City Journal Autumn 2014

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Autumn 2014
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California

Chris Reed
Rail’s Hollow Victories
Budget and court wins give false hope to California’s bullet-train boosters.
3 September 2014

Recent headlines have given true believers in California’s embattled $68 billion bullet-train project a feeling of redemption. The state budget passed in June gave the California High-Speed Rail Authority (HSRA) its first infusion of state funds in years—a $250 million cut of fees from the state’s nascent cap-and-trade program. And on July 31, a state appellate court reenergized the bullet-train project by reversing a lower-court ruling preventing the HSRA from breaking ground using funds from Proposition 1A, a $9.95 billion state-bond measure voters approved in 2008.

Dan Richard, the rail authority board’s combative chairman, was exultant in media interviews and in calls to lawmakers about his agency’s big summer. “The rest of the developed world has moved energetically to adopt high-speed rail. We will too,” he told Capitol Weekly. Richard also found an unlikely admirer in The Atlantic’s James Fallows, a native Californian who embraced the project from his East Coast perch. But this redemption narrative has serious flaws. Governor Jerry Brown’s $250 million cap-and-trade “victory” was notable mostly for how hard he fought fellow Democrats to secure a sum equivalent to 0.4 percent of the rail project’s cost. Prominent Democrats, including state senate president Kevin de Leon and Lieutenant Governor Gavin Newsom, are openly skeptical of the train’s chances of ever running, let alone running on time and on budget.

Budget realities could derail the train quickly. By decade’s end, the state must find $4.5 billion a year to cover a bailout of the California State Teachers’ Retirement System. The state’s dominant political players—the California Teachers Association and the California Federation of Teachers—won’t likely allow this money to come from the general fund’s education budget. Money for the bullet train and just about every state program will be ripe targets for the CTA and CFT.

Another HSRA “victory” was actually more of a media stunt. The agency touted several letters from corporations purportedly showing interest in financing the bullet-train project. In reality, the letters more accurately depicted corporate interest in bidding for contracts. The San Jose Mercury News highlighted France-based Vinci Concessions as chief among the firms interested in helping with financing, but the company has a long history as a bullet-train contractor and a slight record as a co-financier—as its typical contracts show. The language of Proposition 1A forbids any state subsidies, which means the state cannot offer investors the sort of revenue guarantees that governments usually dangle when establishing public-private partnerships.

And the last “victory” is no victory at all. The appeals court that vacated Sacramento Superior Court Judge Michael Kenny’s ruling to block the project did not say that Kenny’s conclusion that the HSRA violated Proposition 1A was wrong. Instead, the decision held that a trial judge had no authority to block construction until the legislature and the High Speed Rail Authority approved a final business plan. “The scope of our decision is quite narrow,” the judges wrote in the first paragraph. The decision went on to reinforce two key protections contained in Proposition 1A—both meant to ensure that the state didn’t spend billions on initial construction only to run out of money before a financially viable train system could be built. Judge Kenny ruled that the state had to identify “sources of funds that were more than theoretically possible” in explaining how it would pay for the project’s $31 billion, 300-mile initial operating segment. He also said that the HSRA had to complete environmental reviews for the entire segment before construction could begin. The appeals court contradicted him on neither point.

The appellate court underscored that the law requires the state to establish “financial viability” for the bullet train’s first segment by adhering to a voter-approved “financial straitjacket.” It said that bond funds could only be spent after a funding plan gained approvals from the state finance department, the Joint Legislative Budget Committee, and an independent financial analyst who certified the plan’s soundness—specifically that if built as planned, the bullet train could operate without a taxpayer subsidy. The appeals court judges also agreed with Judge Kenny that the rail authority had to obtain “all the requisite environmental clearances before construction begins.”

These are shortcomings that Brown or Richard cannot easily finesse. The state has less than $10 billion left from Proposition 1A and from federal stimulus funding. The prospect of obtaining additional federal funding from House majority leader Kevin McCarthy, a Bakersfield Republican and ferocious critic of the project, is virtually nil. And the HSRA reportedly has 10 percent of the necessary environmental clearances in hand—and a long list of lawyers lined up to fight future reviews.

Bullet train cheerleaders may be excited now, but Proposition 1A’s financial safeguards (and California’s budget problems) remain formidable obstacles. Richard, Governor Brown, and others shouldn’t call “all aboard” just yet.

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