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Funding challenges cloud high-speed rail's future

Judge to consider impacts of rail authority's flawed business plan

With California's high-speed rail system preparing for a groundbreaking in Central Valley, the fate of the $68-billion project remains clouded by allegations that the agency charged with building it has violated state law -- an argument that was at the heart of a Friday court hearing in Sacramento.

The question of whether the California High-Speed Rail Authority broke the law by committing to construction contracts for the first 29-mile stretch of the line before figuring out the cost of the line's first "usable" segment features prominently in the latest lawsuit spearheaded by attorney Stuart Flashman. Flashman previously represented Palo Alto, Menlo Park in Atherton in their own lawsuits against the rail authority.

In late August, the plaintiffs -- John Tos, Aaron Fukuda and the County of Kings -- scored an early victory against the rail authority when Sacramento Superior Court Judge Michael Kenny ruled that in submitting a business plan that doesn't identify funding for the first usable segment, the rail authority "abused its discretion" and violated provisions on Proposition 1A, which voters approved in 2008 and which allocates $9.95 billion in state funds for the rail system.

In about three weeks, Kenny is expected to determine what should be done about it.

For Flashman and Redwood City-based attorney Michael Brady, who is working with Flashman on the suit, the rail authority should be forced to rescind and correct its defective business plan before taking on any new financial commitments or compiling further business plans. Specifically, the updated business plan would have to identify how the rail authority would pay for the "initial operating segment" of the San Francisco-to-Los Angeles line.

Under current projections, the initial segment would cost more than $20 billion and would either stretch from Bakersfield north to San Jose or from Merced south to San Fernando. Instead, the rail authority only identified funding sources for the first "initial construction segment," a 130-mile stretch between Fresno and Bakersfield that carries an estimated price tag of $6 billion.

For Flashman and Brady, that's a key difference. The business-plan requirements of Proposition 1A were specifically designed to give taxpayers assurance that the bond money would be spent wisely, they argued in their opening brief. The rail authority has violated these requirements, and the question of remedy is "key to assuring that the promises made to the voters remain meaningful." The mistakes in the early funding plan, they wrote, "created a 'house of cards' that was due to collapse."

"The remedy for those violations must include not only rescinding the defective funding plan and replacing it with a properly-prepared plan, but also repairing subsequent steps in the approval process that relied upon the defective plan," the brief states.

But even if the court rescinds the business plan, it's not clear what effect, if any, the action would take. In July 2012, the rail authority scored its biggest victory to date when the state Legislature appropriated by a single vote $2.6 billion in bond funding for the first construction segment, in addition to the $3.2 billion in federal funds.

At the Nov. 8 hearing, the rail authority's attorney argued that a court order to rescind the business plan would be a moot gesture. The business plan, argued Deputy Attorney General Michelle Inan, was intended to provide Sacramento legislators with the information they needed to consider whether to appropriate the funds. In that sense, it has done its job. Inan argued that "to the extent that there are any protections for costs of taxpayers in the plan, they are exercised through the legislative process." She disputed the plaintiffs' argument, and Kenny's ruling, that the rail authority did not comply with state law.

"There is no non-compliance with Proposition 1A," Inan said. "There's a finding that certain reporting requirements were not satisfied. But the person who reviewed the entity was the Legislature and it appropriated the funds."

The violation of the reporting requirements of Proposition of 1A, she argued, "do not create an enforceable cause of action in favor of taxpayers like Tos," Inan said. When Kenny asked what would happen if the rail authority were to rescind the business plan, she replied, "Nothing practical happens."

In its brief signed by Inan, Attorney General Kamala Harris and Supervising Deputy Attorney General Tamar Pachter, state officials argue that the court doesn't have the authority to tamper with the Legislature's appropriation. So far, the rail authority has used the funds authorized in July 2012 on two major contracts totaling more than $1.1 billion – a $225,900 contract with Caltrans on design work in Fresno and a $970 million one with Tutor-Perini for design and construction work within the counties of Madero and Fresno. These contracts were based on the federal appropriation on state bonds, according to the Attorney General's brief.

"The authority did not enter into either contract until it successfully obtained that appropriation," the brief states. "As this Court found, the appropriation functions independently of requirements in the bond act that the Authority submit a funding plan before it may ask for an appropriation to spend bond money."

