB 3034. These “watchdog” committees function appropriately as a check on the compliance (or lack thereof) of the CHSRA’s business plan with AB 3034 and other applicable California law, and have the right to deny funding requests made by the CHSRA should this compliance not be demonstrated.

            It is the position of the author of this article that the CHSRA’s revised business plan has not demonstrated compliance with AB 3034, and that further funding requests should be restricted or denied until the Authority complies with the statute and other applicable law.

 

LEGAL ANALYSIS

 

  • THE REVISED BUSINESS PLAN FAILS TO DEMONSTRATE THAT A MINIMUM OF 50% OF ALL FUNDS USED TO CONSTRUCT ANY INDIVIDUAL RAIL CORRIDOR OR SEGMENT WILL BE OBTAINABLE FROM NON-STATE FUND SOURCES.

 

The AB 3034 amendments to the California Streets & Highways Code require that at least 50% of the construction cost of each corridor or usable segment thereof come from sources other than California state bond funds.

“Proceeds of bonds described in paragraph (1) of subdivision (b) of Section 2704.04 shall not be used for more than 50% of the total cost of construction of each corridor or usable segment thereof of the high-speed train system, except for bond proceeds used for purposes of subdivision (g).” Cal. Sts. & High. Code § 2704.08(a) (2010). The California legislature makes clear that the remainder of funding to build the high-speed rail network is to come from federal, local, and private investment, when it states: “the authority shall pursue and obtain other private and public funds, including, but not limited to, federal funds, funds from revenue bonds, and local funds, to augment the proceeds of this chapter. Cal. Sts. & High. Code § 2704.07.

Furthermore, the CHSRA is required to demonstrate that the construction cost of any rail corridor or usable segment thereof is completely funded before any state bond funds are released. This means that the CHSRA must obtain funding commitments from federal, local, and private parties, before it can utilize any of the state bond funds for construction. AB 3034 states in relevant part: “Prior to committing any proceeds of bonds described in paragraph (1) of subdivision (b) of Section 2704.04 for expenditure for construction and real property and equipment acquisition on each corridor . . . the authority shall have approved and concurrently submitted to the Director of Finance and the Chairperson of the Joint Legislative Budget Committee the following: (1) a detailed funding plan for that corridor or usable segment thereof that (A) identifies the corridor or usable segment thereof, and the estimated full cost of constructing the corridor or usable segment thereof, (B) identifies the sources of all funds to be used and anticipates time of receipt thereof based on offered commitments by private parties (emphasis added), and authorizations, allocations, or other assurances received from governmental agencies.” § 2704.08(d).

            Even a cursory review of the CHSRA’s revised business plan indicates a substantial failure to comply with the requirements of AB 3034.

            First, the CHSRA states that it will receive $4-5 billion from local governments to fund construction of the high-speed rail system. (CHSRA Business Plan, p. 99). This estimate is entirely unsubstantiated in the plan, even though the CHSRA is required to identify the sources of all funds to be used and anticipated time of receipt by presenting offered authorizations, allocations, or other assurances received from governmental entities. (CHSRA Business Plan, p. 99); Cal. Sts. & High. Code § 2704.08(d). Not only is the claim regarding local funding unsupported by any evidence, but the amount of projected funding is also highly-suspect, given the CHSRA’s description of statements made by local governments depicted in the business plan. For example, the CHSRA states in the business plan that Orange County, one of the largest counties in all of California, has signed an MOU committing $7 million to construction of the high-speed rail line through the Orange County Transportation Authority. (CHSRA Business Plan, p. 100). There are 58 total counties in California, of which only a fraction are served by the proposed high-speed rail line. Additionally, given that Orange County is one of the larger and wealthier California counties, it stands to reason that $7 million is likely to be one of the larger amounts contributed by any California county to high-speed rail. Consequently, for purposes of this analysis, I will generously assume that half of all California counties will subsidize the high-speed rail project, and that all of the 29 counties somehow afford to donate the same amount that Orange County has provided, an extremely generous assumption given the lower wealth and population of many other counties. Even under the extremely generous assumptions described above, the CHSRA would only stand to receive a total of $203 million from local governments for high-speed rail, a far cry from the $4-5 billion they expect to receive for the project. This enormous discrepancy between the expectation of local funding the CHSRA has indicated in the business plan and the actual likely subsidy from local governments makes it probable that the CHSRA will have to get most of the $4-5 billion projected from other sources, or lack adequate funding to complete the project.

