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The Bullet Train to Bankruptcy
Researchers and residents are growing suspicious of high-speed rail in California.


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Californians have a reputation for questioning authority. And increasingly, they appear to be questioning the High-Speed Rail Authority, which voters empowered in 2008 to issue $9.95 billion in bonds and build the nation’s largest such system.

Opposition hasn’t reached critical mass — not yet. But it is broad, and it includes Republicans, some Democrats, community groups, local governments, fiscal conservatives, and neighborhood preservationists.

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Reports from respectable engineering and financial teams, including state agencies, paint a far gloomier picture than the happy-talk done deal that’s been portrayed in the national media. Lawsuits further complicate the picture. The more money California sponges from states that have rejected federal high-speed-rail dollars, the more local support, which is critical for additional funding, seems to be melting away.

Money, or lack thereof, is the biggest problem, says Republican assemblywoman Diane Harkey, who spent 30 years in corporate finance and banking and has introduced a bill to defund high-speed rail. “We’re de facto bankrupt,” she adds. “We’re in this huge hole with a structural deficit. We’re trying to issue bonds for public works in the billion-dollar range and having problems getting any takers, and our rates are sky-high for municipal debt. . . . Is issuing more debt for high-speed rail a priority when competing for scarce resources for education, water, and local transportation?”

Just this week, a new report raised even more questions about plans to pay for the project: Compared with the plan the voters passed, the authors found, costs have doubled to $66 billion, and the scope of the project has been dramatically reduced. If built according to the original specs, the project would have the potential to almost double the state’s bonded indebtedness, to $200 billion or more. This would cost each of California’s 40 million residents $275 to $320 annually for 30 years.

The report, by retired Silicon Valley executives William H. Warren and William Grindley and Stanford Business School professor Alain Enthoven, used the Authority’s own, frequently revised line items to come up with the true price tag. A report by CARRD (Californians Advocating Responsible Rail Design) came up with similar numbers independently. And these estimates assume, Warren says, that a Republican House will provide $15 billion in “free money,” that municipalities will kick in $5 billion, and that private investors will contribute $35 to $54 billion.

Also devastating to supporters of the project are studies by official and quasi-official agencies that have questioned not just costs, but ridership and revenues — and thus the business plan that underlies the scheme. These include the state’s official “peer review” panel that oversees the Authority. In a critical 2010 draft report, it pointed out that the “Institute for Transportation Studies at the University of California at Berkeley, the Legislative Analyst’s Office, and the State Auditor’s office have raised sufficient concerns with the demand model so as to call into question the project’s fundamental basis for going forward.”

What’s the big deal about ridership estimates? The plan that voters approved specified that there would be no operating subsidies once the project had been built; therefore, if the ridership estimates are unreasonably high, there will be a budget gap. This creates what the panel called a “Chicken and Egg” problem: Investors expect a certain rate of return, and if it isn’t guaranteed, they’re not going to put up money; but the government can’t guarantee a rate of return, because to do so would be to promise illegal subsidies in the event of a shortfall. According to Harkey, the Democratic-controlled legislature is still waiting for new ridership estimates from the Authority, and it appears to be slow-walking the project until it sees something credible. A delay seems far more likely than outright killing the project, which is due to start in 2012.

Warren adds: “The real problem is, how will the legislature know they have a ridership estimate they can believe in — there is no track record of such estimates’ being correct. . . . The idea of doing a small project and seeing if they can validate a smaller forecast [before moving on to the full, massively expensive project] is not an idea they seem to be able to understand.”



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