Wednesday, June 6, 2012

Release of California Rail Bonds may be ruled illegal: by Mark Powell



An Argument Against the California Legislature’s Release of $2.7 Billion in Proposition 1A Rail Bonds

As a safeguard against what might be termed a “stranded investment”, the Californian High Speed Rail Authority is required to submit to the legislature (and other parties) a “detailed funding plan for the corridor or usable segment thereof”, for which they are seeking state bond funds [Note 1].

AB 3034 section 2704.01 paragraphs (d) through (g) define important terms:
(d) “High-speed train” means a passenger train capable of sustained revenue operating speeds of at least 200 miles per hour where conditions permit those speeds.
(e) “High-speed train system” means a system with high-speed trains and includes, but is not limited to, the following components: right-of-way, track, power system, rolling stock, stations, and
associated facilities.
(f) “Corridor” means a portion of the high-speed train system as described in Section 2704.04.
(g) “Usable segment” means a portion of a corridor that includes at least two stations.

In their Draft 1012 Business Plan released in November 2011 the Authority proposed building an “Initial Construction Segment” (ICS) in the Central Valley using roughly $3.3 billion in federal funds and $2.7 billion in state rail bonds.  The proposed ICS was not to be electrified and there was to be no high-speed rolling stock.  In other words, it would not be ready for high-speed train service when completed. Opponents of high-speed rail saw the ICS as not meeting the requirements of a “usable segment” and the Authority seemed to implicitly agree with their opponents when releasing the Revised 2012 Business Plan the following April.  That plan deleted all references to an “Initial Construction Segment” and deleted the acronym ICS from the list of acronyms.  Instead the new plan referred to building “the First Construction of the Initial Operating Segment” in the Central Valley.

The Authority does have an adequate funding plan for their “First Construction of the Initial Operating Segment”.  It is guaranteed to be adequate because it involves building non-electrified track from approximately 1 mile north of Madera (probably on the BNSF alignment) south towards Bakersfield until they run out of money [Note 2]. However, it will be argued by opponents of HSR that the Authority needs a complete funding plan for its proposed Initial Operating Segment (IOS) extending from Merced to San Fernando (the first “useable segment”) and it will be argued that the current plan which relies on $21 billion in yet unauthorized federal support [Note 3], or Cap and Trade Funds as a “backstop” [Note 4] to the hoped for federal support, is certainly not adequate.  The opponent’s argument for the funding plan’s inadequacy is bolstered by the fact that neither the US Senate or House of Representatives has budgeted any funds for HSR for the foreseeable future and the California Legislative Analyst’s Office is on record stating that use of Cap and Trade fees would be inappropriate for a variety of reasons.

The federal government also seems concerned with making a stranded investment and federal grant wording  tries to protect federal taxpayers by stipulating that whatever is built with federal funds must have  “operational independence” [ Note 5]. Federal grant FR-HSR-0009-10-01-00 and its four subsequent amendments along with Federal grant FR-HSR-0118-12-01-00 [Note 6] provide funding for what they refer to as “the Project”.   The grant agreements define the Project as stretching south from approximately 1 mile north of Madera towards Bakersfield and the grant agreements mandate that $108 million of the federal grants be kept in an “Interim Use Reserve” to be used to connect the new stretch of track with existing rail infrastructure so that it would have “operational independence” if funds were not forthcoming to complete the Initial Operating Section (from Merced to San Fernando).  This requirement for an Interim Use Reserve seems to argue that not even the federal government sees the Authority has having a credible funding plan to complete the Initial Operating Segment.

A closer look at Proposition 1A funding plan requirements as well as federal funding plan requirements sheds more light on the weakness of the Authority’s funding plan.

