December 5, 2013
A Major Setback for California’s High Speed Train
The future of the California High Speed Rail project hangs in a precarious balance as a result of two rulings handed down by Sacramento Superior Court Judge Michael Kenny on November 25. “The Judge’s ruling will prevent the [California High-Speed Rail] Authority from spending bond measure funds for construction until the funding plan is brought into compliance,” said Michael Brady co- lead attorney on the case. But because that would require finding at least $25 billion in extra funds, Brady believes compliance seems “virtually impossible.” They need to step back and rethink their whole approach,” added co-lead attorney Stuart Flashman.
The Authority’s Chairman, Dan Richard, tried to cast the Court decision in a more positive light. “The judge did not invalidate the bonds as approved by the voters,” he said. “Like all transformative projects, we understand that there will be many challenges that will be addressed as we go forward in building the nation’s first high-speed rail system.”
The Court rulings are the culmination of prolonged litigation. It began two years ago when two aggrieved individuals, farmer John Tos and homeowner Aaron Fukuda joined Kings County Board of Supervisors in filing a lawsuit asserting that the Authority failed to comply with certain statutory requirements in its 2011 funding plan. Oral arguments were held on May 31of this year and on August 16 Judge Kenny ruled that the Authority failed to comply with the requirements of Proposition 1A in two fundamental respects:
(1) It was unable to certify completion of all the environmental clearances for the 300-mile Initial Operating Segment (IOS) extending from Merced to San Fernando Valley. (To date, only a 29 mile stretch of initial construction from Merced to Fresno has been examined); and
(2) It was unable to identify “reasonably expected” sources of funds required to complete the Initial Operating Segment. (See our column, “A Major Court Rebuke for the California Bullet Train,” August 20, 2013)
As to the second defect, the Authority estimates that the Initial Operating Segment (IOS) will cost about $31.5 billion. It currently has only about 20 percent of that sum or $6 billion—$3.25 billion in federal funds and $2.7 billion in Proposition 1A bond funds appropriated to match the federal funds.
In its November 25 opinion, Judge Kenny did not explicitly address this potential funding deficiency nor did he agree to rescind existing contracts with Tutor-Perini and Caltrans or rule on the propriety of using federal grant money, as requested by the plaintiffs. Instead, he ruled that the Authority cannot “proceed to commit and spend Proposition 1A bond proceeds for construction or property acquisition” until it has complied with the requirements stated in his August 16 ruling.
At a November 8th hearing on the remedies, Deputy State Attorney General, Michele Inan, stated that the Authority was spending only federal money pursuant to an agreement with the federal authorities to “front load” expenditure of federal funds. However, she acknowledged that by April 2014 the project will need Prop 1A bond funds to match the federal contributions. Given the Court’s ruling, it is questionable whether state bond funds will be available to provide that match. Without access to the bonds, the Authority would need other sources of public or private funds in order to complete construction of the initial 29-mile stretch (estimated at $2 billion) and continue building the line. .
In a related decision, the Court declined to issue a blanket validation for the sale of Proposition 1A bonds, as requested by the Authority. Without such a validation, State Treasurer Bill Lockyer’s office said the state can’t sell Prop 1A bonds (as reported in the LA Times), thus putting the future of the project even more in doubt.
All of this should give pause to the federal government and cause it to reconsider whether to put more of its funds at risk, say William Grindley and William Warren, independent analysts and authors of thirty-eight reports on the high-speed rail project. “The Federal Rail Administration’s oversight of the Authority’s actions appears short of legal due diligence. By binding itself to and funding the Authority’s action the FRA has become party to those actions. …FRA’s legal position seems cloudy at best,” the two analysts wrote in a recent briefing paper, “DOT/FRA Has Several Reasons to Withhold Further Funding from California’s High-Speed Rail Project,” November 2013. ( posted at https://sites.google.com/site/hsrcaliffr/home/briefing-papers/11-2013-report-for-the-federal-railroad-adminstration.)
Nor is this the end of the litigation. A second phase of the case is to begin shortly over allegations that the project has strayed significantly beyond the 2008 promises of the Proposition 1A bond measure and that the Authority’s plan for a “blended system” of high-speed trains on Caltrain’s commuter tracks in the Bay Area and Metrolink tracks in the south cannot meet the performance requirements of Proposition 1A—notably a nonstop trip between Los Angeles and San Francisco in 2 hours 40 minutes and provisions that the system operate without public subsidies.
Whatever the ultimate consequences of the two Court rulings, their impact on public opinion and on the confidence of the financial community in the project’s fiscal integrity are unquestionable. Further delays in the project’s groundbreaking (already more than a year behind schedule), the prospect of multiple challenges over bond validation, Congressional opposition to providing further federal funds, and, most importantly, inability to identify credible sources of non-federal money to complete the entire Initial Operating Segment, all add up to a very uncertain future for this “transformative” project.
December 5 update
Reps. Denham and Latham request a GAO review
The day after the Court decision, the high speed rail project was dealt another serious blow. Two influential members of Congress, Jeff Denham (R-CA), Chairman of the Railroads Subcommittee of the House Committee on Transportation and Infrastructure and Tom Latham (R-IA), Chairman of the House Transportation Appropriation Subcommittee requested the General Accountability Office (GAO) to review the federal grant agreements with the California High Speed Rail Authority in light of the Court’s rulings.
“… We are concerned about FRA’s ([the Federal Railroad Administration's] stewardship of Federal funds …” their joint letter stated. ”It is of particular concern that FRA executed grant agreements with the Authority and subsequently amended those agreements to allow the expenditure of Federal funds in advance of State matching funds,” a departure from standard federal/local cost-sharing agreements.
Refering to the Court bond validation ruling, the two lawmakers expressed concern how the Authority will be able to match the federal grants. Under the grant agreements, California is obligated to match the federal contributions with about $2.7 billion of its own money. Without access to the bonds, California will have to find other funding sources, the letter said.
The congressmen asked GAO to look into a number of issues, notably, whether the Authority is “violating or on the verge of violating” its grant agreements with the Federal government; whether the recent State court rulings put the FRA in violation of any Federal laws; and “what responsibility falls on FRA to re-evaluate the grant agreements in light of these court rulings.”
Surface Transportation Board (STB) Ruling
In the meantime, in yet another reversal, the Surface Transportation Board has denied the Authority’s request for an early conditional approval to move forward with construction on the 114-mile Fresno-to-Bakersfield leg of the project before environmental reviews are completed. The Authority “has not presented any unique or compelling reason” why conditional approval should be granted, the board wrote in a four-page decision issued on December 3rd.
The decision is likely to force a delay in building a 5-mile stretch of the route through Fresno. While the Authority sought to minimize the impact of the STB ruling, Ann Begeman, the Board’s vice chairman said in a statement that the decision “acknowledges the growing controversy regarding California’s bond funding process.”
“The STB ruling is another major blow in a series of setbacks to the California project,” commented Rep. Jeff Denham . “This ruling shows the project must comply with all state and federal laws before moving forward.”
House Railroad Subcommittee hearing
The Sacramento court rulings and the administration of the federal grants to the California HSR project will be the subject of a hearing by the House Railroad Subcommittee according to unofficial sources. Tentatively scheduled for December 12, the hearing has now been postponed to a later date this month. FRA and Authority officials are expected to be questioned among other issues why FRA and the Authority amended an existing grant agreement to provide the Authority with payment in advance of the state’e matching funds, a departure from standard Federal/local cost sharing agreements which require that funds must be spent concurrently.
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