The Grindley, Warren, Enthoven Report: The Financial Risks of California's Proposed High-Speed Rail Project

Below please find the press release for a new version of the financial report produced in 2010.  This second version is extensively revised and constitutes the most comprehensive independent financial analysis of the California High-Speed Rail project.

There are many reasons for terminating this project.  Some reasons are far more evidence based than others.  Here is the most solid analysis of what matters most; the financial grounds for why this rail project cannot, and must not, be afforded by the State of California.  

The document is 67 pages long and can be downloaded from the web-site:

http://www.cc-hsr.org/   See: "COST: $700,000. Each Working Day"

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\\\For immediate release: September 19, 2011.  Palo Alto, CA.///

 The attached study revisits the issues found in the October 2010 volume, The Financial Risks Of California’s Proposed High-Speed Rail Project. It also analyzes new information from the California High-Speed Rail Authority and other sources on the project. Among the more salient findings are:

The Authority’s construction and permanent job forecasts are vastly overestimated according to US Bureau of Labor Statistics calculation methods.  In fact, at the state level, no new permanent jobs will be created.

All high-speed rail systems in the world are subsidized. The Director General of the International Union of Railways and nine other sources confirm this. Californians decided in 2008 to subsidize up to $9 Billion of the proposed system’s construction costs and none of its operating costs. Nothing more.

The Legislature made it clear in 2008, and the Authority confirmed in its 2009 Business Plan, that the system’s operator would service any construction debt.  No return to the taxpayers for addition funds is authorized.

For every ‘free’ Federal dollar, the State must commit to spend $46 in principal and interest to service the debt on the $66 Billion Phase One project.

If the California voters are to gain the promised Entire System connecting six major cities, it will cost at least $116Billion to build, and require at least $240Billion of debt principal and interest payments over 30 years – three times the cost of $45Billion declared in 2008.

Over the past year the reduction in the availability of Federal ‘free’ grant awards and increases in construction costs have created a situation that is financially untenable. The train’s operating margins (revenues minus costs) will be inadequate to service the debt that might have to be authorized to build the system. This will lead to increases in State taxes, or in an increase in the State’s annual debt service as a percent of General Fund Revenues, of from 25% to 50%.

We acknowledge the movement underway to shift the project’s financial performance metrics from those prescribed in the 2008 law and Prop 1A to one where ‘social benefits’ are the principal measure of its worth. This is not only contrary to the present law, but creates a slippery slope toward justifying other selected ‘worthy’ projects.

For additional information please review the Summary on page 3 that also contains references to the appropriate section of the document on specific subjects. The Preface, pages 9 to 12, also provides a good synopsis.

Our publications on high-speed rail will be found on the web site of the Community Coalition on High-Speed rail – http://www.cc-hsr.org//. They exist in the public domain and require no authorization to copy or distribute.

 The report’s message is vital to all Californians.

 For further information, contact the authors:

Alain Enthoven (650 723 0641)

Bill Warren (650 321 8638)

William Grindley (650 324 1069)

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SUMMARY:

The authors’ analyses of financial aspects of the proposed California High-Speed Rail project (CHSR) found that without Federal grants to pay nearly all the construction costs, there is no chance of meeting the financial requirements of AB3034 and meet the subsequent promises made to Prop1A voters in 2008.

On the key issues of ridership, construction costs and profitability; these are

irreconcilable differences. At times the Authority’s assertions have a ‘through the looking glass’ quality to them. The CHSRA must know their ridership estimates are too high to be believed, and that it’s hubris to say “the users of the system pay for the system.” It’s also blind to ignore that private capital will only come with a ‘revenue guarantee’ (subsidy), and that around the world high-speed rail systems are built by their national governments, which also generally subsidize operations.

Enthusiasts and corporate beneficiaries will argue the State and Federal Governments should pay the construction costs because the train will bring social benefits. This report does not address the benefits or costs of air quality, congestion, foreign exchange, etc. Those were not the performance metrics of AB3034 and to include them requires another law and another approach to the people of California.

PREFACE:

Much has changed in the year since ‘The Financial Risks of California’s

Proposed High-Speed Rail Project’ was posted on http://www.cc-hsr.org/.

That document raised questions both about the CHSRA’s conclusions, and

has been recognized in the financial and general press as a demonstration of

the paucity and poor quality of credible financial information provided by the

California High Speed Rail Authority’s (CHSRA) on the largest-ever proposed

project in California.

As well as new issues that have emerged since, this report revisits some of

the same, yet unresolved issues about the finances of this megaproject.

Among those which provide the context of the present report are:

1. The CHSRA has clung to its unrealistic ridership forecasts. We believe they

do so because their financial plan is ‘geared’ to ridership. That is, both the

CHSRA financial plan’s operating revenues and expenses are fixed in

direct proportion to the number of riders. Fewer riders make their plan

require subsidies, or its equal, ‘revenue guarantees.’

2. Simultaneously, the Authority’s methods both for deriving Operating Costs

and Revenues, as well as the actual inputs to their financial model (which

shows an operating surplus of cash from the first operating year) are

simply unrealistic.

3. Legislative and high-speed rail proponents in the general public still claim

high-speed rail systems worldwide are profitable. They aren’t. Any

semblance of extra cash from operations in Europe or Asia is a mirage of

creative public finance accounting. If those systems had to carry their

capital costs rather than receiving them as a gift of their nations’

treasuries, they would run even deeper in the red.

