May 17, 2019

Yesterday, the Federal Railroad Administration formally notified the California High Speed Rail Authority (CHSRA) that FRA is canceling an $929 million grant agreement signed by the Obama Administration eight years ago and will not be giving CHSRA the money. Instead, FRA will formally “deobligate” the money, which, under the terms of the law appropriating the money, will allow FRA to hold a new competition and award that $929 million to other applicants for high-speed rail, low-speed intercity passenger rail, or rail congestion grants.

An unsigned statement from FRA said “After careful consideration, the Federal Railroad Administration (FRA) has terminated Cooperative Agreement No. FR-HSR-0118-12-01-01 (the FY10 Agreement) with the California High-Speed Rail Authority (CHSRA), and will deobligate the $928,620,000 in funding under that agreement.  The decision follows FRA’s Notice of Intent to Terminate and consideration of the information provided by CHSRA on March 4, 2019. FRA finds that CHSRA has repeatedly failed to comply with the terms of the FY10 Agreement and has failed to make reasonable progress on the Project.  Additionally, California has abandoned its original vision of a high-speed passenger rail service connecting San Francisco and Los Angeles, which was essential to its applications for FRA grant funding. FRA continues to consider all options regarding the return of $2.5 billion in American Recovery and Reinvestment Act (ARRA) funds awarded to CHSRA.”

The $929 million in fiscal 2010 appropriations have never been transferred to California and are still sitting in the U.S. Treasury. The $2.55 billion in FY 2009 ARRA funding mentioned in the last sentence of the statement, however, was all transferred to California and spent (outlays) prior to September 30, 2017, which makes clawing back that money an order of magnitude more difficult for FRA.

California Governor Gavin Newsom (D) issued a response statement to the media: “The Trump administration’s action is illegal and a direct assault on California, our green infrastructure, and the thousands of Central Valley workers who are building this project. Just as we have seen from the Trump administration’s attacks on our clean air standards, our immigrant communities and in countless other areas, the Trump administration is trying to exact political retribution on our state. This is California’s money, appropriated by Congress, and we will vigorously defend it in court.”

(Ed. Note: The “appropriated by Congress” line in Newsom’s statement is true but irrelevant and, in this context, misleading. The word “California” never appears in the provision of law appropriating the money or in any of the report language of the provision – that would have been an earmark, and Congress chose not to earmark that money. The money was not appropriated by Congress specifically for California. The money was appropriated by Congress to FRA to allocate, and FRA, not Congress, allocated the money to California. FRA is now un-allocating the money.)

FRA Administrator Ron Batory’s 25-page letter to CHSRA explaining the decision hinges on the clause of the FRA-CHSRA grant agreement in Attachment 2, Section 23(a), which says:

Upon written notice, the Grantee agrees that FRA may suspend or terminate all or part of the financial assistance provided herein if the Grantee has violated the terms of this Agreement, or if FRA determines that the purposes of the statute under which the Project is authorized would not be adequately served by continuation of Federal financial assistance for the Project. Any failure to make reasonable progress on the Project or other violation of this Agreement that significantly endangers substantial performance of the Project shall provide sufficient grounds for FRA to terminate this Agreement.

The letter also notes that the termination provision follows a DOT regulation which allow DOT to terminate grants if the grantee “materially fails to comply with any term of an award, whether stated in a Federal statute or regulation, an assurance, in a State plan or application, a notice of award, or elsewhere.” The letter then goes on for 19 pages describing CHSRA’s alleged violations of the grant agreement, including:

1. Failure to correct deficiencies in quarterly deliverables, despite FRA feedback and insistence.
2. Material errors and insufficiencies in quarterly budget submissions.
3. Insufficient and inconsistent funding contribution plans.
4. Insufficient and unacceptable annual deliverables.
5. Failure to submit other required deliverables that were due in the third or fourth quarter of 2018 (or, in one instance, fourth quarter of 2016).

