UPDATE FEB. 20, 2019…
On February 19th, a short time after the California High-Speed Rail Board meeting ended, the Federal Railroad Administration notified CEO Brian Kelly that they are seeking to “de-obligate the unspent 2010 grant for $928 million and they are also asking for the ARRA funding back in the amount of $2.53 billion already spent because the project “failed to comply with the terms of the agreement and failed to make reasonable progress on the project.” See the actual communication posted below.
Letter from Federal Railroad Administration to CHSRA stating that effective March 5, 2019, they plan to terminate Cooperative Agreement No. Fr-HSR-0118-12-01 Agreement, thus de-obligating the full $928,620,000 under the Agreement.
As a coda to all this…
From NY Times article, Feb. 19, 2019, by By Annie Karni and Jennifer Medina
Gov. Gavin Newsom of California, who announced last week that he was scaling back the project, said the Transportation Department’s move was retaliation for the border wall lawsuit, filed on Monday with 15 other states.
“It’s no coincidence that the administration’s threat comes 24 hours after California led 16 states in challenging the president’s farcical ’national emergency,'” Mr. Newsom said in a statement. “This is clear political retribution by President Trump, and we won’t sit idly by. This is California’s money, and we are going to fight for it.”
The future of High-Speed Rail and what the Governor’s speech means
Feb. 18, 2019
Governor Newsom declared out loud, what has been clearly obvious to those following the high-speed rail project, there’s not enough money nor the time to complete the first phase of the high-speed rail project between Los Angeles and San Francisco. We applaud him for that. After all, it was supposed to be up and running by 2020; but no more federal grants or private investors have materialized, premature building occurred before proper planning, and property purchasing issues all held up progress.
The headlines from Governor Newsom’s first state of the state speech declared the demise of the Phase One project. Later however, the Governor seemed to emphasize that he left the door open for further development if more money was found. While that was part of his original speech, anyone would say, “If more money is found, we’d reconsider.” That was sort of a given but wasn’t the main “take away” from his state of the state speech considering the tone of other statements.
But Newsom’s plan, now concentrated on finishing only the San Joaquin Valley section, creates several issues and possibly new lawsuits.
Conflict in the Federal contracts for the American Recovery and Reinvestment Act of 2009 (ARRA) grant and Prop 1A.
Rail Authority Board CEO, Brian Kelly declared, "The Governor has called for setting a priority on getting high speed rail operating in the only region in which we have commenced construction—the Central Valley."
Is that feasible under Prop 1A? Not according to at least three former Chairmen of the Authority Board and the Peer Review Group.
The area between Merced and Bakersfield does not have the ridership to support a high-speed rail service by itself. That’s why it had to be attached to either Northern California or Southern California, which seemed to have the available riders. Here are several quotes made years ago from high-speed rail officials and the peer review group that confirm the San Joaquin Valley segment on its own does not conform to Prop 1A requirements as an independent segment.
First, during the July 14, 2011 board meeting regarding agenda item #7, Initial Operating Segment, the following statements were made. Here is the video. Listen to mm 4:08 to 4:25 In this 17-minute segment, two people, Project Manager Hans Van Winkle and then board member Curt Pringle explained how the Central Valley segment alone is not an operating segment.
Former General Hans Van Winkle [Project Manager] stated to the Board, “[with respect to Merced to Bakersfield] we’re not calling it an IOS (Initial Operating Segment), we’re calling it an extended ICS (Initial Construction Segment) because in all likelihood, we don’t think that the revenue projections with associated costs would make a viable system.”
Continuing, then board member Curt Pringle (future Chairman) chimed in to spell out how it’s supposed to work. “An IOS (Initial Operating Segment) is the initial segment in which we can operate the high-speed train. We’ve got to the Initial Construction Segment (ICS) that’s where we are spending money but we understand we cannot operate independent high-speed service within the ICS to make enough money to pay for the operation. So, our next determination is to try to figure out where that Initial Operating Segment will be, where we can use that Construction segment and beyond to be able to pay for cost of operation.”
On March 13, 2012, then-Board Chairman Dan Richard, made this statement in a Senate Joint Committee Meeting in Mountain View:
“Our business plan never intended, our business plan does not contemplate that we would operate the HSRS in the Central Valley. That has never been part of our plan, for exactly the reason you said, there’s not sufficient ridership to do that. In our plan of November 1st, we said after this ICS (Initial Construction Segment) was built the next thing that would happen was an IOS (Initial Operating Segment) and that would be the first true operation of high-speed.”
There is also a reference to the legality of the Central Valley segment by itself in a letter dated January 3, 2012 from then Chairman Will Kempton of the Peer Review Group.
The letter was very uncomplimentary of the funding plan and the draft 2012 Business Plan which was issued together in November 2011. On page 3, they offer this under paragraph titled, “The ICS/IOS distinction.”
