As promised, here is the first part of William Grindley's paper, "A Train to Nowhere But Bankruptcy." This paper will appear on this blog in three parts over several days, and finally, we will conclude with the citation notes (of which there are many).
Consider this a kind of three chapter 'cliff-hanger,' or. . . . .
"The Reckless Adventures of Those CHSRA Scamps as they Evade Oversight and Accountability."
After all, it is a kind of detective story, with good guys, like the State Legislative Analysts' Office, the State Inspector General's office (now shut down by Jerry Brown), the State Auditor General, and even the CHSRA Peer Review Committee. And, of course, the bad guys, the CHSRA Board and their paid, muscular minions. The question that our story -- ably written by William Grindley -- now raises is: Will those bad boys with their scam on California be brought to justice?
You may wish to print each section as it appears. It will make great reading to your kids at bed-time.
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A Train To Nowhere But Bankruptcy
A Brief History Of Why California Lost Faith In Its High-Speed Rail Project
- from the authors of -
The Financial Risks of California's Proposed
High-Speed Rail Project
January 3rd 2011
The project to link California's major cities with a high-speed rail system has devolved into an embarrassment - an undefined length of track between Central Valley towns without electrification, a locomotive or passenger cars. Chances diminish daily that this section will become the spine of a LA-SF service as prospects for more Federal grants have diminished. Three State agencies have stated the project is badly managed. But the California High-Speed Rail Authority (CHSRA) continues to spend about $1millon/working day on a project endorsed by politicians who haven't done their financial homework, plus engineering, hardware and software salesmen whose companies will benefit. Unless Californians stop this mad dash to build a project that will cost far more than admitted to, require perpetual subsidies and does not even comply with the law that created it, the California High-Speed Rail project (CHSR) may become the straw that breaks California's fiscal back.
A Brief History of Why California Lost Faith
In Its High-Speed Rail Project
This paper chronicles some of the shortcomings and lack of competence of the California High-Speed Rail Authority (CHSRA) its Board, and its many consultants and contractors. The CHSRA's repeated failures, evasion and dissembling have been tolerated through 2010. Despite the State's dire fiscal condition, the race to commit billions in capital spending to trigger billions of perpetual operating and financial losses continues unchecked. It is no wonder that California has lost faith in the CHSRA and their project.
2008 - Winner Takes All - The zenith of California's high-speed rail project (CHSR) was shortly after November 2008 when Proposition 1A won with 52.7 percent of the votes cast. Although previously criticized, specifically by the Reason Foundation and the Jarvis Taxpayers Association, a winners' glow surrounded the California High-Speed Rail Authority (CHSRA).
Questions Turn Into Doubt Throughout 2009 - A few months later, the Legislative Analyst's Office (LAO), a few members of the State Senate and some private citizens criticized the shoddy nature of CHSRA's 2008 Business Plan, which although legally required before the Prop 1A vote, was only submitted afterwards. But the Legislature didn't ask hard questions about the sources of claims made to voters regarding costs, fares and jobs. Nor did State officials seriously question the $33 billion Phase One plan to build the San Francisco to Los Angeles link.
At the end of 2009, with the release of the CHSRA's 2009 Business Plan, citizens complained that the Authority had lowered the number of destinations promised in the
Prop 1A vote, increased ticket prices by 90%, reduced the projected ridership volumes, and increased construction costs by 30% to $43 billion to reflect previously ignored construction inflation. Nor had the Authority complied with the law's demand for an investment grade business plan or a risk management plan. With a ridership forecast beyond being credible, doubts about the Authority's promises and the professionalism began to grow. But no visible action came from the Legislature or Governor's office except to continue to promote and pay for the project.
Early 2010 - Doubts Ignite Frustration - The official State opinion of the Authority's competence and its two business plans remained status quo ante until April 2010, when California's Auditor issued a harsh assessment of the Authority's financial management.
The 2009 Business Plan Concerns Analysts, The State Senate And Citizens - A month after CHSRA submitted its 2009 Business Plan, the LAO weighed in again; pointing out that this 2009 Plan again failed to meet the investment grade standards that the LAO and the Senate Transportation and Housing Committee demanded a year earlier. The Senate began to express concern over other legislative demands being ignored such as a risk mitigation plan and the lack of a peer review.
These opinions joined a rising chorus of findings from citizens groups like CARRD (http://www.calhsr.com/) and the Community Coalition on High-Speed Rail (http://cc-hsr.org/). But these were largely treated as 'systemic noise'. No visible sanctions were taken against the Authority, and its fiscal year 2009-10 budget remained at $139.1 million for planning, design and public outreach.