Per Section 2704.08(c)(2) the funding plan required by Prop 1A for a “corridor” or “usable segment” is to certify to the following:
(A) The corridor, or usable segment thereof, in which the authority is proposing to invest bond proceeds.
(B) A description of the expected terms and conditions associated with any lease agreement or franchise agreement proposed to be entered into by the authority and any other party for the construction or operation of passenger train service along the corridor or usable segment thereof.
(C) The estimated full cost of constructing the corridor or usable segment thereof, including an estimate of cost escalation during construction and appropriate reserves for contingencies.
(D) The sources of all funds to be invested in the corridor, or usable segment thereof, and the anticipated time of receipt of those funds based on expected commitments, authorizations, agreements,
allocations, or other means.
(E) The projected ridership and operating revenue estimate based on projected high-speed passenger train operations on the corridor or usable segment.
(F) All known or foreseeable risks associated with the construction and operation of high-speed passenger train service along the corridor or usable segment thereof and the process and actions the authority will undertake to manage those risks.
(G) Construction of the corridor or usable segment thereof can be completed as proposed in the plan.
(H) The corridor or usable segment thereof would be suitable and ready for high-speed train operation.
(I) One or more passenger service providers can begin using the tracks or stations for passenger train service.
(J) The planned passenger service by the authority in the corridor or usable segment thereof will not require a local, state, or federal operating subsidy.
(K) The authority has completed all necessary project level environmental clearances necessary to proceed to construction.

Opponents will argue that a funding plan can only apply to a project that completes a “corridor” or “useable segment” (A) that will be “suitable and ready for high-speed train operation” (H).  The Initial Operating Segment from Merced to San Fernando could possibly meet these requirements, but the “First Construction of the Initial Operating Segment” or the “Project”, as this work is termed in the Federal Grants, cannot.  It can be argued that the current funding plan is lacking in other areas, but these two seem most critical.

In short, the executive branch of the federal government is anxious to give the Authority funds needed to build the Central Valley “Project”.  However, the law behind Proposition 1A, AB 3034, seems to dis-allow using bond proceeds for construction of the Project as defined in the Grant Agreements.  It can be argued that AB 3034 only allows for using bond proceeds to build a “corridor” or “useable segment” such as the complete Initial Operating Segment (Merced to San Fernando) and it can be argued the Authority’s funding plan for this work is grossly inadequate.

The California Legislature appears ready to release rail bonds to begin construction of “the Project” in the Central Valley in spite of the non-compliance of the Authority’s funding plan with the legislature’s own law, AB 3034.  These same lawmakers have skirted laws in the past. [Note 8] Specifically, AB 3034 mandated a grossly prejudicial wording for the November 2008 rail bond initiative ballot Title and Summary and disallowed the Attorney General’s Office from doing its duty to correct the prejudicial language as called for by the Political Reform Act of 1974.   The Attorney General in 2008, now our Governor and chief proponent of high speed rail, conspired with the legislature and allowed the lawlessness to proceed.  However, a suit was brought after the passage of “the Safe, Reliable, High-Speed Passenger Train Bond Act for the 21st Century” and the court ruled [Note 9] that the legislature did not have the right to disregard the law and dictate the Ballot Title and Summary for Proposition 1A.  Californians who now, knowing the truth about high-speed rail, oppose it by a strong margin [Note 10] can only hope that someone steps forward and successfully challenges the Legislature’s next act of lawlessness – release of the rail bonds in spite of a grossly adequate funding plan.

Factual statements made in this article are footnoted below and can be accessed by clicking on the link embedded in the article:

Note 1:  Assembly Bill 3034, section 2704.08.(c) (1)
Note 2:  Grant Agreement FR-HSR-0118-12-01-00, Attachment 3, pages 11-12
Note 3:  Revised 2012 Business Plan, Exhibit 7-10
Note 4:  Revised 2012 Business Plan, page 7-1
Note 5:  Federal grant FR-HSR-0009-10-01-00 as amended, Attachment 3A, Background and Key Assumptions section
Note 6: Federal grant FR-HSR-0009-10-01-00 and its four subsequent amendments along with Federal Grant FR-HSR-0118-12-01-00
Note 8:  High Speed Railroading of the Public article
Note 9:  Howard Jarvis Taxpayers Association versus Bowen
Note 10:  USC Dornsife/Los Angeles Times survey taken June 2, 2012

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