            Second, the CHSRA states that it expects to receive $17-19 billion from the federal government to fund the construction of the high-speed rail system. (CHSRA Business Plan, p. 94). However, it is entirely unclear how the CHSRA intends to receive $17-19 billion from the federal government when this amount is more than the entirety of all federal funding to be distributed throughout the nation. As the CHSRA accurately states in other parts of its own business plan, the American Recovery and Reinvestment Act only provides for $8 billion total for high-speed rail systems throughout the entire country, with an additional $5 billion total over 5 years ($1bil./year), for a total of $13 billion. (CHSRA Business Plan, p. 96). These are amounts to be distributed to projects in all states by the federal government, and as a result, it is likely that California will only receive a portion of this available funding for its project. Indeed, the CHSRA seems to recognize this fact when it projects that it will receive only $6 billion of the initial ARRA funding, and that only $4.7 billion will be devoted to the high-speed rail system. (CHSRA Business Plan, p. 96). Consequently, if we assume that the CHSRA receives the same portion of future ARRA funding that it projects to receive of the initial ARRA funding, then the CHSRA stands to receive only $4.7 billion plus (.75)($5 billion), totaling only $8.45 billion from the ARRA. With regard to funding under other federal programs, the CHSRA has provided no evidence or other indication that it has applied for, or been granted, financing under any of the other federal programs. (CHSRA Business Plan, p. 94-100). AB 3034 requires that these funding commitments be described with great specificity as to the amounts, sources, and timing of disbursements of funds, and the CHSRA business plan fails to provide sufficient data to comply with the statute. Cal. Sts. & High. Code § 2704.08(d). As a result, the CHSRA’s claim that $17-19 billion of the construction cost of the high-speed rail project will come from federal funds is highly-suspect, and more clarity is needed on this point before state bond funds are released under the premise that at least 50% of the cost of any corridor will come from non-state bond fund sources.

            Third, the CHSRA states that it expects to receive $10-12 billion from private investment sources, even though the CHSRA presents no evidence that it has obtained any funding commitment or letter of intent whatsoever from any of the financial firms it claims have interest in the project. See generally, CHSRA RFEI, CHSRA Business Plan. Furthermore, it seems that the CHSRA has only found a total of 5 financial institutions interested in providing funding for the project, on terms undetermined and in amounts unstated. (CHSRA RFEI, p. 3). In fact, the CHSRA states that even among the 5 financial institutions it claims are interested in the project, that many have “specific concerns centered on the extent to which private investment is to be repaid through ridership revenues.” (CHSRA Business Plan, p. 105). These concerns are likely justified, as for an unexplained reason, the CHSRA has predicted that between the years 2000 and 2030 the population will increase 42%, but rail traffic will supposedly increase five-fold, by 400%. (CHSRA Business Plan, p. 68). Given that this prediction of future demand for rail goes to the heart of the profit assumptions by the CHSRA to pay on private debt, it is a dubious assumption that the high-speed rail network will obtain private funding for the project, and the CHSRA has demonstrated no evidence to the contrary. Combined with the likely inadequate local and federal funding on the project, the lack of private investment will cause the CHSRA to have insufficient funding to complete the proposed segments of the project, and render compliance with AB 3034 improbable.

 

  • THE REVISED BUSINESS PLAN FAILS TO PROVIDE FUNDING FOR PUBLIC OUTREACH TO REMEDY THE CHSRA’S CURRENTLY INADEQUATE OUTREACH PROGRAMS.

 

The CHSRA states in the revised business plan that “public outreach” is critical to the scoping and alternatives analysis required by law. (CHSRA Business Plan, p. 28-29). This purported goal by the CHSRA is consistent with the recommendations of the Senate Budget Sub-Committee, including specific comments by Senators Simitian and Lowenthal, made to ensure a public discourse of important issues regarding the project.

