Thursday, April 5, 2012

The California High-Speed Rail Authority Business Plan analyzed by Mark Powell

New blog entry by our southern California colleague Mark Powell.  He provides us with a tight analysis of the new high-speed rail Business Plan and identifies discrepancies, errors, misstatements, falsehoods and other typical rail authority marketing ploys. The bottom line on this business plan is that it is, like its predecessors, a dishonest document.

If you're curious about the source of the data upon which I base my many sweeping generalizations, here's a typical example. There are several other data sources as well, of course, including William Grindley's extensive writings. Mark, along with William, are among the most diligent and rigorous.

Thanks, Mark, for all your hard work.



Makeover depicted in new Revised Draft 2012 Business Plan

The California High-Speed Rail Authority's Draft 2012 Business Plan released in November of 2011 (November Plan) was widely criticized for starting construction in the Central Valley, high costs, lack of a credible funding plan, and its completion date of 2033.  But a careful read of the Revised Draft 2012 Business Plan (April Plan) released the Monday following April Fool's Day reveals the same foul beast with only cosmetic revisions.

The $6 Billion Train to Nowhere

Critics, including State Senator Simitian (Member of Select Committee on HSR) and Will Kempton (Chairman of the High-Speed Rail Peer Review Group) questioned the November Plan for proposing to spend $6 billion on 130 miles of non-electrified track running from north of Fresno north of Bakersfield that would have little utility if  10's of billions of dollars could not be found to lengthen this Initial Construction Section (ICS) to connect Merced with Palmdale creating an Initial Operating Section (IOS).  The Authority's April Plan addresses this concern by simply renaming the first 130 miles of track the "First Construction of the Initial Operating Section". [Note 1] 

Banished from the April Plan are the words, "In Banished from the April Plan are the words, "Initial Construction Section" and its acronym, "ICS". [Note 2]

The April Plan cynically deals with the high cost of the IOS by merely reducing the inflation cost escalators for the project from 3%/year to 1%/year for years 2011-2012 and to 2%/year for years 2013-2015. [Note 3] 

This sleight-of-hand reduces the IOS's cost from $32.9 billion as reported in November to $31.3 billion in the April Plan.  With only $6 billion ($3.3 billion in Federal Grants and $2.7 billion in State Bonds) on hand to begin construction of the IOS, the funding gap shrinks from $26.9 Billion to $25.3 Billion. [Note 4] [Note 5] 

In either case, this shortfall is more than 4 times the amount on hand and is based on the low end of a range of construction costs.  At the high end of the range, the IOS would cost $36.5 billion [Note 6] and the funding gap would exceed $30 billion, or more than 5 times the amount currently on hand.

Most of the shortfall is again found in non-existent federal support programs.  The November Plan, using the lower of the cost estimates, fills the funding gap with $21.8 billion in Federal Support and $5.3 billion in State Bonds.  The April Plan uses $20.2 billion in Federal Support, $4.4 billion in State Bonds, and $.7 billion in "Other Funds".  In spite of a funding situation that is essentially unchanged with respect to the Initial Operating Section, the Authority boldly claims in their new plan, "The key initial operating segment from the Central Valley to the Los Angeles Basin is fully funded". [Note 7]

The Promise of a Bay to Basin Train

The April Plan reduces the cost of extending the IOS into San Jose to $19.9 billion [Note 8] from the $21.1 billion reported in the November Plan. [Note 9] This slight cost reduction is again due to lower inflation projections for the early years of the project.  Having spent the last $1.1 billion in State Bonds to upgrade Metrolink and Caltrain systems as part of the new "Blended Approach" to high-speed rail construction [Note 10], no State Bonds are available for work on this segment.  Its funding scheme relies entirely on non-specific federal funds of $8.4 billion, $1.2 billion of "Other Funds", and $10.1 billion in Private Investment.  In other words, there are no secured funds for building this segment at all.

Private Investment

The November Plan promised $11 billion in Private Investment to help build the segment connecting the Central Valley with San Jose. [Note 11] What that plan failed to disclose about this Private Investment was later disclosed by the State Auditor.  Namely, that all operating profits out to the year 2060 would be given to the private investors in return for the upfront capital. [Note 12] 

Now, with significantly reduced operating profits in the April Plan [Note 13A] [Note 13B], $10.1 Billion in Private Investment is being promised to help build out from the Central Valley to San Jose. [Note 14] However, the April Plan also calls for additional profits to be sold, generating another $3 billion in upfront capital [Note 15] to upgrade and electrify Metrolink and Caltrain tracks creating the Authority's Phase 1 Blended Systems. Again, the business plan fails to specify the years of operating profits being sold and Californians will need to wait for the State Auditor to tell us.  But with lower operating profits, the higher total Private Investment capital will likely mean that operating profits, once envisioned as the source of funds to expand the system to San Diego and to Sacramento, will flow to private investors for the remainder of this century.

The Promise of Cap and Trade Funds to "Backstop" Federal Funds

The new plan relies primarily upon $8.2 billion in State Bonds ($.8 billion of the voter approved $9 billion having been spent on Administrative Costs, Environmental Studies, and Preliminary Engineering), $13.1 billion in Private Investment, $41.9 billion in Federal Support, and $4.9 billion in "Other Funds" (local funds not likely to materialize). [Note 16] The April Plan includes a statement that "Cap and trade funds are available as needed, upon appropriation, as a backstop against federal and local support". This statement is directly at odds with a recent report by the non-partisan California Legislative Analyst's Office (LAO) cited in an LA Times article warning that the amount of money generated by the (Cap and Trade) program will fluctuate wildly from year to year. "This means that they may be more appropriately used for one-time or short-term, purposes rather than for the support of ongoing programs or tax reductions". [Note 17] Moreover, no one knows how much revenue will be generated by California's Cap and Trade Law (AB 32), a law passed in 2006 that has yet to generate any revenue, and that has already been the subject of one ballot initiative to delay its implementation.  Numerous special interests already compete for every spare dollar in this near bankrupt state and using any revenue for high-speed rail construction will require legislative approval, perhaps a 2/3 majority.

