Here is the second part of William Grindley's paper about the history of the HSR project in California. By now, you should have read yesterday's New York Times editorial about the California project.
This documentation of the sequence of events that William portrays here is what lead up to that editorial and why the NYT is saying that the project should be terminated. The third section of William's paper will appear on this blog tomorrow.
========================================
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
See: http://www.cc-hsr.org
Begin Part II.
Mid-2010 - Frustration With The Legislature Turns Into Citizen Action - Eighteen months after 'the voters spoke', Sacramento's legislators still proclaimed their allegiance to high-speed rail. But citizens were asking which project did the legislators support. Was it the initial one with a 100 million riders and a $55 SF-LA ticket that didn't need a subsidy, or was it the 2009 Plan with lower ridership but higher ticket and construction costs, and the need for a revenue guarantee - all antithetical to the ballot promises?
It is puzzling that California's Legislature, in a nearly bankrupt state, has been willing to spend nearly a half-billion dollars ($484 million) over the last decade on a project with such questionable financial underpinnings. The Legislature appropriated another $221.3 million for FY2010-11 to continue studies along the entire Phase One LA-SF route; a 60% increase over the FY2009-10 budget of $139 million. The current fiscal year's (FY2010-2011) appropriation amounts to spending at the rate of about $1,000,000 ($1 million) per working day. CHSRA got this increase despite the Auditor's Report, despite neither an investment-grade business plan nor a mitigation plan as required by AB3034, and despite CHSRA's highly questionable ridership forecasts.
However, most shocking was the increased funding despite the Authority's submission on August 5th 2010 of requests to the FRA to fund only one of four segments of the heretofore Phase One project. Why would the State continue to pay for planning all segments of the LA-SF system when the Authority tacitly admitted that only one might possibly be funded at present? By November, it was clear that the first 'section' (not segment which carries a legal definition) would be in the Central Valley somewhere between Merced and Bakersfield. Even if two segments were funded over the next decade, the second must be the least expensive - as legally required by AB3034; suggesting the second segment would also be in the Central Valley. Even if the two were built, the third would be 12-15 years in the future - making most, if not all of the many studies' conclusions 'stale'.
Given those likelihoods, why spend money on engineering, environment and public relations when the FRA was to decide which part to build. This abdication of decision responsibility negates the need for expensive studies such as those being done by the outside engineering firms and managed by Parsons Brinkerhoff. These engineering and environment studies would be near worthless a decade later and certainly open to court challenge. More money wasted.
Continuing to fund the Authority or issue debt to build any portion of it seems counterintuitive in a State obligated to pay about $5 billion in debt servicing this fiscal year on its more than $90 billion of outstanding bonds. It makes even less sense in the light of additional, future debt servicing costs on the currently authorized, but as for now unissued, $40 billion of State bonds.
Citizens Take The Initiative - The continued State funding for the Authority, the CHSRA's shift to a Valley section and; with one exception, the lack of action by the Legislature brought forward both more community activism and a citizen's report on the project's financial risks. CARRD and The Community Coalition continued to work, and High Speed Boondoggle (http://highspeedboondoggle.com/) became the statewide grassroots organization that has taken the issue of the train from citizens' and local governments' concerns to a well organized, in-the-streets protest movement.
Simultaneously, citizens who are economists, business and financial industry leaders produced a report on the proposed financial viability of the project. The report, The Financial Risks of California's Proposed High-Speed Rail Project concluded that the project will not only not make the $370,000,000 ($370 million) in operating surplus its first year, but will have accumulated a minimum of $4,000,000,000 ($4 billion) negative cash flow starting in its first four years of operations. Even that conclusion assumes all the financial, construction and operating plans defined in the 2009 Business Plan actually occur as projected. Any different combination of funding for the project's construction or its operations leads to larger peak negative cash flows in the fifteen operating years starting in 2020; the same timeframe CHSRA used. Those conclusions, available in Section 5 of Financial Risks (http://cc-hsr.org/) show the proposed project could never meet AB3034's restriction to not require a subsidy; aka a revenue guarantee.
The Authority Tacitly Admits It Has Little Chance Of Funding Its LA/Anaheim-SF Phase One project - On August 5th the Authority's Board made a strategic shift to face reality. To the surprise of many high-speed rail proponents, the Board announced that the following day it would submit proposals to the FRA to fund only one for the four segments of the heretofore Phase One project.
