Funding questions loom over high-speed rail’s new plan

Seeking to comply with a legislative requirement, the agency charged with building California’s high-speed-rail system on Monday released an updated business plan that offers upgraded ridership projections, revised construction plans and very few answers on the critical question of how the system will be funded.

The business plan, which was a requirement of the appropriation bill the state legislature passed in 2012, serves as an upgrade to a plan that the rail authority submitted two years ago.

Though the 2012 plan alleviated some concerns in Palo Alto and along the Peninsula by scrapping the highly contentious proposal for a four-track system (with Caltrain on the outside tracks and high-speed rail inside) in favor of a more palatable two-track one (in which the two agencies share the same tracks on the Peninsula), the document was criticized by local officials, watchdogs and one Sacramento County judge for failing to disclose how the California High-Speed Rail Authority plans to pay for the first usable stretch of the $68-billion line.

Known as the “initial operating section,” this portion of the line would stretch from Merced to San Fernando Valley and would cost about $31 billion, according to the rail authority’s new estimate.

The new plan, like the prior ones, leaves this question of how to pay for this segment largely open. Though it keeps the price estimate for the full line at $68 billion, the same as in the 2012 plan, and introduces a new funding mechanism supported by Gov. Jerry Brown, it fails to account for more than $20 billion in funding that the first segment needs and doesn’t yet have.

So far, the rail authority has roughly $6 billion committed to constructing the first portion of the line, a 29-mile stretch between Madera and Fresno that would not have any actual trains.

The agency’s failure to identify funding sources for the usable segment prompted Judge Michael Kenny to conclude in November that the rail authority acted in violation of Proposition 1A, the $9.95 billion bond voters approved for the rail system in 2008. Kenny ordered that the rail authority rescind its business plan.

In a separate ruling, he also denied the rail authority’s request to validate $8 billion in bond expenditures, saying in his ruling that he was not convinced by the process in which state officials vetted the rail authority’s request for funding.

The rail authority’s business plan is unlikely to satisfy Kenny’s concern. Though it includes upgraded methodology for calculating ridership and revenue projections and remains as optimistic as ever about the rail line’s financial viability, it provides only the faintest indication of where the $20 billion would come from.

The agency, which in late January appealed Kenny’s ruling, is preparing to use $3.3 billion in committed federal funds and about $7 billion in Proposition 1A funds, of which $4.2 million has already been allocated. This leaves a $21-billion budget hole that the rail authority hopes to fill with private investments that have yet to materialize and proceeds from the state’s cap-and-trade program, which are included in Brown’s proposed budget but have yet to be approved by the Legislature.

Even if the cap-and-trade proceeds are ultimately allocated for the rail project, the $250 million that Brown proposed to dedicate to high-speed rail would come nowhere near filling the chasm between the how much the project has for the first segment and how much it would need. Yet the new business plan argues that the ongoing commitment of these funds is “important in several key respects, both for enhanced transportation and the reduction of greenhouse gas emissions through electrified train service.”

The rail authority also expects this new funding source to bring in private investment, a key component of all prior business plans. The new business plan states that the commitment of state funding will “allow the Authority to leverage both public and private financing and, depending on the level of commitment, potentially finance the completion of the IOS.”

The 2014 business plan also includes an expanded section on risk and new methodology for calculating risk through a simulation tool called the Monte Carlo risk analysis. The technique used in the 2014 plan, is “fundamentally different from that used in 2012, and represents a much more comprehensive methodology.”

The result, however, is pretty much the same. Once again, the business plan argues that the system will be financially viable and “will not require an operating subsidy, consistent with other systems around the world.”

The ridership forecast estimates that 10.4 million passengers will ride the rail system in 2025 under the “medium” scenario and that the number will gradually increase over the years, reaching 38.5 million riders in 2060. The business plan notes that the updated numbers how a higher ridership than previously projected, “on average, approximately 25% higher in the Medium scenario.”

Projected farebox revenues follow a similarly upward track, gradually rising from $801 million in 2025 to $7.9 billion in 2050. Overall revenues are lower in this plan than in the 2012 version largely because riders are expected to take shorter trips than was previously projected. Even so, the plan predicts that the system would be financially feasible.

In a statement, rail authority CEO Jeff Morales said the new plan maintains the “core elements” of the 2012 version, “a better, faster and cheaper high-speed rail that forms the backbone of a statewide rail modernization program.”

“The updated forecasts and analyses continue to show that, as the system develops over time, it will generate financial value through positive net operating cash flow and attract private investment,” Morales said.

The plan is still in draft form. Anyone wishing to comment on the document can fill out an online form on the business plan website or email 2014businessplancomments@hsr.ca.gov.