August 16, 2018

Last Thursday (August 9), the House Subcommittee on Railroads, Pipelines, and Hazardous Materials met in California for a field hearing on the status of the state’s high-speed rail (HSR) project.

The hearing featured four witnesses: Calvin L. Scovel III, USDOT Inspector General; Brian Kelly, California High-Speed Rail Authority (CHSRA) CEO; Louis Thompson, California High-Speed Rail Peer Review Group Chairman; and Robbie Hunter, Building and Construction Trades Council of California President.

California established the California High Speed Rail Authority (CHSRA) in 1996 to plan for a possible HSR system connecting the major population and economic centers of the state, from San Francisco and Sacramento to San Diego. Since then, the project has seen fluctuating cost estimates and anticipated completion dates.

In his opening statement, subcommittee chairman Jeff Denham (R-CA) –­ whose district would be bisected by the trains – referred to the project as “the poster child for mismanagement.” Denham said that other pressing issues, such as the state’s water crisis, were more worthy of even a fraction of the money that has thus far been allocated to the HSR project.

With a new cost estimate that could reach $100 billion, which doesn’t include the originally planned legs of the project reaching Sacramento or San Diego, Denham claimed that if more tax dollars are going to be asked for, more information is needed about the state of finance and funding.

Focus on finances and funds

The project has struggled to reach a stable policy and financing framework amidst shifts in leadership. Per Proposition 1A, which was approved by Golden State voters in 2008 with 52.7 percent of the vote, the state was allowed to sell $9.95 billion in general obligation bonds, $9 billion of which was specifically allocated to HSR. Bond funds were only permitted for use on half the cost of the project, and CHSRA was required to seek private and additional public funds for all remaining costs.

The project received over $3.9 billion in federal appropriations in fiscal years 2009 and 2010 through the Federal Railroad Administration’s (FRA) High-Speed Intercity Passenger Rail (HSIPR) program. Most of that money was from the 2009 ARRA stimulus law, and per the use-it-or-lose-it requirements of ARRA, all of that money had to be expended by September 30, 2017. However, the $929 million in FY 2010 funding has yet to be spent.

The project has also received funding from the state’s cap-and-trade program in the form of a one-time $650 million amount in addition to variable quarterly amounts. The 2018 Business Plan for the project assumes annual receipts of $750 million from cap-and-trade. Though the state Legislature extended the cap-and-trade program’s length through 2030 when it passed Assembly Bill 398 in July 2017, the program’s ability to transfer funds to the HSR project was in jeopardy in the state’s primary election this past June with Proposition 70, which would have prevented CHSRA from borrowing against post-2023 cap-and-trade revenues. That measure failed.

Rep. Alan Lowenthal (D-CA), who served as the chair of the state Senate Transportation Committee when the bond issue came before voters, pointed to the discrepancy in the $9.95 billion in state bonds and $3.875 billion put forth by the federal government in the originally proposed plan. Proposition 1A was put before voters under the assumption that funding was to be split equally between the state government, federal government, and the private sector. Responding to this discrepancy, Kelly stated that the business plan allows CHSRA to build exactly what was originally proposed in Prop 1A, albeit in stages.

With regard to garnering private sector interest, Kelly stated that low-risk projects more easily attract investors. Currently, however, California is operating under a constrained funding program, and much of the project is still under environmental review. Once the project can demonstrate that it produces revenue, private money will be brought in, stated Kelly.

Of the federal and state money that has been received, only $4.6 billion has been spent while $18 billion remains unspent.

Streamlining environmental review

Addressing Kelly, chairman Denham inquired about the reasons for the delays to date and where CHSRA plans to come up with additional funding for the 2018 plan. Before Kelly could complete his response, Denham interjected with, “Is it labor? Has CEQA been a hold up? Are we done with the environmental review yet?”

Kelly pointed to requirements to quickly spend federal dollars, stating,  “we got into construction before we had all the right of way and third party agreements done. We will not repeat this process.” Denham again interrupted, asking what the state of California is doing itself, and how streamlining can be incorporated to speed the process.

Kelly indicated that the Authority has been trying for eight months to get National Environmental Policy Act (NEPA) responsibilities assigned to the state of California, which would help to move the process along more quickly. The project has ten segments and eight are still under environmental review.

Audit of FRA’s oversight

In 2017, Chairman Denham requested a federal audit to analyze whether necessary safeguards were in place to ensure that FRA’s HSIPR grants were allocated and expended appropriately.

The audit began in April of 2018, thus there were not yet conclusive findings to report at this hearing. Yet, Scovel reported that the FRA has taken steps to address the DOT-OIG’s recommendations, notably improving HSIPR project planning materials to include guidance to grantees on ridership forecasting, public benefit evaluations, and operating cost estimates.

When pressed on the roughly $1 billion gap in state matching funds needed to meet the $2.5 billion in federal dollars already spent, Scovel replied that CHSRA has until the end of 2022 to match.

Additionally, the audit is evaluating FRA’s oversight of grants to CHSRA. While the audit is currently underway, its objectives are to assess FRA’s 1) risk analysis, assessment, and mitigation efforts, and 2) procedures for determining whether Federal funds expended complied with Federal laws and regulations.

Preliminary findings from the oversight evaluation indicate that, among other things, FRA has updated its guidance on identifying and mitigating risks during grant amendment and adopted a grant-management staff-training program.

Next steps

Despite the tone of criticism set by chairman Denham’s opening statement, an optimistic outlook for the status of high-speed rail in California was present throughout the remainder of the hearing.

Rep. John Garamendi (D-CA), standing in for the ranking minority member of the subcommittee, highlighted that the project helped to bring an 18 percent unemployment rate in Stanislaus County down to 7 percent. In addition, an estimated $2 billion in economic activity has been already generated in the Central Valley, and roughly 500 Central Valley companies have been used as suppliers to the project.

The project has anticipated economic benefits, as well. Rep. Zoe Lofgren (D-CA) pointed to the opportunity for public-private partnerships as a means to raise revenue for construction and provide important housing and employment opportunities. Google has already announced plans for development at San Jose’s Diridon Station, which is expected to bring about 20,000 employees to downtown.