The court, the brief argues, "lacks authority to invalidate contracts validly entered into based on that appropriation merely because of inadequacies in the funding plan that the Authority was required to submit before requesting an appropriation."

Flashman and Brady strongly dispute this stance. Even if the contracts aren't invalidated, forcing the rail authority to rescind the plan and correct it will help ensure that future plans are based on accurate documents that comply with the law. In their view, unless the court takes action, the colossal project will continue to travel down a slippery slope toward an uncertain future.

"When you find yourself in a hole, the first thing you do is stop digging," Flashman said at the Nov. 8 hearing, adding that he doesn't believe the rail authority has gotten that message.

"We feel the court needs to step in and say, 'You need to stop digging,'" Flashman told Kenny.

Kenny did not indicate on Friday whether he will rescind the business plan. In his prior ruling, he wrote that the court "is not yet convinced that invalidation of the funding plan, by itself, would be remedy with any real, practical effect."

Even if the rail authority comes away from the latest legal challenge relatively unscathed, the project's future remains murky. The funds appropriated by the Legislature so far are just a fraction of the system's projected cost of $68 billion. For the balance of the funding, the rail authority is banking on private investments that have yet to materialize and on federal programs that don't currently exist, such as tax credit bonds. The 2012 business plan that Kenny found deficient acknowledges that "it may take several years working with other stakeholders in the high-speed rail sector to obtain passage of the desired federal legislation."

Still, local officials in Palo Alto and elsewhere are bracing themselves for changes that may come to the rail corridors well before high-speed rail is in place. This includes the long-awaited electrification of Caltrain, which will be funded by high-speed-rail dollars and which is expected to be completed in 2019. The project will allow the commuter service to expand the number of trains and provide faster service. Ultimately, the electrified tracks are expected to support both Caltrain and high-speed rail as part of a "blended system" design on the Peninsula.

Anticipating these changes, the City Council approved on Nov. 5 a study that will consider the costs of building a trench for Caltrain in the southern part of the city and submerging roadways at three rail crossings. Councilman Pat Burt pointed to Caltrain's expanded service, rather than high-speed rail, as the main reason to commission the analysis.

"I don't believe high-speed rail is likely to come to the Peninsula," he said.

Comments

 +   Like this comment
Posted by resident
a resident of Charleston Meadows
on Nov 12, 2013 at 12:29 pm

IAW the SF Chronicle 11.12.13 "Land Acquisition for bullet train low speed so far" the eminent domain acquisitions for land are focusing on the Merced to Fresno segment. Assume the next segment would be Fresno to Bakersfield which is the busiest transition point for rail systems in the valley corridor. The acquisition of land via eminent domain and lease back is the mechanism for providing the funding. They cannot project when they will break ground.

This same funding mechanism was projected for the Maybell project - build 12 homes at market price to fund the senior housing. This is the same funding mechanism or the SF Warriors stadium - they need to build the two condominium towers to fund the cost of the stadium. How that funding mechanism plays in the peninsula corridor appears to focus on the San Antonio to Oregon Expressway portion - the CC's preference.
San Mateo currently has a large housing project that was previously the race track that is next to the Caltran tracks - the train featured in their ads. San Carlos is currently attempting to approve a massive housing project - 8 city blocks along the Caltran corridor. Assume that eminent domain will not be exercised where there are currently large projects being built on the peninsula corridor. These new developments define the ability to install HSR on the peninsula corridor. Mountain View has the Lite Rail at the Caltran station so the lower end of the valley is defined by the existing transportation systems.
The heavy development on the corridor suggests that HSR will not use the corridor if it cannot fund via eminent domain.
Suggest that the city not overreach for expensive consulting fees as it could be a waste of money. We are not defining the HSR corridor - the other cites with large developments are defining the limitations of HSR within the corridor end to end. San Francisco and the Transportation Center will also define the HSR route.


 +   Like this comment
Posted by Norman
a resident of Menlo Park
on Nov 12, 2013 at 1:17 pm

The $68 billion price tag does not include the interest payments on the debt during the 20 year buildout (this has been verified by the California Legislative Analyst's Office). I estimate that the interest payments will add about 40% to the cost and that's not the inevitable cost overruns. I say let us just run a Maxibus operation up and down the state and save $100 billion.


