Friday, December 30, 2011

Mark Powell's analysis of "California High-Speed Rail's Fraudulent Funding Plan

It always gives me great pleasure to post Mark Powell's blogs and papers on this blog.  I'm not only preaching to the choir; I'm asking the choir to preach to me and the rest of us. We may speak with different voices, but the central theme is the same; the California High-Speed Rail project must be terminated.

Here is Mark's excellent argument why the project should be shut down based on the rail authority's flawed funding model.  The bottom line here is that there will be no further funds after the initial funding is consumed; that is, the slightly less than $4 billion from the FRA and the $10 billion in bond funds.

Those bond funds cannot be spent unless they are matched by other funds, such as those from the FRA.  In any case, after those are gone, nothing.  Everything else is wishful thinking on the part of the rail authority and their greedy colleagues and contractors.

There is no funding model.  There will be no further funding.  The project should not start, even if nearly half a billion dollars have already been spent on administrative costs, public relations, and all the other paperwork that has kept these guys occupied, off the streets and out of mischief.  Scratch that last part.  They've been doing a lot of mischief.
California High-Speed Rail's Fraudulent Funding Plan
Rail Authority Relies on Non-Existent Federal Programs and All $9 Billion of Proposition 1A Bonds to Build the Initial Operating Section.
The voter approved High-Speed Passenger Train Bond Act, Proposition 1A, stipulates that a funding plan must be in place for a usable high-speed rail corridor before any Rail Bonds can be released for construction of that corridor [Note 1].  

The California High-Speed Rail Authority's Draft 2012 Business Plan purports to show funding plans for usable corridors.  These corridors are termed Initial Operating Sections (IOS). 
IOS-North would extend north towards San Jose from the Initial Construction Section (ICS) built between Madera and Bakersfield while IOS-South would extend south from Bakersfield towards Los Angeles.  The completion of either IOS requires a minimum of roughly $26 billion [Note 2] based on the low end cost of $98.5 Billion for Phase 1 of the statewide system; San Francisco to Los Angeles/Anaheim.  The Authority's high end cost for Phase 1 is $117 Billion.   This $26 Billion is in addition to the $6 billion required to build the ICS [Note 3] which some have dubbed the “Train to Nowhere”.  

Quoting directly from the Authority's Draft 2012 Business Plan:
“The IOS will require a mix of funding from federal, state and local sources to support construction in the years 2015 to 2021. Committed funding for this future period is not fully identified. Several potential options exist to fund the completion of an IOS and provide the state with an operating high-speed rail segment.”[Note 4]

In truth, “committed funding” is not identified at all and “potential options” to fund the system amount to little more than wishful thinking on the part of the Rail Authority.  Each IOS suffers the same funding issues.  For the sake of brevity, this article discusses funding IOS-South. 

Paying for IOS South 
Federal Grants of $8.488 Billion[Note 5]
The Rail Authority's funding plan cites President Obama's Fiscal Year 2012 Budget Request for the Department of Transportation which proposed “establishing a comprehensive Transportation Trust Fund comprised of subaccounts for highway, transit, an infrastructure bank, and high-speed rail. The plan designated $37 billion for new rail network development, at an average level of $6 billion per year.”  The Rail Authority's “funding plan” relies on this level of federal support and its hope of reaping 20% of the annual $6 Billion for each of the seven years from 2015 through 2021 [Note 6].

It does not seem much of a concern to the Rail Authority that President Obama's budget request for high-speed rail was not approved by Congress and that zero dollars were allocated for FY 2012 and subsequent years
Qualified Tax Credit Bond Proceeds of $13.29 Billion [Note 7]
Again citing the Rail Authority's Draft 2012 Business Plan:
“The proposed tax credit bond program for transportation would allow state or local issuers to sell long term QTCBs, with the federal government subsidizing all of the annual interest cost, making these comparable to zero-interest loans from the state or local project sponsor's perspective. Moreover, Congress allows QTCBs to be set up with internal debt service sinking funds that can be reinvested up to a federally prescribed rate (the current maximum allowable yield is about 4 percent), which enables investment returns to contribute substantially to repayment of the QTCB principal at maturity. These two features could allow the State's planned Proposition 1A bond payments to secure 3.5 times the total Proposition 1A bond principal without additional cost to the state.”
The “proposed tax credit bond program” referred to by the Rail Authority is just that, a proposed program.  It is Senate Bill 1436, the Transportation and Regional Infrastructure Project Bonds Act of 2011.  Moreover, this proposed program would authorize only $50 Billion for all of the 50 states and each state would only be authorized to issue $1 Billion of these bonds.  In an interesting exchange between Congressman Gary Miller and Roelof van Ark, Rail Authority CEO, at the December 15, 2011 House Committee on Transportation and Infrastructure Hearing on High-Speed Rail, Congressman Miller pressed van Ark on the following points [Note 8]:

οSenate Bill 1436 is a bill NOT a law.
οEven if it were a law, it would only allow California to issue $1 Billion in QTCB's. [Note 9]
οWhy do you show $12.9 Billion (actual number is $13.29 Billion per Exhibit 8-24 of Business Plan) in QTCB proceeds? Where do the other $11.9 Billion come from?

