Tuesday, January 17, 2012

Comments for the California High-Speed Rail Authority from the California Farm Bureau Federation

The California Farm Bureau Federation represents most of the farm-related industries in California's Central Valley.  The Valley, as you know, is going to be penetrated and devastated by the high-speed rail corridor. Growing numbers of residents, business people and farmers are pretty upset about this. Lawsuits have been filed and more are on their way.

Here is the letter the Farm Bureau sent to the California High-Speed Rail Authority.  While their comments, sent in response to the draft CHSRA 2012 Business Plan, may have little 'constructive' impact on the rail authority, it does say, clearly and unambiguously, what many in the Central Valley think.  That is, that the project stinks and should be shut down.  I certainly can't ask for more than that!
Office of the General Counsel
2300 River Plaza Drive
Sacramento, California 95833-3293

Sent via U.S. Mail & E-Mail

January 16, 2012
California High-Speed Rail Authority
770 L Street, Suite 800
Sacramento, CA 95814
Re: Comments on the Draft 2012 Business Plan

Dear Authority Members:

The California Farm Bureau Federation (“Farm Bureau”) is a non-governmental, non-profit, voluntary membership California corporation whose purpose is to protect and promote agricultural interests throughout the state of California and to find solutions to the problems of the farm, the farm home and the rural community. Farm Bureau is California's largest farm organization, comprised of 53 county Farm Bureaus currently representing more than 74,000 agricultural, associate and collegiate members in 56 counties. Farm Bureau strives to protect and improve the ability of farmers and ranchers engaged in production agriculture to provide a reliable supply of food and fiber through responsible stewardship of California's resources.

Farm Bureau submits these comments on the High-Speed Rail Authority (“Authority)’s 2012 Draft Business Plan. The High-Speed Rail is an enticing dream—but an unattainable one in the real world. Farm Bureau is opposed to the project and believes the Draft Business Plan underscores many of the reasons the project is a fiscally reckless proposition for California.

Legal Consistency with Proposition 1A

A fundamental concern with the Business Plan is the plan’s failure to demonstrate the project can meet Proposition 1A’s requirement that the project can function without an operating subsidy—or that currently identified sources of funding can cover the project’s estimated $98.5 to $117.6 billion capital cost of construction (which translates to a projected $177 to $212 billion with interest through 2042).1 Presently, except for an estimated $6 billion needed for the construction of a so-called “Initial Construction Section” in the Central Valley, the source of funding for the whole of the project’s remaining capital cost of $92.5 to $111.6 billion is a mystery (although it does seem fairly safe to assume California and U.S. taxpayers will be footing the bill on the interest). This problem, in turn, bears directly on the viability of the High-Speed Rail Project itself: The Authority must demonstrate that the project is financially viable, that it can be completed on time and on budget, and that the project will cover its own operating expenses. At this point, however, both the Authority’s Business Plan and its November 3, 2011 Funding Plan fail completely to carry this burden. The legal consequence of this failure is stark: Until the Authority can make a credible case for the High-Speed Rail Project, the State of California not only should not, but in fact cannot issue bonds committing the State to physical construction of the project.

1. See November 7, 2011 Mark Powell blog post, “Against California High-Speed Rail” (last access January 14, 2012 at http://againstcaliforniahsr.com/ridership-california-high-speed-rail-hsr/california-high-speed-rail-business-plan-financing-cost-ridership.)

Major Gaps and Flaws in the Business Plan

Reasons why the Authority’s Business Plan and Funding Plan fail to satisfy the letter of Proposition 1A, and to show the project is financially feasible are myriad: Not least of all, the Business Plan’s ridership, revenue, and cost projections are based on implausible, incomplete, and unsupported assumptions. Without any guarantee of completion, or of compliance with the fiscal requirements of Proposition 1A, there is little or nothing to prevent the project from becoming a permanent drain on state’s coffers. The project would then divert billions away from more necessary projects, improvements to existing transportation infrastructure, education, law enforcement, health care, and essential social services. Worse yet, the Plan risks committing the state to the construction of the Central Valley segment of the project through some of the world’s best and most productive farmland, yet offers little more than a hope and a prayer that funding for the rest of the project will somehow magically appear in the future.