This wasn't a surprise to those who knew that the Federal Government's FY2011 budget likely - and ultimately did - include only about $1 billion for a national high-speed rail program; nothing near the FY2010 national stimulus of $8 billion. Also predictable was that the first part built would have to be in California's Central Valley since AB3034 requires the least cost segments be built first. While there were worries the Chinese or French government would step in to finance all or part of the estimated $43 billion project, by early August that scenario had faded considerably with China's reassessment of the financial viability of its own high-speed rail commitment. And as both California's precarious financial condition and the US government's fiscal problems began to get 'top of mind' consideration, the entire project began to seem more remote.
Q4 2010 - Prospects Go From Bad To Worse - Two years after 'the voters spoke', Sacramento's legislators still proclaimed their loyalty to high-speed rail. But increasingly frustrated and articulate citizens were asking their elected leaders which project they supported; the initial 100 million riders and a $55 SF-LA ticket that didn't need a subsidy. Or are they loyal to the 2009 Business Plan with 39 million riders, one-way SF-LA $105 tickets, costing $43 billion to construct and needing a State subsidy of $35 billion to $60 billion over the Plan's 2020 to 2035 timeframe and probably forever?
California's FY 2010-11 Budget Negotiations Required The CHSRA Submit To More Oversight; But In October Governor Schwarzenegger Vetoes Those Demands - Becoming increasingly wary of the 'good news' syndrome from CHSRA in the face of contrary evidence, the Senate negotiated budget items for more oversight. Specifically the budget provisions required:
1) a legal analysis of a revenue guarantee, to answer whether or not it is a disguised subsidy
2) a summary of expenditures for community outreach, particularly how the monies for Ogilvy are being used
3) a financial plan with alternative funding scenarios, since by mid-2010 it was clear there were no forthcoming private sector monies or local government grants
4) both investment grade business and risk mitigation plans demanded by AB3034, but never delivered,
5) a response to the April 2010 State Auditor's report, which roundly criticized the performance of the Program Management Contractor, Parsons Brinkerhoff,
6) a report on how the Authority has addressed the ten recommendations of the Bureau of State Audits (BSA)
When the budget finally passed in October, these requirements were line item vetoed by Governor Schwarzenegger. Not only was the Legislature outraged, but also several lawsuits from citizens groups were started, challenging the Constitutionality of the Governor's action.
In October, Six Months After The Auditor's Report, California's Inspector General (IG) Concurs With The Auditor's Findings - Governor Schwarzenegger's appointee, Inspector General Laura Chick, issued a letter to CHSRA on October 27th which starts its substantive review with “The Authority is not fully prepared to distribute and monitor ARRA funds.” and continues “. . policies and procedures to ensure the appropriate expenditure of ARRA funds have not been detailed and required language is not included in contracts.”
The IG, charged with overseeing the use of ARRA funds, evaluated progress towards meeting the Auditor General's April report over the six months since it was released. At first glance, it seems to praise the Authority for implementing half of the ten Bureau of State Audits, (BSA) recommendations. But the praise is highly qualified and the IG concurred solidly with the Auditor's later comments on its ten recommendations:
While giving the Authority an essentially failing grade for responses to the Auditors report (50%), the Governor-appointed Inspector General made no recommendation to withhold any of CHSRA's FY 2010-11 budget.
November 2010 - The Senate Shifts The Burden Of Proof To The Authority - One hundred days into the start of FY2010-11, California finally got a budget in late October, with CHSRA oversight activities struck from it. The Authority and its Board may have thought they had escaped a 'silver bullet' with the Governor's veto. Not only was the Governor's action inexplicable, considering the Legislature was doing its job in its oversight responsibility, his actions may have been illegal.
The cumulative effect of two years of not being in compliance with the demands of AB3034, evasive or no answers to legislators' questions; and the pressure of citizen groups brought around key senators to publically express their frustration. On November 4th, State Senator Lowenthal convened a hearing on high-speed rail ridership. The hearing started with the State Auditor's testimony (see above) that gave the CHSRA a failing grade. Then the LAO reiterated their lack of success in securing not only the data they needed for analysis, but even basic data to answer key questions asked of the Authority. Then ITS Berkeley was invited to repeat their findings on the Cambridge Systematics' model, after which they were invited to return to the dais to rebut the about-to-be-given CHSRA critique of the ITS. This was an unprecedented move.