“The CHSRA has created a difficult dilemma in the ICS/IOS distinction. The ICS was defined in discussions with the US Federal Railroad Administration (FRA). The ostensible justification – construction in the Central Valley would be cheaper and less subject to environmental opposition and would permit an initial high-speed test and demonstration track has subsequently come under considerable question. Further, the ICS as planned is not a very high-speed railway (VHSR) as it lacks electrification, a VHSR train control system, and a VHSR compatible communication system. Therefore, it does not appear to meet the requirements of the enabling State legislation. The only clear remaining basis for the ICS is that it can serve as a vehicle for the use of Federal money that has specific deadlines. Although the ICS is a basic component of either IOS (and the ultimate system); it has no independent utility other than as a possible temporary re-routing of the Amtrak-operated San Joaquin service during the time period after the ICS is available but before an IOS is opened. Further, the ICS will not be electrified and thus cannot serve as a high-speed test track for future VHSER rolling stock.”
Of course, the Authority then made the decision to head south. It allocated $705 million for Caltrain electrification in the San Francisco segment and $500 million for the Los Angeles segment, known as “bookend spending.” That seemed to heal the board’s relationship with the Peer Review Group, which had been strained considering the tone of Chairman Tom Umberg’s angry response to their letter.
With recent develops in the state of the state speech, Governor Newsom admitting there isn’t the money to go much further than the San Joaquin Valley; so, we are left with just one segment that is not a financially feasible nor an operable segment according to Prop 1A, confirmed by the above quotes from the Rail Authority and its Peer Review Group.
Singular Focus: “The Claw back”
However, it appears that Newsom is singularly focused on trying to avoid what is called a federal claw back, but not Prop 1A requirements. That is if the project fails in the federal requirements for the American Recovery and Reconstruction Act (ARRA) funding they received, he may have to give the money back. He said in his speech last Tuesday,
"Abandoning high-speed rail entirely means we will have wasted billions of dollars with nothing but broken promises and lawsuits to show for it. And by the way, I am not interested in sending $3.5 billion in federal funding that was allocated to this project back to Donald Trump."
But it appears the President is watching the situation closely…he wants the money back anyway.
Trump Tweet Feb 13th:
"California has been forced to cancel the massive bullet train project after having spent and wasted many billions of dollars. They owe the Federal Government three and a half billion dollars. We want that money back now. Whole project is a "green" disaster."
To clarify, the Rail Authority may still have $929 million of the $3.5 billion. The $929 is a separate allocation called the 2010 Grant. The Authority has spent $2.553 billion that came from the American Recovery and Reconstruction Act grant (ARRA). They promised the FRA a 50% match on that money, by the way without permission from California’s Legislature. Then there were subsequent negotiations that the state would receive the ARRA fund grant money first instead of matching as the state spent their funds first.
By contract they were not supposed to be able to access the 2010 grant money until the match of the first grant was complete unless the Rail Authority had that component changed in the funding agreements. So, in all likelihood the 2010 Grant should still be out there unspent. According to the January 2018 Finance Meeting in the Executive Summary page 4, they will not finish spending the state’s match for the ARRA funds until December 2022 .
Difference in terms:
The difference in terms between the Federal grant contract and Prop 1A:
At this time the state has three sources of money, state bond funds, the federal funds, and cap-and-trade funds. The federal funds have a contract to guide the state how they can and cannot spend the money. Then you have Prop 1A with very specific and different provisions that have strict guidelines about for what and when, the bond funds can be spent.
Right now, it seems Newsom’s main focus is satisfying the terms of the federal contract required by the receipt of the ARRA funds. It basically says if the state doesn’t build high-speed rail, they must build something that has independent utility. The HSRA agreed with the FRA that Plan B should be an improvement to Amtrak. If the state failed to produce either Plan A or B, the federal government could use a claw-back provision to get the ARRA grant funds back, either in the form of a check by the state of California or the withholding future federal funds normally given to California for other purposes. In off-the-record conversations with transit experts, they said claw-backs were unheard of. However, as indicated by his tweet, the President is watching this project carefully.
Note: When Prop 1A passed, it did not have any independent utility provision. It permitted high-speed rail to be built in segments. But it was clear about one thing; while any usable segment built could be used by other rail providers, it must be ready for high-speed rail service. Among many requirements, one is it must have the ridership to financially support the costs it creates which translates into “thou shalt not have an operational subsidy.” The Authority has admitted it won’t be self-sufficient for at least 4 years and that was when they had a full operational segment, not just the ‘stand-alone’ Valley segment.
Regional project support and environmental completion:
Here are some other issues:
Newsom says in his speech, "Look, we will continue our regional projects north and south. We’ll finish Phase 1 environmental work. We’ll connect the revitalized Central Valley to other parts of the state and continue to push for more federal funding and private dollars. But let’s just get something done."
First let’s talk about regional projects. Caltrain was to receive over $705 million from the High-Speed Rail project for electrification of the line per the 1029 Appropriation bill voted on in April 2012. It was designated as bookend spending, not in Prop 1A. Today we are not sure how much of that money is in their hands but it was to be dispersed to Caltrain on an as-needed basis.