Given the purported commitment of the CHSRA to “public outreach,” and the explicit advice of the Senate to engage in enhanced public outreach, it is shocking that the revised business plan has no budget for “outreach” whatsoever. (CHSRA Business Plan, p. 8). In fact, according to the CHSRA’s own statement of funds expended, the CHSRA has expended nothing on “outreach” since 2006, when it expended only $50,000. (CHSRA Business Plan, p. 8). There are two logical deductions to be taken from the CHSRA’s failure to list any outreach expenditures in the business plan, but both demonstrate the inadequacy of the CHSRA’s plan. First, it is possible that no expenditures were listed in the chart when expenditures were in fact made. However, this possibility would then seem to indicate that all of the data in the chart should be suspect, as potentially incorrect. Second, it is possible that the CHSRA spent no funds on “public outreach” over the last 4 years, or such inconsequential funds that the failure to state this funding should constitute an admission that very little outreach funding existed. Under either assumption, the CHSRA’s lack of funding for public outreach is a material concern of many residents, who feel disenfranchised with the process.

Furthermore, although the CHSRA states that “statewide and regional outreach efforts have always included significant steps to engage, inform, and take input from California’s diverse communities,” and that “Multi-lingual printed materials and legal advertising have been a compulsory part of the Authority’s outreach,” the author can find no link whatsoever from the main page of the CHSRA’s website to receive documentation in any other language than English. (CHSRA Business Plan, p. 56; CHSRA’s website at www.cahighspeedrail.ca.gov). Additionally, the author performed a search for over ten minutes on the CHSRA’s website, individually clicking on each major section of the site, which requires English-language proficiency, and could require only one single promotional video in one language (Spanish), that provided any information regarding the CHSRA’s plan. This video also contained almost no detailed information regarding the project, and appeared to be only a marketing video for high-speed rail, clearly inadequate to reach an educated disposition regarding the costs and benefits of the project. The CHSRA should be required to provide meaningful data and documents in other languages, so that an educated decision can be reached among non-english speaking California residents.

 

  • THE REVISED BUSINESS PLAN FAILS TO PROVIDE PLAUSIBLE RIDERSHIP FORECASTS AS REQUIRED BY AB 3034.

 

The CHSRA is required by AB 3034 to provide accurate ridership forecasts and projected operating revenue for the high-speed rail project before state bond funds are released. Cal. Sts. & High. Code § 2704.08(c)(2)(E). While the CHSRA revised business plan attempts to provide such figures, these estimates are totally implausible and should be considered highly-suspect without further verification.

The CHSRA claims that “the [ridership] forecasts assume that high-speed train travelers will not face airport-style security checks and processing time.” (CHSRA Business Plan, p. 69). This tremendous assumption by the CHSRA results in one of two substantial problems. If the CHSRA is correct, and no substantial security is implemented on high-speed trains, even those traveling at 200+ miles per hour through densely populated areas, then it would seem that substantial security risks would arise, particularly with regard to terrorism or other sabotage of the rail network. A high-speed train traveling through densely populated areas would likely be a prime target for any terrorist, and any likely “incident” would cause billions in damage. This fact will not be lost on the Department of Homeland Security, and it is likely that any high-speed rail network of the kind planned in California would require substantial security, delaying travel times for high-speed trains between destinations and increasing cost. In fact, given that high-speed rail is a vastly slower mode of transportation than air travel, the only advantage of traveling on a high-speed train from a consumer perspective is, perhaps ironically, the lack of security, which for reasons aforementioned, is likely to be promptly required. Given the likelihood that security on the high-speed rail network will be as extensive as airport security, there are no substantial comparative advantages from a consumer perspective to utilizing a high-speed train over air travel. Therefore, it is likely that the CHSRA’s estimates of ridership, and the corresponding estimates of revenue, are grossly overstated.

 

CONCLUSION

 

            While the CHSRA’s revised business plan provides somewhat greater detail than its predecessor, substantial work must be done for the CHSRA to prove compliance with AB 3034. Until the requisite statutory showing is made, the CHSRA should be prohibited from tapping state bond funds for construction of the high-speed rail project. This compliance with AB 3034 must be demanded of the CHSRA to ensure that the intent of the Californians who voted for the project be realized, and that if the high-speed rail project is to be “done,” that the project is “done right.”