In addition to these flaws, the Business Plan provides no credible answer to the fundamental question, from where the tens of billions of dollars needed for completion of the project will come. In partial answer to this question, the Authority’s bullish demand forecasts make even (still subsidized) Japanese and French ridership numbers look anemic—yet how this radical cultural shift is to take root in California goes wholly unexplained. Beyond this, there is no support for the Business Plan’s assertions that taxpayers can count on cautious private investors, a deficit-ridden Congress, a crisis-driven state legislature, or cash-strapped local governments to cover the overwhelming bulk of the project’s capital cost for its completion. Nor does the plan make a convincing case that the project itself could achieve the profits and returns on investment needed to attract partners or investors in the first place, or cover its operating costs, as Proposition 1A requires, once the project is operational.

Little or No Interest from Private Investors

As for the appetite of private investors for investing of tens of billions of dollars in the various phases and segments of the proposed High-Speed Rail, a group calling itself the Community Coalition on the High Speed Rail has provided an excellent assessment in a series of briefings, white papers and reports available at http://www.cc-hsr.org/.2 Prepared by three respected academics, the most important of these extremely informative, thoroughly researched, thoughtful, and insightful papers, were also peer reviewed and endorsed by literally dozens of CEOs, business people, bankers, and investors well versed in and familiar with the business world.

Central to these papers is the notion that a high-speed rail that cannot withstand ordinary private sector scrutiny is not a feasible project consistent with Proposition 1A’s prohibition on operating subsidies. Founded on this basic principle, the CCHSR papers show why the High-Speed Rail project is not in the best interest of the State of California or its citizens.

Despite changes to the Business Plan and various adjustments since many of these papers were completed, the CCHRS papers’ core concerns remain valid and painfully relevant to the current Business Plan. Indeed, considering the Authority’s doubling and tripling of the High-Speed Rail’s initial estimated cost from $43 billion to $98.5 billion, and even $117.6 billion, in the time since those papers were completed, it would appear that the CCHSR papers’ concerns are now more valid than ever. In fact, these critical issues are so important that, in our opinion, the CCHSR papers—including, particularly, the October 12, 2010 paper, “Financial Risks of California’s Proposed High-Speed Rail Project”—should be required reading for anyone interested in the High-Speed Rail and worried about the well-being and long-term fiscal health of our State.

2. See CCHSR’s papers at http://www.cc-hsr.org/, including 
“Financial Risks of California’s Proposed High-Speed Rail Project,” dated October 12, 2010; 
“Dubious Ridership Forecasts,” dated October 18, 2010; 
“Six Myths Surrounding California’s High-Speed Rail Project,” dated November 13, 2010; 
“Seven Deadly Financial Facts for California’s High-Speed Rail Authority,” dated January 18, 2010; 
Brief Note No. 1, “On the Likelihood of More Federal Construction Monies,” dated June 28, 2011; 
Brief Note No. 2, “On High-Speed Rail Riders and Ridership Forecasts,” dated June 6, 2011;
Brief Note No. 3, “On Cost Overruns While Building Megaprojects,” date June 6, 2011; 
Brief Note No. 4, “On Construction Jobs in the High-Speed Rail Project,” dated June 6, 2011; 
Brief Note No. 5, “On Permanent Jobs Created by the High-Speed Rail Project,” dated June 6, 2011; 
Brief Note No. 6: On High-Speed Rail’s Need for Operating Subsidies,” dated June 6, 2011; 
Brief Note No. 7, “On Private Capital for California’s High-Speed Rail Train,” dated June 6, 2011; 
“Will the High-Speed Rail Benefit California’s Middle Class,” dated April 4, 2011; 
“Financial Analysis of the Proposed High-Speed Rail Project,” dated June 2, 2011.

Recent Public Documents Highlight the High-Speed Rail’s Many Challenges

Praised for its honesty as to cost, if nothing else, the Business Plan shows the emperor has no clothes—and this fact is increasingly corroborated by other public documents: For example, a recent State Auditor’s report found the High-Speed Rail Authority has a $14.75 billion shortfall in identified federal funding, and a $7.5 billion total funding gap through 2013.3 With total expenditures since 1996 estimated in 2011 at $630 million,4 the State Auditor’s Office found the Authority has a poor track record on accountability, and found evidence of bookkeeping inconsistencies and irregularities, management anomalies, contracting excesses, and inappropriate spending.5 It would seem, any mildly prudent person would have to ask himself, “Is this a good start to a $100, a $150, a $200 billion-dollar project?”