In addition to that, FRA has determined that CHSRA will not be able to complete the project by December 31, 2022, which is the deadline in the last Obama Administration amendment to the grant agreement. And Gov. Newsom’s announcement that he would stop pretending that the state could somehow continue building the system beyond the Merced-Bakersfield corridor without vast amounts of outside money is cited in Batory’s letter: “Although the State’ s retreat from a foreseeable statewide HSR system may not, standing alone, constitute a violation of the FY 10 Agreement, it is nonetheless a relevant consideration in FRA’ s termination decision, given FRA’ s understanding of the State’ s intention to construct a ‘800-mile, statewide … high-speed electrified train service between the Bay Area, the Central Valley, Sacramento, and Southern California,’ Ex. A at A0038, and the agency’ s responsibility to oversee the HSIPR Program.”

In a clear sign that the Trump Administration is anticipating a lawsuit, at the same time FRA announced the decision and published Administrator Ron Batory’s 25-page letter to CHSRA explaining the decision, they also put online thousands of pages of documentary record of their communications with CHSRA since the Trump Administration took office in January 2017.

Questions arising from this action include:

Will FRA be able to do this? This will clearly wind up in court, but FRA definitely has the advantage. Possession being nine-tenths of the law, the fact that FRA never handed over the $929 million means that a judge would have to issue an order to FRA to write a check, putting the burden of action on California to prove, first of all, that the decision is reviewable, and if it is reviewable, that they were not in material breach of the grant agreement. Fortunately for California, they had not planned on spending the $929 million until fiscal year 2021, which would give a lawsuit time to proceed.

GAO’s legal opinion on the $2.55 billion in ARRA money for the project has some interesting parallels here. With regard to the ARRA money, FRA originally insisted on California matching every dollar of ARRA money immediately with its matching dollar of state money. FRA later changed its mind and decided to let California spend all the ARRA money immediately and then spend its state match years later. GAO found that FRA was allowed to change its mind because it had a “discernable rational basis” for the decision, the standard set by federal courts. In court, all FRA has to prove is that CHSRA was in material breach of the letter of the grant agreement, and that the decision was neither arbitrary or capricious.

CHSRA can be expected to argue that while they were in multiple technical violations of the grant agreement, those don’t add up to material violation, and even if they did, people violate their grant agreements all the time and DOT only rarely, if ever, uses that as justification for canceling the grant agreement.

Will the cancelation of the $929 million kill the project? Not necessarily. Two weeks ago, ETW analyzed CHSRA’s latest financial plan for completing the Merced to Bakersfield segment of the rail system. Under that plan, the $929 million in federal FY10 money was part of a $20.5 billion in anticipated revenues needed to pay for $20.4 billion in construction costs of the 171-mile segment, acquisition of trainsets, statewide planning, and other costs. But that was using the low end of the possible range of future receipts from cap-and-trade auctions between now and 2030. CHSRA estimated that the low end of those receipts from 2019 through 2030 would be $6.0 billion. That low end is $500 million per year times 12 years. But the high end of that estimated range was $750 million per year, which would be $9 billion over 12 years. The mid-point of that would be $625 million per year, or $7.5 billion over 12 years. At the mid-point of that range, or a little below mid-point, CHSRA would still have enough money even if FRA is successful in killing the $929 million FY10 grants.

But that assumes no more significant cost overruns, which for this project has long been a loser’s bet.

Who else could apply for the money? Once FRA deobligates the $929 million (which shouldn’t take long – some paperwork and a change in the OMB computer system), FRA can then put out a new Notice of Funding Opportunity and ask eligible entities to apply for a share of the money. Under the FY 2010 law, the money is available forever, and shall be used “to make grants for high-speed rail projects as authorized under section 26106 of title 49, United States Code, capital investment grants to support inter- city passenger rail service as authorized under section 24406 of title 49, United States Code, and congestion grants as authorized under section 24105 of title 49, United States Code, and to enter into cooperative agreements for these purposes as authorized.”

The real question is, if FRA puts out that $929 million in another NOFO, which states, localities and railroads would apply, knowing that the money might be tied up in court for a while? And would any potential applicants be able to use any of the members of the CHSRA consultant team who are currently counting on getting that money?