Tuesday, November 8, 2011

"Bond, James (municipal high-speed rail) Bond."

You can't dismiss this as just any other critical article about the new HSR business plan. Why not?  Because it's from The Bond Buyer, an on-line newsletter for people who are in the bonds business, including municipal bonds.  And, that means, in this case, the high-speed rail municipal GO bonds in California, $9.95 billion worth.

Here are some points in the article that warrant commenting.

1. Justifying the rising cost by claiming increased populations is nonsense, unless those population increases come from affluent and well to do sectors.  Ticket costs for HSR will be the highest of any train ticket.  More Californians doesn't mean more rich HSR-riding Californians.

2. Likewise, Rod Diridon, one of the original devisers of this project, justifies huge development costs this way. “HSR will cut travel times and costs while moving people to work and products to the market more competitively with the rest of the world.”  Diridon has always been spinning these gossamer webs.  First of all, it's no longer clear that travel times will be cut. Indeed, the new business plan indicates that it will take as much as four hours to make the trip promised to be 2:40. Then, the train is not intended as a commuter train "moving people to work," (the rail authority has denied that it would be). And finally, what do getting "products to market" have to do with it, since it's not a freight train.

3. Saying that the use of existing rail lines and corridors eliminates NIMBY concerns is nonsense.  It's just the opposite with the Caltrain corridor.  However, it needs to be added that even the NIMBYs don't want it in anyone's "back yard," or business, or farm. 

4. There certainly has been a lot of approval about this new business plan's "honesty" and "transparency." That's not entire true however, since the data-based rationale for the various claims is pretty much absent.  Where does that $81 ticket price come from?  If anything, this business plan continues to lack a huge amount of critical information essential to any business plan, and essential to making sense out of it.

5. "The $9.95 billion bond authorization was always envisioned as a down payment."  By whom? How was that communicated? And as a down payment for what?  Costs of $33 billion or $100 billion? Indeed, without some understanding of the nature of bond financing, the voters were led to believe their support for the $9.95 would be the only state obligation.  It would cost the state nothing since it was based on borrowed dollars. That notion still has not been eliminated in the voters' minds.  They should understand that a $100 billion project will require massive additional capital funding from the state as well as the federal government. Particularly so since the rail authority acknowledges that no private investment funding will materialize prior to actual train operations. 

6. “The High-Speed Rail Authority’s business plan is solid,” Brown said.  There are several reasons for him saying this, and reading the business plan itself is not one of them.  He put two of his appointees on the CHSRA Board to rewrite the plan. The real justification for this project is for California to receive the promised $3.5 billion from the FRA. Brown's determination to access these funds is demonstrated in his objections to any accountability or oversight of CHSRA behaviors or management.  He has not rescinded Schwarzenegger's legislative accountability veto, even when it was found illegal.  He eliminated the office of Inspector General. The business plan is solid for Brown because he doesn't understand it.

7. Tax-credit leveraging of bonds as a revenue increaser need to be approved by the House Republican majority.  That's not going happen.  The federal government will not subsidize annual interest costs.  "Rail officials said in the business plan the tax-credit bond program for transportation would allow state or local issues to sell the qualified tax-credit bonds with the federal government subsidizing all of the annual interest cost." The article fails to quote a number of statements made by the State Treasurer Bill Lockyer who is enormously skeptical of this project and the likelihood of bond sales for HSR.  This tax-credit arrangement is a financial scam.

8. The presumption that private investors will participate in a PPP program rests entirely on the likelihood of revenue returns from the operation of the train, which is now several decades away.  And, it has been clearly documented that no HSR train anywhere produces investment grade surplus revenues to attract private, income producing loans.  They all, one way or another, receive government, tax-based subsidies. (With two or three notable exceptions.)

Let's just conclude that this article damns the project, particularly from an investment point of view, with faint praise.  Needless to say, it is not the intent or purpose of The Bond Buyer to discourage their subscribers from buying bonds, even including shaky California munis. Seen in that light, this is a pretty critical article.


Price for Golden State Rail Soars
Friday, November 4, 2011
By Randall Jensen

SAN FRANCISCO — California’s plan for a bond-funded high-speed train system just got more expensive. Fifty billion dollars more expensive.

The higher price tag, revealed this week when the California High-Speed Rail Authority released an updated business plan, includes proposals to leverage more debt through means like qualified tax-credit bonds and private-activity bonds.

The HSRA projects capital costs could reach $98.5 billion in year-of-expenditure dollars over 30 years to build 500 miles of high-speed passenger train lines between San Francisco and Los Angeles. Last year, the authority said it expected a high-end cost of $45 billion.

“Two words: sticker shock,” said John Pitney Jr., a professor of politics at Claremont McKenna College in Los Angeles. “The new cost estimates could give pause to a lot of people in California and create political difficulties in moving this project forward.”

Pitney said the new sticker price could be difficult to sell to residents when all levels of government are cutting back.

High-speed rail advocates see the high cost as justified by the state’s rising population and associated transportation needs over the 30-year period.