Mr. van Ark did not answer this question other than to say it was just an example of how something “could work”.  

There is one way to use QTCB's to “secure 3.5 times the total Proposition 1A bond principal without additional cost to the state” and raise the $13.29 Billion in “QTCB Proceeds itemized in the funding plan. The state would need to issue the $5.316 Billion in Proposition 1A Bonds shown in Exhibit 8-24 of the Business Plan.  The current language in Senate 1436 requires only a 20% match from the state.  The Rail Authority's Business Plan merely chooses to ignore the bill's language capping each state's issuance of QTCB's at $1Billion and instead focuses on the maximum 5 to 1 match.  $13.29 Billion of the “QTCB Proceeds” could be spent on construction of high-speed rail if $18.6 Billion in QTCB's were issued by the state.  The unspent proceeds ($5.31 Billion), invested at 4% as allowed by the law cited by the Rail Authority, would earn $13.29 Billion in interest by the QTCBs' maturity date and would be used to pay off the bonds in full.  

Congressman Miller evidently just couldn't grasp the depravity and level of deceit hidden in the Rail Authority's funding plan.  The Rail Authority's funding plan does not call for issuing $13.29 Billion in QTCB's when a law allowing only $1 Billion is being considered in the Senate.  Their funding plan calls for issuing $18.6 Billion in QTCB's!!  True to form, this important detail is hidden from the public, and Congress, because the Rail Authority avoids the use of the words “bonds issued” in their funding plan.

Proposition 1A Rail Bonds Issued for $5.3 Billion [Note 10]
The Rail Authority's funding plan calls for issuing $2.7 Billion in Rail Bonds to build the Initial Construction Section, $5.3 Billion to build the Initial Operating Section, and $.7 Billion to be allocated to “administration and preliminary engineering, planning, design, environmental, and other programs before revenue operations commence”.  To date, $.3 Billion in Rail Bonds have been issued and spend.  All $9.0 Billion in voter approve Rail Bonds are accounted for in the Authority's funding plan for the Initial Operating Section.  No Rail Bonds will be available to complete Phase 1 or to build out the system to San Diego and Sacramento.    This situation is totally in line with the 2008 Business Plan released 3 days after the statewide election which showed all $9.0 Billion in Rail Bonds being spent on Phase 1, San Francisco to Los Angeles/Anaheim [Note 11].  

One wonders if the Rail Authority was ever serious about building the statewide system promised to the voters across the state, especially when all Business Plans since 2008 have been devoid of any discussion regarding the cost and schedule for constructing the Phase 2 links to San Diego and Sacramento.  However, it is no wonder at all that with Californians learning more each day, they now oppose high speed rail by a margin of 2 to 1 [Note 12].

From the date of its inception in September 1996 with the passage of California Senate Bill 1420, the California High Speed Rail Authority has been charged with the following task:

“ In order for the state to have a comprehensive network of high-speed intercity rail systems by the year 2020, it must begin preparation of a high-speed intercity rail plan similar to California's former freeway plan and designate an entity with stable and predictable funding sources to implement the plan.” [Note 13]

The Authority's latest Business Plan is utterly devoid of the “stable and predictable funding sources” statutorily required before any Rail Bonds can be issued.  Any attempt to issue Rail Bonds in 2012 will surely result in a winnable lawsuit brought against the Rail Authority by opponents of this project and more tax dollars will be spent defending the Rail Authority's indefensible funding plan.

Write to Governor Brown and Members of the California Legislature and demand a stop to the horrific waste of California Taxpayer Dollars currently funding the High-Speed Boondoggle.

Statements of fact made in this article are supported by the footnotes shown below:


Note 1:  Text of Proposed Law: Proposition 1A as shown on the Official Supplemental Voter Information Guide for the November 4, 2008 Ballot; page 10 of voter guide; Section 2704.08 (c)(1)
Note 2: California High Speed Rail Authority Draft 2012 Business Plan; average of IOS North and South in Year-of-Expenditure Dollars; Average of costs found in Exhibits 8-23 and 8-24
Note 3: California High Speed Rail Authority Draft 2012 Business Plan; Exhibit 8-22
Note 4: California High Speed Rail Authority Draft 2012 Business Plan; page 8-4; bottom paragraph
Note 5: California High Speed Rail Authority Draft 2012 Business Plan; Exhibit 8-24
Note 6: California High Speed Rail Authority Draft 2012 Business Plan; bottom half of page 8-7
Note 7: California High Speed Rail Authority Draft 2012 Business Plan; Exhibit 8-24
Note 8:  Congressman Miller questioning Roelof van Ark at  3 hours 00 minutes 45 seconds into Video of House Transportation and Infrastructure Committee Meeting on California HSR
Note 9: Explanation of Senate Bill 1436 found on website of the bill's sponsor, Senator Ron Wyden
Note 10: California High Speed Rail Authority Draft 2012 Business Plan; Exhibit 8-24
Note 11:  California High Speed Rail Authority 2008 Business Plan; page 21; Figure 26
Note 12:  Field Poll conducted November 15-27, 2011
Note 13: SB 1420 (Kopp) Transportation: High-Speed Rail Act.

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