Then Senator Joe Simitian, the State Senator who had sponsored AB3034 legislation and continued to express his loyalty to high-speed rail, asked Chair Lowenthal if he might comment. What came next was totally surprising from the cautious, process-oriented senator. His words and body language showed not only how reluctant he is to comment, but also his deep-seated frustration. When CHSRA CEO van Ark tried to persuade the Senator that he was not able to meet two years of demands, Senator Simitian ends the conversation with “I am un-persuaded by your explanation sir.” The exchange is documented in a video clip at http://www.youtube.com/watch?v=ojh2qYa2fmU&feature=related
This was a pivotal point in the Authority's relations with their key oversight committee. The Chair of that transportation committee, Senator Lowenthal, sits on the budget subcommittee of Senator Simitian. Trust disappeared, and the burden to prove their veracity and professional capability is now the Authority's. On Friday, December 3rd, in a subsequent meeting, Senator Lowenthal said, "I just don't have any confidence in (authority staff's) judgment that they've demonstrated so far." Nothing will be the same after that November 4th hearing.
Evidence Emerges Of Improper Conduct By CHSRA's Board And Consultants and Contractors - The CHSRA has had a Conflict of Interest Code since 2001. Some CHSRA Board members as well as CHSRA contractors may have violated various State and Federal laws regarding three issues: holding two offices which are in conflict of interest; accepting gifts and not registering those, and performing consulting contracts for beneficiaries of the CHSR project. And, according to the former CHSRA Executive Director, some CHSRA contractors were also accepting gifts.
Note that CHSRA has very few State employees, but hundreds of consultants, contractors, and subcontractors, acting as employees. This is critically important as many of these outside vendors and suppliers, both domestic and foreign, probably plan to compete on contracts for the capital development and possibly operations phases of the Phase One.
Authority Board Chair Curt Pringle And Member Richard Katz Held Incompatible Offices - Appointed by Governor Schwarzenegger in 2007, both were held to be in violation of California law by the State Attorney General, Edmund Brown Jr. This December 1st 2010 ruling was preceded by Richard Katz's resignation the week before. Even after the ruling, Chair Pringle continued to be both Mayor of Anaheim, a key destination for the high-speed rail, and a member of the Orange County Transportation (OCTA) Board. Although no longer a CHSRA Board member, Richard Katz continues as a board member of the Los Angeles County Metropolitan Transport Authority (LA Metro) and a board member of Metrolink.
This ruling was no surprise, since in April 2010 the State's Legislative Counsel had issued a similar opinion to the Secretary of the Senate. Nine days after his appointment in 2007, Curt Pringle voted to change the southern terminus to Anaheim as opposed to downtown LA. In May of 2007, he voted to exclude San Diego and Sacramento from Phase One. The CHSRA Board also failed to reveal this 2007 change in destinations of Phase One to voters before they were asked to decide on Prop 1A, eighteen months later in November 2008.
Board Members Under Investigation For Trips Sponsored By Foreign Governments - The LA Times' wrote articles on trips outside the US paid for by foreign governments in late 2010. Then California's Fair Political Practices Commission (FPPC), charged with enforcing ethics violations in the State government launched an investigation of four of the nine CHSRA Board members (Quentin Kopp, Curt Pringle, Lynn Schenk and Tom Umberg) as well as former Executive Director, Mehdi Morshed. Schenk and Umberg have been officially notified by the FPPC that they are under investigation.
Board members have received gifts, as reported by some on their Form 700, the document on which state employees, officials and consultants declare any income, investments and gifts that might pose a conflict. Even listing the gifts seems to be in violation of the Authority's own Conflict of Interest Code. While these are still allegations, they do point to potentially more widespread conflict of interest conduct.
CHSRA Contractors Accepted Gifts - CHSRA's own ethics policy also forbids any gifts to contractors - current and potential. But in a bit of irony, during the January 6th 2010 Executive Committee meeting on ethics, then CHSRA Executive Director, Mehdi Morshed, admitted the Authority's contractors accepted gifts. In an exchange with then-Chairman Pringle and attorney George Spanos, Morshed says “I said let's hope not because the contractors are accepting gifts all over the place.” Almost immediately afterwards, Morshed repeats “ . . well, I know, they're getting trips and, you know, all kinds of - well, anyway.”
This kind of gift acceptance is clearly in violation of the California Conflict of Interest Code. These actions may also be in violation of more serious charges embodied in the provisions of contracts signed by contractors, agents and any party working for the CHSRA which state; “The Consultant warrants that this Agreement was not obtained or secured through rebates, kickbacks or other unlawful consideration promised or paid to any Authority agency employee.”