In addition, Southern California had $500 million for the Rosecrans/Marquardt grade separation in Santa Fe Springs and improvements to LA Union Station. This was not included in the funding plan by HSR and this particular spending was not included in Prop 1A or the enabling legislation called AB 3034. The only dollars allocated in Prop 1A was $950 million called connectivity funds and Caltrain among other several transit agencies received those dollars already.
Environmental reports:
Unfortunately, as part of the funding agreement for the ARRA funding, the environmental work for all of Phase One from San Francisco to Los Angeles is required.
This effects the people and businesses along the route. Whether building will ever happen, a completed environmental report will hang over the head of homeowners and business owners. Trying to sell your property under those conditions will be tough since landowners will be forced to disclose. It could be years or never when the project is expanded. Remember an environmental report can be rendered “stale” and may have to be redone anyway. If funding is found 10-15 years down the road, there is a probability that the entire routing of the project could be changed.
What’s the value in building just the Central Valley Segment?
Former Senator Joe Simitian did not think it had much value. Years ago, before the first appropriation bill at the (Senate Budget Subcommittee #2: he wrote, April 18, 2012,
"If we don’t have additional funds forthcoming, if we have no more money from the feds, private investment or another bond measure, at the end of $6.2 billion we have 130 miles of conventional rail. That investment that gives us forty-five minutes off the commute time [in some cases parallel to an existing Amtrak line] and the value is $15 million a year which is not a great return on investment for $6.2 billion. Absent of additional investment, we’re left with a stranded investment with modest value."
Note today that cost for the Central Valley segment is now estimated between $12.6 -$15 billion but now including Merced, which in total is about 165 miles.
A silver lining to the scaled back project?
According to an article written by George Skelton for the LA Times there is some good to come from building the segment in the Central Valley, particularly linking the Merced section. https://www.latimes.com/politics/la-pol-sac-skelton-newsom-state-of-the-state-high-speed-rail-20190214-story.html Here is an excerpt:
"Sen. Cathleen Galgiani (D-Stockton), who originally authored the high-speed rail legislation that was eventually approved by voters, saw a glass half full."
"She says, when the $15 billion Merced-to-Bakersfield route is completed, the governor or his successor can take it another step."
"She’s excited about the train coming to Merced. Because from there, riders will be able to connect with a commuter train to San Jose over the Altamont Pass into the East Bay."
Business owners and home owners along the route in the Central Valley feel differently since they are giving up family lands for a project that will never be as sold in the Prop 1A ballot measure.
There may be good news for Caltrain in all this whoopla. Without high-speed rail activity, they can retain the capacity for expansion of their system for commuters. With high-speed rail operating on their corridor, it would have stifled growth for the commuter travel expansion since the high-speed rail trains would have taken up the capacity by 2-4 trains during commuting hours, leaving Caltrain with little expansion room. If Caltrain can get the same money from the high-speed rail project and not have to give up capacity, it would be the most ideal situation for them.
Another View:
William Grindley, co-author of over 40 high-speed rail papers including the newest one, released last month (See this article about lack of riders and therefore inability to meet operating costs) is not enamored with the governor’s decision.
"I’m puzzled by Newsomlogic (as it should be called). Newsom says “we do have the capacity to complete a high-speed rail link between Merced and Bakersfield.” But he knows all he has to spend is $3 Billion of CA money to match (not be forced to return) Federal $$."
"That [Altamont Corridor Express (ACE)] commuter train currently only goes to Stockton. But as part of a gas tax backroom deal two years ago, Brown provided $400 million to extend the rail line 61 miles to Merced."
Grindley goes on to say his co-author,
"…Bill Warren’s analysis of some months ago, showed the Authority has already spent about $5.1 Billion. When Grindley drove the route a year ago, all he saw was a bridge over the Fresno River, several isolated concrete structures that looked to be HSR fly-overs and a bit of western downtown Fresno leveled."
"So, if Newsom really did the math, he’d have understood that California has either matched the US DOT/FRA funds or is very close to matching them – AND has to spend a lot more dollars to get the full 165 miles of Merced-Bakersfield built and equipped."
"My prediction is that reckoning will come in a year or two when the contractors’ breach-of-contract lawsuits pile up, when ongoing work is halted for lack of payment and Gov. Brown’s surplus has evaporated."
Last words:
Transit experts predict we will know more of the Governor’s intent by his next moves such as if he cancels engineering planning for the San Joaquin Tunnels for which they have no money or does something to stop the cap and trade funding for the project. Neither is required in the federal contract.
We will see what the new sheriff in town, Chairman Lenny Mendonca for the California High-Speed Rail Board does to uncover the true condition of the high-speed rail project. Hopefully the new Chairman will allow the Auditor to continue examining the project and poke into important areas, such as compliance with Prop 1A’s requirement for "no operating subsidy" before making final decisions as to the fate of the project.
No doubt spending $15 billion for the Central Valley segment is better than spending $77 billion. However, without a clear plan to connect to the most populous cities in the North or the South, risking a possible claw back of about $3 billion might have been a wiser decision than facing more lawsuits for non-compliance with Prop 1A. But according to Grindley and Warren, Newsom’s plan is a "train from nowhere to nowhere with nobody on it."