4. Estimated Phase One (LA-SF) construction costs have increased from

$33 Billion in 2008, to $43 Billion in 2009 to $66 Billion or more in early

2011. This completely changes the sources and equations of debt and

debt servicing costs from a 2009 estimate of State bonds and private

sector monies of about $19-20 Billion to as much as $54 Billion. The

estimated cost to build the ‘Entire System’ is now roughly $116 Billion,

nearly three times the costs in 2008’s ballot description.

5. The CHSRA continues to spend State General Funds, Prop1A bond and

Federal grant monies in the hope that this will stimulate true private

participation. It hasn’t and won’t without revenue guarantees (aka.

subsidies). The CHSRA Board has known this from five months before the

November 2008 vote on Prop1A when their own consultants, IMG,

reported the results of an Authority-commissioned survey.

6. Some within the Authority and Legislature still believe the Federal

government will provide the project $17-19 Billion of ‘free money’ grants,

and California’s cash-strapped cities and counties would provide another

$4-5 Billion. Three years after Proposition 1A, the State has in been

awarded $3.3 Billion (not all of which is obligated) in Federal grants for

construction and $0.4 Billion for the SF Transbay Terminal. Matching that

is the possibility of about $2.7 Billion of Prop1A bonds. Few if any more

grants are likely to come from the US Government, as it has a debt crisis

of its own. Likewise, it is inconceivable at this time that local governments

(many of whom are laying off teachers and public safety personnel) would

grant the project ‘free’ monies.

7. The myth persists that private sector money, either ‘at risk’ or though

Public Private Partnerships (PPPs), will appear after the State and Federal

governments build an initial ‘proof of concept’. More than twenty years

after the State began to invest in the concept, no private money has

appeared. Neither the worldwide history of high-speed rail, nor the

Authority’s financial plans to date have proven there is sufficient profit in

the project to overcome the all-too-obvious financial risks. Ask a simple

question: “If high-speed rail is so profitable, why did private companies

leave the rail business forty years ago and why haven’t private investors

clamored for the opportunity to build California’s system at their risk.”

8. The Authority’s claims of construction and permanent job creation are

grossly inflated and should have been dismissed. However rail proponents

and potential beneficiaries have used the good offices of California’s

engineering and construction unions egregiously. To falsely promise so

many jobs to so many workers suffering from the Great Recession was

exploiting their misfortune.

9. The statutorily required Peer Review Group, while criticizing the

Authority’s management of the project, continues to hint – if not advocate

– that the project’s construction costs should be borne by the State and

its taxpayers. That is the way high-speed rail megaprojects are built in

Europe and Asia. But California’s high-speed rail project’s enabling

legislation, AB3034 (Galgiani), explicitly eliminates that option. In

November 2008 Prop1A California’s taxpayers only authorized $9 Billion in

General Obligation (GO) Bonds to invest in construction.

10. Construction costs rise relentlessly. In August 2011 the Authority

announced that the roughly 180 miles of Central Valley construction could

cost $10-14 Billion, 50-100% higher than the 2009 estimates. Those

analyses were based on what is referred to as 15% engineering studies

completion, and the Authority’s data again had not factored in Year of

Expenditure (YOE) accounting as required by the Federal Railroad

Administration.2 This makes the likelihood of further cost increases

inevitable.

The 2011 construction cost estimates included herein were made by several

individuals and groups during this year. In all cases, the baseline forecasts of sources of funds, as well as the estimates of ridership, construction and

operating costs was the CHSRA’s 2009 Business Plan. The analyses herein

were completed using the 2009 Business Plan as the base case (the 100%

Case). Each analysis starts with the 2009 base case (the 100% case). The

analyses then varied future events, such as ridership volumes, ticket prices

and construction costs to gain an understanding of the range of the future

financial results that may occur. This is documented in the Endnotes of this

report, and in all cases, these documents can be found at the referenced,

online sources.

By definition, the scope of this report is limited. We do not address the ‘social costs or benefits’ of the proposed project. Indeed, this high-speed rail project may make the engineering, construction, materials, electrification and rolling stock suppliers wealthy. It also might cut our nation’s dependence on imported oil, clean the air, and relatively decrease traffic congestion – although the forty-five year presence of Shinkansen in Japan and the thirty year presence of France’s TGV seems to have produced few if any of those social benefits.3

But ultimately the project must stand or fall on the basis of accounting

principles set forth in Section 2704 08(J) of AB3034 that says the project

cannot receive an operating subsidy. Equally important, the Legislature

requested, and the voters approved, only $9 Billion to invest in the system’s

construction. Changing that requires both authorizing a new law and gaining

another approval of the voters.

As now must be clear, this report’s co-authors have come to realize the

failings of the CHSRA’s financial analysis and the subsequent shortfall of

credible financial conclusions. Here is the cover quotation from the October

2010 Financial Risks report, with new portions modified by bold typeface.

“We do not oppose high-speed rail in concept. It seems to work

in parts of Europe and Japan and possibly elsewhere; albeit

with deep construction and continuous operating

subsidies, illegal under AB3034. The 2008 Prop1A promise

that captured many voters was that the California High-Speed

Rail (CHSR) would not cost the taxpayer a penny more than the

$9Billion approved by Proposition 1A. After months of work

on this report, six other reports, a complete financial

analysis and twenty plus Notes, we are forced to conclude

that the Authority’s promise seems is an impossible goal.”