Notably, the Authority's 2009 Plan itself seemed to have lost some of its 2008 swagger. The ridership forecast had dropped nearly two-thirds from about 100 million to 39 million riders per year in 2030; the one-way LA-SF ticket had nearly doubled from $55 to $105. Additionally capital costs had increased by nearly a third from $33 billion to $43 billion. The CHSRA claims most of the increase was due to having to account for inflation. However, it's hard to believe that, in their many years of relations with the Federal Railroad Administration (FRA) the CHSRA did not know this by the time of the 2008 vote on Prop1A. And while still maintaining the fiction of a first year operating surplus of $370 million (achieved inter alia by ignoring debt servicing costs) this Plan mentioned the need for a revenue guarantee (aka a legally-prohibited subsidy) five times.
Frustration expressed by the State Senate was met by vague answers as to the delivery of legislated work product, while awarding Ogilvy Public Relations $9 million to centralize public relations. The Federal award of less than half the CHSRA's grant request was 'spun' by their PR agency as a victory, and a forthcoming CEO appointment was portrayed as the route to assuaging all criticism. While some of the luster was gone, California's Legislature still gave the Authority the benefit of the doubt.
The April State Auditor's Report (No. 2009-106) Turns The Tide - In its overview, the politically independent State Auditor's office pointed to provisions that citizens had objected to and the Authority had sidestepped after November 2008. “According to state law, the entire network, from Sacramento to San Diego, is intended to be complete by 2020.” This is a direct reference to the Prop 1A official ballot initiative's description of serving seven destination cities, which had been abridged eighteen months before to defer four destinations (Sacramento, Oakland, Riverside and San Diego). This substantial change was not explained to voters in the run up to the 2008 General Election.
The Auditor's overview also pointed to the reality of fewer-than-the requisite Federal grant funds, with unlikely prospects for significantly more. “The Authority's 2009 business plan estimates it needs $17 billion to $19 billion in federal funds. However, the Authority has no federal commitments beyond $2.25 billion from the American Recovery and Reinvestment Act of 2009 (Recovery Act), and other potential federal programs are small.”
Then the Auditor zeroed in on the Authority's poor management and accounting practices -
“The Authority does not have a system in place to track expenditures according to categories established by the Safe, Reliable High-Speed Passenger Train Bond Act for the 21st Century, its largest source of committed funding.
The Authority has not completed some systems needed to administer Recovery Act funds, for example, a system to track jobs created and saved.
Some monthly progress reports, issued by the Authority's contracted Program Manager to provide a summary of program status, contain inconsistent and inaccurate information.
The Authority paid contractors more than $268,000 for services performed outside of the contractors' work plans and purchased $46,000 in furniture for one of its contractor's use, based on an oral agreement contradicted by a later written contract.”
In addition, the Auditor raised other serious concerns such as asking what was a revenue guarantee, where was the mandated Peer Review Group, and why were there were poor or no financial tracking systems. The Auditor concluded its April 2010 report with ten detailed recommendations to make the Authority's business practices more responsible and credible.
Six months later, on November 4th, the Auditor reported to the Senate on progress towards completing those recommendations. The Authority, while making promises to continue their efforts to conform to the Auditor's demands, had only completed one of the ten recommendations. When asked by State Senator Joe Simitian what grade the Auditor would give the Authority on its efforts, Auditor Elaine Howle said “Certainly less than fifty percent, Senator”.
The State Senate Demands A More Plausible Ridership Forecast - Once as high as nearly 100 million riders by their tenth operating year (2030), the CHSRA forecast, prepared by Cambridge Systematics (CS), was geared down after Californians supported Prop 1A. But even for 39 million riders to pay into the fare box when California's population is to be forty-seven million (2030) still stretched credulity.
The 'Achilles Heel' of the Phase One project always has been the Authority's ridership forecasts. Every financial aspect is dependent on their ridership forecasts - revenues, operating expenses, and their ability to meet debt-servicing requirements. Most importantly, a plausible forecast would decide whether the project would meet its legal restrictions (AB3034) for no operating subsidy.
Citizen groups such as CARRD showed how falsely constructed the CHSRA's expensive macro-economic ridership model was. In January 2010, CHSRA Spokesman Jeff Barker admitted that what was seen by the public was different from what the Authority had seen, and Cambridge Systematics blamed the Metropolitan Transportation Commission (MTC) for not updating the model with the correct coefficients. This three-way finger pointing exercise allowed the Authority to ignore demands for revised projections but continued to erode confidence in the project and its elected officials' oversight.
In April 2010, California's Senate empowered UC Berkeley's Institute for Transportation Studies (ITS) to review the Cambridge Systematics model's construction. In July, ITS reported to the CHSRA Board that the model should not be used for policy decisions since many of its data sources were questionable; coefficients were used at inappropriate places and it did not follow currently-accepted best practices methodologies. The Board took no action to amend or change the CS model.
End of Part I. Stay tuned to this blog for Part II, and then Part III. You don't want to miss any of it.