Another case in point, the High-Speed Rail Peer Review Group’s recent report to Legislature on the HSR’s November 3, 2011 Funding Plan included findings, (1) that the Business Plan’s ridership forecasts have “no apparently quantitative basis” and are currently “unverifiable”; (2) that the project’s currently estimated $98.5 billion capital cost will likely increase; (3) that the project’s initial focus on the Central Valley, and its reliance on tens of billions of dollars of uncertain federal funding, magnify the risk to the State should these monies later fail to materialize, or should completion of subsequent segments later prove infeasible; and (4) that other large funding gaps for project completion must be closed through a credible and specific plan to attract private and local investment, before the project can be called “financially feasible.”6

On page 4 of the Peer Review Group Report, there is the following discussion:

The fact that the Funding Plan fails to identify any long-term funding commitments is a fundamental flaw in the program. Without committed funds, a mega-project of this nature could be forced to halt construction for many years before additional funding could be obtained. The benefits of any independent utility proposed by the current Business Plan would be very limited versus the cost and the impact on the State’s finances. The CHSRA has also made it clear there will be no private sector interest in the project until the full public role is defined and funded, which means that significant private funding will not be available for many years. Moreover, we are not optimistic that this situation will change in the foreseeable future. The Legislature could, of course, rectify this by enacting a dedicate fuel tax or some other form of added user charge that would not aggravate the existing State budget deficit. Lacking this, the project as it is currently planned is not financially feasible.7

Then, there is the Peer Review Group’s ominous conclusion:

[W]e [the Peer Review Group] cannot overemphasize the fact that moving ahead on the HSR project without credible sources of adequate funding, without a definitive business model, without a strategy to maximize the independent utility and value to the State and without appropriate management resources, represents an immense financial risk on the part of the State of California…. [T]he Peer Review Group cannot at this time recommend that the Legislature approve the appropriation of the bond proceeds for this project.8

Yet another sign that the High-Speed Rail Project is in deep trouble can be inferred from the fact that many of the same problems and uncertainties that prompted the Legislative Analyst’s Office to conclude that the High-Speed Rail project had reached a “critical juncture” in May of 2011, remain largely unresolved in present Draft Business Plan.9 And, as if all of this were not enough, a field poll survey completed in November of 2011 found 59 percent of voters said they would vote against a High-Speed Rail if given the opportunity to vote again today.10

3. See State Auditor’s April 2010 Report 2009-106: “High-Speed Rail Authority: It Risks Delays or an Incomplete System Because of Inadequate Planning, Weak Oversight, and Lax Contract Management” (last accessed on January 13, 2012 at http://www.bsa.ca.gov/pdfs/reports/2009-106.pdf). (See also “Highlights” at http://www.bsa.ca.gov/reports/highlights/2009-106.)

4. See California Watch, “Rail authority spends hundreds of millions with little oversight,” dated July 10, 2011 (last viewed on January 13, 2012 at http://californiawatch.org/dailyreport/rail-authority-spends-hundreds-millions-little-oversight-11392.)

5. See ibid.

6. See California High-Speed Rail Peer Review Group to Legislature, dated January 3, 2012 (hereinafter “Peer Review Group Report”).

7. Peer Review Group at 4.

8. Peer Review Group at 7.

Conclusion and Recommendations

Farm Bureau recommends the State of California step back from the ledge on this incredibly wasteful, grossly mismanaged and unnecessary project. If it is necessary to take the question to a re-vote of the people, so be it. In the meantime, what is certain is that a radical escalation of spending on the High-Speed Rail, even as the project unravels before us, is not just irresponsible—it’s fiscally suicidal.

Initially agnostics and even conditional supporters, we, along with a substantial and apparently growing majority of citizens in California, have at length come around to the conviction that the High-Speed Rail is a bad idea. The Authority’s Business Plan greatly strengthens and confirms the correctness of that view. Fortunately, the current transition within the Authority, gives us all a moment to reflect. The California Legislature should do the hard thing, and it should do the right thing: It should cut funding to the project now, until a sufficient business and funding plan is completed, or until the matter can be put back before California voters—this time properly informed as to true costs and benefits and realistic prospects of such a project.

Thank you for the opportunity to comment.


Justin E. Fredrickson
Environmental Policy Analyst

cc: Honorable Doug LaMalfa
Honorable Diane Harkey

9. See Legislative Analyst’s Office report, “High-Speed Rail Is at a Critical Juncture,” dated May 10, 2011 (last accessed January 13, 2012 at http://www.lao.ca.gov/reports/2011/trns/high_speed_rail/high_speed_rail_051011. pdf.)

10. See Field Poll Release No. 2400, December 6, 2011 (last accessed on January 13, 2012 at http://www.field.com/fieldpollonline/subscribers/Rls2400.pdf).

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