March 8, 2019

On March 4, the California High Speed Rail Authority (CHSRA) issued a formal response to the Federal Railroad Administration’s February 19 notice that it intended to cancel the $929 million grant of fiscal year 2010 appropriations promised by the Obama Administration for the Golden State’s troubled high-speed rail project.

CHSRA President and CEO Brian Kelly said in a statement that “withdrawing federal funds from this project is unwarranted, unprecedented and harmful to the people and the economy of the Central Valley, California and the nation.” CHSRA issued two separate letters on the 4th: a three-page summary letter from Kelly to FRA Administrator Ron Batory, and a ten-page, more detailed letter from Kelly to the FRA grant administrator for the project. (The latter looks like prep work for the inevitable lawsuit that will be filed by California if USDOT attempts to cancel the grant agreement.)

There is no timeframe for when USDOT will, after reviewing CHSRA’s submission, take formal action to cancel the grant.

The $929 million grant was awarded to California in two parts ($715 million in the original December 2010 announcements from the FY 2010 appropriation and an additional $214 million in May 2011 awarded after other states had started turning back their grant awards and FRA had to distribute the money elsewhere). (That’s a federal share of 72 percent for this grant – eat your heart out, transit new starts.) The money is to be used to match $360 million of CHSRA funds and will mostly be dedicated to the final construction of the Initial Construction Segment from Madera in the north to Shafter in the south.

Batory’s letter listed five areas in which, he said, CHSRA was in violation of the grant agreement, justifying cancelation. They are listed below, along with CHSRA’s response.

What specific failures to comply with the grant agreement did FRA allege? Batory’s letter cites five specific reasons they intend to cancel the grant agreement:

Allegation: CHSRA is behind schedule in spending its own money.

Batory’s letter says “For example, CHSRA committed to a $141.8 million State contribution to advance final design and construction activities in December 2018, but reported only $47.9 million of actual expenditures in that month.” This may be true – the project is, by any measure, behind schedule – but it does not seem that USDOT is this quick to cancel project agreements and take away funds for other projects that fall behind on their spending schedules.

The CHSRA response letter admits that they had at least one expenditure shortfall, in December 2018, but says that the schedule of payments was not actually written into the grant agreement. CHSRA also says that since the FRA letter only listed that one example of a shortfall, it is unfair to cancel the agreement without giving them a full list of their alleged transgressions. Moreover, the whole response letter talks about California not being in “material breach” of the grant agreement which is an implicit acknowledgement that they may have, technically, been in breach of the agreement but they hope to convince a judge that every big project goes into technical breach once in a while and that singling out this project for punishment is arbitrary and capricious.

Allegation: CHSRA will be able to complete the Central Valley Segment by the end of 2022 as currently required by Amendment #1 to the original agreement.

FRA is probably correct on this – the California State Auditor agrees that there is a high risk that CHSRA “could miss the new deadline unless Central Valley construction progresses twice as fast as it has to date” – but that doesn’t mean FRA has to cancel the agreement. The Obama Administration gave CHSRA a four-year extension rather than tear up the agreement. Besides, it is unclear if FRA can make that determination now instead of after the deadline is missed.

The CHSRA response letter admits that “Completing these packages on this schedule will be challenging.” CHSRA also says “The Agreement contains no ‘time is of the essence’ provision. Nor does the Agreement’s termination provision state that failure to achieve 100% completion by the end of 2022 constitutes grounds for termination.” The letter goes on to criticize FRA for slow-walking the NEPA environmental clearances, which CHSRA says is adding months of delay to the project.

Allegation: CHSRA failed to submit deliverables.

Batory’s letter said: “CHSRA’s failure to submit required critical grant deliverables adequate to demonstrate CHSRA is effectively managing delivery of the Project. Such deliverables include Funding Contribution Plans.” Basically, FRA does not like the timeliness or depth of detail of some of CHSRA’s required paperwork filings.

CHSRA responds: “This is the first time that the FRA has identified deliverables as an issue so major that it might justify termination of the FY10 Agreement, and because the Notice fails to identify any particular report or deliverable, much less the deficiency in it, the CHSRA is not in a position to respond fully to this concern at this time. Nonetheless, it is clear that these asserted deficiencies do not justify termination of the Agreement.” CHSRA again blames the lack of NEPA-related deliverables on FRA’s own delays.

Allegation: CHSRA failed to take corrective actions recommended by FRA.

Batory’s letter says “CHSRA has failed to take the appropriate corrective actions to ensure delivery of the Project.” The letter alleges that CHSRA has not been responsive to FRA suggestions for improvement after their quarterly status meetings.

CHSRA responds: “The last monitoring report CHSRA received from the FRA was dated February 12, 2018, and the summary table of items requiring corrective action in the report is empty. The Notice asserts that the FRA identified areas of interest in the 2017 annual monitoring review, which the CHSRA failed to satisfactorily address. This does not support the Notice’s assertion that the CHSRA has failed to take corrective actions because the FRA never notified the CHSRA that corrective action was required.”

Allegation: Gov. Newsom’s State of the State address killed the project that the grant agreement was supposed to fund

Batory wrote that “As described in the Agreement and in the various CHSRA applications for Federal financial assistance, the Project is a component part of the larger high-speed rail system that would, ultimately, connect San Francisco in the north and Los Angeles in the south. During his recent State-of-the-State address, Governor Newsom presented a new proposal that represents a significant retreat from the State’s initial vision and commitment and frustrates the purpose for which Federal funding was awarded (i.e. an initial investment in the larger high-speed rail system).”

CHSRA responds: “Far from frustrating the purpose of the FY10 and ARRA grants, the Governor’s focus expands that purpose and maximizes the utility of the first building block in the high-speed rail program. These grants are for construction of the initial portion of the high-speed rail system, and they require the CHSRA to construct a 119-mile segment from Poplar Avenue, approximately 15 miles north of Bakersfield, to Madera. Governor Newsom is proposing to expand this project by 50 miles – with California bearing the expense of doing so – to reach south into downtown Bakersfield and north to Merced, so that this initial segment will connect three of the largest cities in the Central Valley (Merced, Fresno, and Bakersfield), three major universities and three of the fastest growing California counties, as well as providing important transit connectivity to the Altamont Corridor Express (ACE) and Amtrak traveling to the Bay Area and Sacramento and to bus services traveling from Bakersfield to Los Angeles. This expansion will make the initial building block of the high-speed rail program more immediately productive, which ‘furthers, rather than frustrates, the purpose of the federal grants.”