The Real Cost Savings in the April Plan

$23 billion in savings is derived by simply not completing the Full Build Option for Phase 1, San Francisco Transbay Terminal to LA Union Station/Anaheim.  In a revealing cautionary note, the April Plan states, "if required, a Full Build option for Phase 1 could be completed by 2033 at an incremental cost of $23 billion in year-of-expenditure dollars, for a cumulative cost of $91.4 billion." [Note 18] The difference between this cost and the $98.5 Billion reported as the low end of a range of costs (going up to $117.6 Billion) in the November Plan is attributed to the April Plan using lower inflation costs in the early years of the project. 
[Note 19] 

Moreover, the additional expenditure of $23 billion will be "required" according to a report issued two months before the November 2008 vote entitled, The California High Speed Rail Proposal: A Due Diligence Report.  In their report, the transportation experts working for the Reason Foundation, a non-profit think-tank, warned against a project cobbled together at the major urban centers using Metrolink and Caltrain tracks (exactly the system being proposed in the April Plan).  Quoting from their report:

" Because the existing Bay Area and Los Angeles rail lines are heavily utilized, the CHSRA would need to add track capacity, electrify the lines, and enhance grade-crossing protections. Even with such upgrading the HSR trains would need to mesh with the operating schedules and travel times of the commuter trains.

The skeletal system would be able to provide service between San Francisco and Los Angeles on a non-stop schedule of up to 5 hours and 30 minutes and between San Francisco and Anaheim with a stop in Los Angeles on a schedule of up to 6 hours and 15 minutes." [Note 20]

The voter approved Safe, Reliable High-Speed Passenger Train Bond Act for the 21st Century mandates that rail bonds can only be used to construct a system meeting a time limit of 2 hours 40 minutes for travel between San Francisco and Los Angeles, roughly half the time quoted above. [Note 21]


The Train to Nowhere, costing $6 billion, will still be the Initial Construction Section although it is now termed the "First Construction of the Initial Operating Section".

The Authority claims to have fully funded the IOS without identifying a single additional dollar of funding other than a promise by our current governor that Cap and Trade funds are available "upon appropriation (by the legislature), as a backstop against (potentially $100 billion in missing) federal and local support".

The completion date of the Initial Operating Section remains 2022 while final completion of Phase 1 is moved up to 2029 by not finishing the project.  If the Full Build Option of Phase 1 is "required" to meet Proposition 1A mandated travel times, then both plans show a Phase 1 completion date of 2033.

The April Plan is similar to the November Plan in that it works almost exclusively with the low end of a range of costs.  In the November Plan the range was $98.5 to $117.6 billion.  The April Plan presents a lower range of costs by reducing inflation costs in the early years of the project saving $7 billion, and by speculating that $23 billion needed to complete Phase 1 can be avoided without extending travel times at all.

Neither plan produces any revenue stream needed to grow the system to link with San Diego and Sacramento as was envisioned in prior business plans and sold to the voters in 2008.

Senator Simitian, speaking to Rail Authority Chairman Dan Richard, closed a recent Senate Hearing on High-Speed Rail by proclaiming, "a wise man once told me that when you find yourself riding a dead horse, it's time to dismount" [Note 22].  Wise words indeed.

California High-Speed Rail is a "dead horse".  However, it is not "time to dismount".  

Californians have yet to climb on the horse.  Whether viewed as a dead horse or a lipstick laden pig, it's simply time to walk away from it.

Factual statement made in this article are footnoted below and can be accessed by clicking on the note shown in the body of the article.


Note 1: April Plan, Executive Summary, page ES-14, Exhibit ES-4
Note 2: April Plan, Acronyms and Abbreviations, page iii
Note 3: April Plan, page 3-2, Exhibit 3-1
Note 4: November Plan, page 8-28, Exhibit 8-24
Note 5: April Plan, page 7-15, Exhibit 7-10
Note 6: April Plan, page 7-25, Exhibit 7-20; Scale up low cost of $31.3 billion by ratio of high to low costs shown in the exhibit.
Note 7: April Plan, page 7-25, Summary paragraph, first bullet point
Note 8: April Plan, page 7-18, Exhibit 7-14
Note 9: November Plan, page 8-33, Exhibit 8-30
Note 10: April Plan, page 7-22, Exhibit 7-17
Note 11: November Plan, page 8-33, Exhibit 8-30
Note 12: California State Auditor High-Speed Rail Authority Follow-Up, January 2012, Report 2011-504, page 2, top paragraph
Note 13A: April Plan, page 7-4, Exhibit 7-4
Note 13B: November Plan, page 8-21, Exhibit 8-14
Note 14: April Plan, page 20, Exhibit 7-15
Note 15: April Plan, page 7-22, Exhibit 7-17
Note 16: April Plan, page 7-25, Exhibit 7-20
Note 17:  LA Times Article, California cap-and-trade money should be spent carefully, analyst says,  February 9, 2012
Note 18:  April Plan Executive Summary, page ES-14
Note 19:  November Plan, page 8-2, first paragraph
Note 20:   California High Speed Rail: A Due Diligence Report, September 1, 2008
Note 21:   November 2008 Supplemental Voter Guide, Text of Proposed Law, Section 2704.09(b)(1).
Note 22:  Senator Simitian's quoted at 33 minutes 35 seconds into Part 4 of Senate Hearing Video


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