A Major Setback for California’s High-Speed Train

Published November 27, 2013

The future of the California High-Speed Rail project hangs in a precarious balance as a result of two rulings handed down by Sacramento Superior Court Judge Michael Kenny on November 25.

“The judge’s ruling will prevent the [California High-Speed Rail] Authority from spending bond measure funds for construction until the funding plan is brought into compliance,” said Michael Brady co-lead attorney on the case. But because that would require finding at least $25 billion in extra funds, Brady believes compliance seems “virtually impossible.”

“They need to step back and rethink their whole approach,” added co-lead attorney Stuart Flashman.

The Authority’s chairman, Dan Richard, tried to cast the court decision in a more positive light.

“The judge did not invalidate the bonds as approved by the voters,” he said. “Like all transformative projects, we understand that there will be many challenges that will be addressed as we go forward in building the nation’s first high-speed rail system.”

Two Fundamental Failures

The court rulings are the culmination of prolonged litigation. It began two years ago when two aggrieved individuals, farmer John Tos and homeowner Aaron Fukuda, joined the Kings County Board of Supervisors in filing a lawsuit asserting that the Authority failed to comply with certain statutory requirements in its 2011 funding plan. Oral arguments were held on May 31of this year and on August 16 Judge Kenny ruled that the Authority failed to comply with the requirements of Proposition 1A in two fundamental respects:

(1)  It was unable to certify completion of all the environmental clearances for the 300-mile Initial Operating Segment (IOS) extending from Merced to San Fernando Valley. (To date only a 29-mile stretch of initial construction from Merced to Fresno has been examined); and

(2)  The Authority was unable to identify “reasonably expected” sources of funds required to complete the Initial Operating Segment.

As to the second defect, the Authority estimates the Initial Operating Segment (IOS) will cost about $31.5 billion. It currently has only about 20 percent of that sum or $6 billion — $3.25 million in federal funds and $2.7 million in Proposition 1A bond funds appropriated to match the federal funds.

In his November 25 opinion, Judge Kenny did not explicitly address this potential funding deficiency nor did he agree to rescind existing contracts with Tutor-Perini and Caltrans or rule on the propriety of using federal grant money, as requested by the plaintiffs. Instead, he ruled that the Authority cannot “proceed to commit and spend Proposition 1A bond proceeds for construction or property acquisition” until it has complied with the requirements stated in his August 16 ruling.

No Clear Source of Funds

At a November 8 hearing on the remedies, Deputy State Attorney General Michele Inan stated the Authority was spending only federal money pursuant to an agreement with the federal authorities to “front load” expenditure of federal funds. However, she acknowledged that by April 2014 the project will need Prop 1A bond funds to match the federal contributions.

Given the court’s ruling, it is questionable whether state bond funds will be available to provide that match. Without access to the bonds, the Authority would need other sources of public or private funds in order to complete construction of the initial 29-mile stretch (estimated at $2 billion) and continue building the line.

In a related decision, the Court declined to issue a blanket validation for the sale of Proposition 1A bonds, as requested by the Authority. Without such a validation, State Treasurer Bill Lockyer’s office said the state can’t sell Prop 1A bonds, thus putting the future of the project even more in doubt.

All of this should give the federal government pause and cause it to reconsider whether to put more of its funds at risk, say William Grindley and William Warren, independent analysts and authors of 38 reports on the high-speed rail project.

‘Short of Legal Due Diligence’

“The Federal Rail Administration’s oversight of the Authority’s actions appears short of legal due diligence. By binding itself to and funding the Authority’s action the FRA has become party to those actions. . . . FRA’s legal position seems cloudy at best,” the two analysts wrote in “DOT/FRA Has Several Reasons to Withhold Further Funding from California’s High-Speed Rail Project,” a briefing paper released in November 2013.

Nor is this the end of the litigation. A second phase of the case is to begin shortly over allegations that the project has strayed significantly beyond the 2008 promises of the Proposition 1A bond measure and that the Authority’s plan for a “blended system” of high-speed trains on Caltrain’s commuter tracks in the Bay Area and Metrolink tracks in the south cannot meet the performance requirements of Proposition 1A — notably a nonstop trip between Los Angeles and San Francisco in 2 hours 40 minutes and provisions that the system operate without public subsidies.

Whatever the ultimate consequences of the two court rulings, their impact on public opinion and on the confidence of the financial community in the project’s fiscal integrity are unquestionable. Further delays in the project’s groundbreaking (already more than a year behind schedule), the prospect of multiple challenges over bond validation, Congressional opposition to providing further federal funds, and, most importantly, inability to identify credible sources of non-federal money to complete the entire Initial Operating Segment, all add up to a very uncertain future for this “transformative” project.

Used with permission of InnovationNewsBriefs at innobriefs.com.