Rod Diridon, executive director at San Jose State University’s Mineta Transportation Institute and former chair of the High-Speed Rail Authority’s board, said fast trains are more cost-effective than expanding highways and airports.

“High-speed trains are a critical investment in our future,” Diridon said in a statement. “HSR will cut travel times and costs while moving people to work and products to the market more competitively with the rest of the world.”

Despite the fiscal reality, most California Democrats praised the new business plan for being realistic.

Gov. Jerry Brown quickly came out with a statement Tuesday in support, saying the project would create hundreds of thousands of jobs, link the state’s population centers, and avoid major airport and highway expansions.

“The High-Speed Rail Authority’s business plan is solid,” Brown said.

Treasurer Bill Lockyer, who noted in his recent debt affordability plan that bullet trains could add to the state’s long-term debt needs, said his office is reviewing the plan and will offer a financial assessment.

Lockyer said authority officials are having a “more honest discussion” about the costs, benefits, and feasibility of the rail projects. “That new approach deserves praise,” the treasurer said.
The state’s Republican minority was not as enamored. Senate Republican leader Bob Dutton of Rancho Cucamonga called the rail project a “boondoggle.”

“Even before the first shovel of dirt has turned, the cost estimates have nearly tripled,” he said in a press release.

Though the price tag has raised eyebrows, the new plan includes the use of existing rail lines in urban areas, in an effort to temper objections from “not-in-my-backyard” opponents that have plagued the HSRA’s planning.

The political theater is just a preview of what is to come during legislative hearings next year. If approved, construction on the first line in the Central Valley would start next fall.

Lawmakers created the rail authority in 1996 to plan a high-speed passenger train system to link the Los Angeles and San Francisco Bay regions. In 2008, plans came closer to reality when voters approved a $9.95 billion general obligation bond measure to seed construction.

The authority’s new business plan lays out the construction and estimated funding for the high-speed systems in five stages through 2033. They include an initial segment in the Central Valley between Bakersfield to Fresno at a cost of $6 billion; an extension either north to San Jose or south to the San Fernando Valley at up to $26 billion; a northern or southern extension that was passed over in the first extension; running trains into downtown San Francisco and Los Angeles and Anaheim; and finally, Anaheim extensions to Sacramento and San Diego.

State and federal funding has been authorized for the initial $6 billion Central Valley construction segment.

So far, $300 million of state GO bonds have been issued for the authority. It said it plans to use $2.7 billion for the first phase of the program, $5.3 billion on the next phase, and the balance for the rest. About $700 million will be used for preliminary design, engineering, and administrative work.

The $9.95 billion bond authorization was always envisioned as a down payment.

The authority will ask lawmakers to appropriate the $2.7 billion in bond funding in next year’s budget.

Because the bond measure forces the HSRA to find matching funds as well as sets caps on its use for preliminary work, it has had to look to other sources for the majority of financing.

As part of the strategy, rail officials hope to use the majority of state bond money to help secure long-term qualified tax-credit bonds through a yet-to-be-approved federal program.

For instance, in one of the financing scenarios for linking the Central Valley line to either San Jose or the San Fernando Valley, the authority would leverage $4.9 billion of state bonds for $12.3 billion of tax-credit bonds.

In the last 10 years, Congress has authorized $35 billion of the tax-credit bonds for various projects. The business plan bases its tax-credit bond assumptions on a bill introduced in the U.S. Senate by Ron Wyden, D-Ore., and John Hoeven, R-N.D., that would create a $50 billion program for surface transportation projects using the tax-credit bonds.

Rail officials said in the business plan the tax-credit bond program for transportation would allow state or local issues to sell the qualified tax-credit bonds with the federal government subsidizing all of the annual interest cost.

Additionally, such tax-credit bonds could be set up with an internal debt-service sinking fund that could be reinvested up to a set rate, currently around 4%, which could be used for repayment of principal at maturity, according to the business plan.

As a result, the authority said the Prop. 1A bond payments could secure 3.5 times their principal without raising costs for the state.

The business plan also laid out a plan to use private-activity bonds for financing.

If the rail facilities are owned by neither the state or local government, the private-activity bonds would not be subject to the $95 per-capita annual volume cap, according to the rail authority.

Rail officials pointed to the U.S. Department of Transportation’s SAFETEA-LU program that has a $15 billion nationwide volume cap for private-activity bonds, of which only $6.3 billion has been issued or allocated.

The private-activity bonds would fit well with the program’s aim to include public-private partnerships as a major part of the funding puzzle.

The authority said it would pursue P3s to attract private capital “at the point when appropriate conditions exist” throughout all stages of the program for design-build construction contracts, operations contracts, and for rolling stock and capital maintenance.

However, the majority of the money, mostly in the later stages, is set to come in the form of federal grants, up to as much as 80% of the overall cost.

Last year, Washington awarded California a $2.25 billion grant from the American Recovery and Reinvestment Act’s high-speed rail program. The authority hopes to get help from various other federal transportation programs.

No comments: