The California High-Speed Rail Authority on Wednesday issued its first update to state legislators since Gov. Gavin Newsom turned the project on its head.
The bottom line: the authority says it’ll meet a critical federal deadline, and the new cost will be $20.4 billion – but that will be for a much-abbreviated line in the San Joaquin Valley.
Newsom in February declared he did not foresee a means to complete the decade-long effort to complete “a path to get from Sacramento to San Diego, let alone from San Francisco to L.A.”
“Let’s be real,” Newsom told legislators in Sacramento in his Feb. 12 State of the State address, adding that what the state could accomplish with its available resources was “complete a high-speed rail link between Merced and Bakersfield.”
Wednesday’s report addresses how the rail agency is realigning its efforts with the governor’s proposed change of focus.
“The Project Update Report demonstrates a clear path forward of what we can – and will – do in the next few years to make high-speed rail a reality in California,” said Brian Kelly, the rail authority’s CEO. “Our conservative estimate of funding shows we have the funding to deliver fully electrified, high-speed trains connecting 171 miles from Merced to Fresno to Bakersfield, while we complete our important environmental work statewide and continue to make key investments in the Bay Area and Southern California.”
Annie Parker, a spokeswoman for the rail agency, described the direction as “a building block approach.”
“We’re going to continue with the process of building what we can with the money that we have, to put high-speed rail into service as soon as possible in California,” she said. “From there, we’ll work on extending out to the Silicon Valley.”
The report calls for the rail agency to continue working on other aspects of the project, including environmental and engineering analysis, in other parts of the state. while work goes on in the Valley. “This policy recommendation is not a Central Valley line instead of the Silicon Valley to Central Valley Line (Valley to Valley), it is a Central Valley line first – as we work toward completing the Silicon Valley to Central Valley Line and then connecting Bakersfield to Los Angeles,” the report states.
In a letter introducing the administration’s new analysis, rail authority board chairman Larry Mendonca – Newsom’s chief economic adviser – acknowledged up front that the decade-plus project “is at a crossroads” and is faced with “deeply entrenched challenges.”
“The initial cost projections and timelines were simply unrealistic. In 2008, voters were told the project would cost $45 billion. Now, the actual cost appears closer to $80 billion,” Mendonca wrote. The new report, he says, lays out how the administration plans to move forward, and notably that it is committed to doing that.
The report reflects what Kelly described last month as a much more realistic estimate of what the agency can do with money it can count on, rather than presumptions of future money that is far from certain.
A more realistic approach
“The recommendation of how to move forward is largely based on what we can afford to do,” Kelly told the authority’s board members in April. “The change of direction, to me, is to not commit to outcomes we cannot identify funding for.”
The change in direction, said rail authority board vice chairman Tom Richards, is substantial. Since 2016, the agency has aimed to build an initial operation system from Bakersfield to San Jose, connecting the San Joaquin Valley to the Silicon Valley.
Wednesday’s report estimates the cost of building in the three construction segments now underway in Madera, Fresno, Kings, Tulare and Kern counties from Madera to Shafter at about $12.4 billion, up from $10.6 billion a year ago. A little more than half of the increase, about $990 million, comes from allowing for a larger contingency for unforeseen expenses, said Roy Hill, the authority’s chief program officer. He attributed the rest of the increase to factors such as changes to the scope of construction and other cost increases.
Between adding more than 50 miles to extend what’s now being built north to Merced and south to Bakersfield, an allowance of about $700 million to buy high-speed train sets, and work on the San Francisco Peninsula and in the Los Angeles Basin to prepare for future high-speed rail service, the report estimates the cost of the abbreviated system called for by Newsom at $20.4 billion.
The report’s suggestions are based in part on research and estimates produced by one of the authority’s primary consultants, DB International U.S., a team that includes German rail operator Deutsche Bahn AG and American subsidiary DB International USA Inc.
Coming up with the money for a full San Francisco-Los Angeles route by way of the San Joaquin Valley – a price tag most recently estimated at about $77.3 billion – has been one of the primary challenges confronting the rail project. Proposition 1A, a 2008 high-speed rail bond measure, authorized about $9.9 billion, to be augmented by federal money and investments from private industry.
But aside from early injections of about $3.5 billion from the Obama administration in 2010, there’s been no additional federal money. And private involvement has been limited to companies bidding on construction contracts rather than putting their money on the table.