Chairman Pringle And Member Katz Had Consulting Contracts From Firms With Interests In The Project - Curt Pringle & Associates is a full-service public relations, public affairs and government relations firm, providing a wide range of services to both private and public sector clients. Pringle has reported the income from firms that have an interest in the project, including a major construction supplier that owns property along the proposed route and a large corporate donor to the 2008 Prop 1A campaign. This seems to violate both CHSRA and FRA ethical practices. Likewise, now former Board member Richard Katz has a public relations firm and has worked for the Walt Disney Corporation, which would benefit from the proposed nearby Anaheim high-speed rail station.
Both Katz and Pringle have reported receiving more than $10,000, which under state law is the threshold for disclosing sources of outside income from the special-interest clients. Although both may have reported the income, these contracts may represent violations of the ethics agreements between the Federal Railroad Administration (FRA) and a grantee; ie CHSRA. That code for grantees specifically states:
“the Grantee's officers, employees, board members, or agents may neither solicit nor accept gratuities, favors or anything of monetary value from present or potential contractors or subgrantees.” [sic]
California's Conflict of Interest Code once again may have been breached by the two members' actions.
And the FRA code for grantees also states:
“no employee, officer, board member, or agent of the Grantee may participate in the selection, award, or administration of a contract supported by Federal funds if a real or apparent conflict of interest would be involved.”
Similarly, since former CHSRA Executive Director Morshed stated that the Authority's contractors accepted gifts, those contractors would not be in compliance with the Authority's own Conflict of Interest Code, nor would the Authority be in compliance with enforcing that Code. Since the issue of ethics was discussed in January 6, 2010, and the two members apparently continued to perform work for clients with financial interests in the project, their actions could not have been an oversight. Chair Pringle was in the January meeting and could not claim a lack of knowledge of the ethics rules.
The FRA May Have Inappropriately Authorized Grants For CHSRA Without Fully Checking Whether Authority Board Members Or Its Contractors Complied With Both Authority And FRA Ethics Rules - Apparently none of the four Federal grants given to the CHSRA by the close of 2010 has yet been dispersed. Until funds are dispersed, formal Federal investigations cannot be put in motion. At the State level, investigators will link Board members, employees and consultants' actions to the California Conflict Of Interest Code and action taken from those findings.
If the FRA had knowledge about the dual office conflict of interests, or gifts of travel to Board members; or that CHSRA contractors had accepted gifts, or that Messrs. Pringle and Katz performed consulting work for firms with financial interests in the high-speed rail project, there could be legal complications. It would then seem that the FRA would not be in compliance with its own Grant Agreement provisions concerning personal or organizational conflicts of interest.
Some of the possible questions for the FRA to ask itself in regard to this matter are:
a) Does the knowledge of ethical violations constitute grounds for the FRA to terminate its agreements with the CHSRA?
b) Is the FRA required to disperse any of the several tranches of grants to the CHSRA in light of the findings of non-compliance with either the FRA or California's code on conflicts of interest?
c) What action does FRA take against the CHSRA Board or its employees or agents because they are found to have violated those codes?
d) What did the FRA signatories know, and when, about the CHSRA's Board and consultants being out of conformance with the ethics codes?
Federal Money Is Not Free Money - The DOT/FRA might wish Californians would appreciate the largesse of the people of the United States. But the grants for the Borden-towards-Bakersfield section are a sharp two-edged sword. For the $2.987 billion dollars the Federal government has committed to grant to the CHSRA, the State will be required to offer buyers up to a maximum of $2,578,000,000 ($2.578 billion) of State bonds to match those Federal grants. In a nearly fiscally stressed state, that simply piles on more debt servicing.
If the Borden-towards-Bakersfield section actually cost only $5.565 billion, then Californians must sell $2.578 billion of bonds to investors. At General Obligation bond rates for California of 5.03% for 30 years, the total cost to the State retire that debt is $5,050,000,000($5.05 billion).
Monthly debt servicing on those bonds is about $14,200,000 ($14.2 million) or $168,000,000 ($168 million) a year. Since debt servicing is the first obligation of the State, the second obligation, to education, must suffer. By way of example, a large California high school's operating costs are about $50 million per year. In order to fund what has been called a 'Train to Nowhere', the existing Federal grants make the State choose between the train or closing four high schools. Are those grants a gift or a liability California cannot afford?