 +   Like this comment
Posted by YR
a resident of another community
on Nov 13, 2013 at 7:23 am

The shallow, parochial Nimby's in Palo Alto are an embarrassment to California. If these nitwits had ever traveled outside their suburban wasteland, they would know high speed rail is highly successful in Europe and Asia. Most of the world's top 20 industrialized nations are building high speed rail. Even Saudi Arabia, the world's leading oil exporter, is building high speed rail. The airline lobby in California is fighting high speed rail tooth and nail, since the airline lobby knows how successful high speed rail has been in Europe, killing short-haul airline routes. Now everyone takes the Chunnel from London to Paris.


 +   Like this comment
Posted by resident
a resident of Charleston Meadows
on Nov 13, 2013 at 8:36 am

YR - where do you live? Why are you focusing on PA relative to HSR? The definition of HSR is San Diego / LA to San Francisco / Sacramento. PA is only a dot on the map within the whole landscape of this project - and it does not even rate as a stopping point. San Jose is a bigger dot since it has multiple transportation projects in place - including the ACE system. The passage corridor in question is under the management of Caltrans which is the lead on this project. They take direction from Sacramento. HSR going through the corridor is questionable since the logistical considerations and funding required is not there. Any financial considerations are pointing to existing right of ways - they have already changed the projection in the Central Valley. California politics in this matter include the Central Valley and LA who have more at stake here. They are the big dogs. The actions in the project are well documented and continually supported in the large, major newspapers. PA is not mentioned in the major papers specific to HSR. No one is disputing the need for HSR and everyone is interested in the progression of events. It is Jerry Brown's job to compete with Europe and Saudi Arabia. He is calling the shots.


 +   Like this comment
Posted by Crescent Park Dad
a resident of Crescent Park
on Nov 13, 2013 at 10:49 am

Kind of a blunt and simple question: if HSR is such a good deal, why hasn't any of the expected/hoped for private investors stepped up to the plate? Better yet, if HSR is such a good deal, why hasn't any of the for profit transportation companies decided to do this project themselves?

Simple answer: it is going to bleed money. Which is why this particular version of HSR has to stop before we waste any more tax dollars.


 +   Like this comment
Posted by Duh
a resident of Fairmeadow
on Nov 13, 2013 at 11:22 am

Actually, the expected/hoped for private investors are SUING to get this project stopped. The reasons: it simply is not a good investment; the cost has been dangerously underestimated; the ridership has been dangerously overestimated; the state cannot afford to pay fair market value for the land and private properties it must purchase. This kind of thing will bankrupt California once and for all, and there will never be a profit, not even a break-even. Historically, the only HSR to make a profit has been the Shinkansen in Japan. Most of the others, such as the TGVIJTRZN in France, are underwater in debt, their governments thinking of mercifully ending them.


 +   Like this comment
Posted by Robert
a resident of another community
on Nov 13, 2013 at 11:33 am

>Better yet, if HSR is such a good deal, why hasn't any of the for profit transportation companies decided to do this project themselves?

Simple answer, transportation in this country isn't really based on a "profit" model. I don't think we had investors lining up to finance the widening of the 101 either...


 +   Like this comment
Posted by resident
a resident of Charleston Meadows
on Nov 13, 2013 at 12:15 pm

DUH - IAW the article dated 11.12.13 in the SF Chronicle when "eminent domain" is used for a state project there is a mathematical application concerning the price for the land which is not tied to market value. It is based on assessed value for tax purposes with other mitigating situations. There is actually an eminent domain lawyer in Walnut Creek mentioned in the article. So the state is paying people for their land/facilities below market value. People in Fresno now have to confront this situation. Translate that situation to California end to end and you have a fairly ugly situation. Assume that now the state is leasing back the land at market value and the differential then funds the project. Since the project has not broken ground yet assume that is planning to work off the differential in payment for land vs lease income.


 +   Like this comment
Posted by Julian
a resident of Palo Verde
on Nov 13, 2013 at 7:33 pm

HSR: a badly designed project, and a badly designed project with good buzzwords is still a badly designed project.


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