The report indicates that concentrating on developing an operational system in the Valley is “a realistic and pragmatic approach for using the considerable revenues available for this program between now and 2030. ...”
The new report also forecasts a schedule for construction of the current segments in the Valley. “The authority currently expects to meet completion of civil and structural construction and track installation requirements by December 2022 as required in the federal grant agreements,” the report states. For the entirety of the Merced-Bakersfield system, the new schedule anticipates that construction of the rail line, installation of tracks and testing of trains and systems would not be completed until the end of 2028.
Can it pay for itself?
What’s murky is the issue of whether enough people will ride a Merced-Bakersfield bullet-train line to avoid the rail authority having to subsidize operations – something that is firmly forbidden by Proposition 1A.
DB International, the consultant hired by the rail agency to be its early train operator, “has done an analysis on ridership and revenues and looked at what level of revenue we can achieve,” said Hill. “It indicated in Merced-Bakersfield that there is a state subsidy needed.”
The report indicates that rather than the rail authority subsidizing the train operations, the agency could work out an arrangement with the state Transportation Agency and the San Joaquin Joint Powers Authority to lease the high-speed train tracks once testing of the rail line is completed until the system is ready to run trains to the Silicon Valley. The San Joaquin Joint Powers Authority runs Amtrak’s San Joaquin trains through the Valley, and those operations are subsidized by the state Transportation Agency.
Under Proposition 1A’s requirements, “it’s important to have someone else operate” the trains instead of the authority, said Russ Fong, the agency’s chief financial officer. Having a different agency lease the tracks and run the trains may get out from under Proposition 1A’s subsidy prohibition.
“It’s going to take us a little time to figure out,” Fong said. “We haven’t gotten there yet with this particular plan.”
Any subsidy at all from the state, whether it’s by the rail authority or another agency, is not likely to sit well with critics of the project. Assemblyman Jim Patterson, D-Fresno, issued a statement Wednesday in which he described the report as “nothing more than a shell game.”
“This report says the goal is to move Amtrak onto the high-speed rail track and let them operate it with a whole lot of government subsidy in an effort get around the Prop 1A bond language,” he added. “They have no other options because they know perfectly well they will need subsidies to operate but the bond language is very clear that this is forbidden.”
Subsidies aren’t the only concern confronting the rail authority. After Newsom’s speech outlining a focus on operations in the Valley rather than to the Bay Area, President Donald Trump used Twitter to suggest that the federal government would seek to get back the grant money it put toward the project years ago. In late February, the Federal Railroad Administration announced its intention to rescind a grant of $929 million because of ongoing schedule concerns and doubt over whether the authority could meet a 2022 deadline to finish construction in the Valley.
The FRA also threatened legal action to recover another $2.5 billion in federal stimulus grants that have already been spent by the state on planning, engineering and construction in the Valley.
“We clearly recognize that these funds are at risk,” Wednesday’s report states. If the federal government withdraws its money from the project and no new sources of money are found, “the Authority would work with the California Department of Finance and the (Newsom) administration on alternatives.”
To date, the only ongoing source of money for the project comes from cap-and-trade funds, part of the state’s greenhouse gas-reduction program in which carbon polluters buy credits for the right to emit greenhouse gases. The cap-and-trade program is authorized through 2030.
Determined to move forward
Mendonca’s letter indicates that Newsom remains committed to not let the years of effort and billions spent so far go to waste.
“Some have suggested the state should walk away from the more than a decade of collaboration and progress that Republican and Democratic administrations and a generation of legislative leaders have made to bring the project this far,” Mendonca said. “Such a path would leave California, having spent $5 billion, with nothing but lawsuits, job losses and billions of IOUs with nothing to show for our debts.”
Mendonca added that the governor, in his upcoming May budget revise, “will announce that critical oversight and management functions will be brought back in-house, replacing consultants with state staff” at the rail authority.
“The path forward is clear. The California High-Speed Rail Authority will continue its efforts toward getting a working section completed in a responsible and transparent way,” Mendonca said.
Carl Guardino, president and CEO of the Silicon Valley Leadership Group, said the new approach, including a larger contingency for construction in the San Joaquin Valley, makes sense.
“It sounds like he (Newsom) is being prudent” in adding a bigger contingency,” Guardino said. “I believe the governor continues on the correct course. You have to mix common sense with the available dollars and cents.”