Part II- Financial Problems of the High-Speed Rail Project
Perhaps the most glaring problem with the California High-Speed Rail Authority’s project is the financial mismatch between project costs and available funds. Of course, nobody expected even a $9.9 billion dollar bond to cover the full cost of building a high-speed rail system, even if it were matched with federal and private funding. However, the expected cost of completing the system has escalated steeply, while the only added funds have been $3.5 billion in federal grant funds and a small but continuing contribution from the state’s “cap and trade” program. Absolutely no private funds have been provided. (The French rail company SNCF offered funding in exchange for agreement to routing changes; But the Authority turned them down flat.)
Escalating Costs
Under the high-speed rail bond measure (Proposition 1A) approved by California voters in 2008, the entire system (including extensions to San Diego and Sacramento!) was supposed to be completed by 2020. More than ten years later, that completion date has been pushed out to 2029, and the Phase I project has shrunk. Instead of San Francisco – L.A. – Anaheim (about 500 miles) the new segment only runs from Merced to Bakersfield (about 175 miles). Meanwhile project costs have escalated, from $45 billion for the full 800 mile system (including San Diego and Sacramento termini) to $20.4 billion for just Merced – Bakersfield. Costs for completing just the Phase I San Francisco – Los Angeles segment are now estimated at up to (if not more than) $100 billion.
Illegal Public Subsidy
Not only that, the bond measure promised that any segment built using bond funds would run without a public operating subsidy. But a report by Deutsche Bahn, the German rail company chosen by the Authority as its “initial train operator,” says that the Bakersfield – Merced segment would operate at a $50 million per year deficit. That means it would need an (illegal) subsidy to keep running.
That would seem enough to convince any rational person that the system, as currently proposed, no longer makes sense (if it ever did). But there’s more. The Federal Railroad Administration has withdrawn its $925 million grant to the Authority. The FRA acted because there is no way the Authority can complete its initial 119 mile segment by the contractual deadline of 2022. (The Authority has not even completed the initial 26 mile segment it began building in 2015. Nor has it acquired all the land needed to finish the 119 mile segment.)
Inadequate Funding
As mentioned earlier, the Deutsche Bahn study for the Bakersfield – Merced segment figures that whole segment would cost $20.4 billion. Where will that money come from? Aside from the Prop. 1A bond funds, Jerry Brown got the Legislature to commit 25% of revenue from “cap & trade” auctions to the HSR project. (More on that below.) Deutche Bahn generously estimated that the Authority could squeeze out just enough cap & trade revenue (>$500 million per year) to make it to $20.4 billion. But that was before the FRA withdrew $928.6 million. Not only that, but the FRA is also talking about requiring the return of the $2.5 billion of ARRA grant fund the Authority got in 2009 for its “shovel-ready” project. Under Prop. 1A, bond funds can’t be spent on construction unless the Authority can show it has available all the funds needed to fully construct the proposed segment. That no longer appears possible for the Bakersfield – Merced segment.
A further complication is that the high-speed rail bond funds can provide no more than half of construction costs. With the federal funding having shrunk from $3.5 billion to about $2.5 billion, the amount of bond funds that can be spent must also shrink by that amount. In short, only a Pollyanna would, at this point, expect the Authority to be able to complete a working Phase I high-speed rail project in the foreseeable future.