Last summer, when promoting “Proposition 1A, the Safe, Reliable High-Speed Passenger Train Bond Act for the 21st Century” as a $40 billion, 800 mile high speed train system from Southern California to the Bay area the California High-Speed Rail Authority, CHSRA, made some assumptions that already are out of sync with the governor’s application for federal funding.
In their promotional materials the CHSRA stated that the financial strategy “relies on three sources–state and local funding, federal financing, and “P3″–public -private partnerships.”
Under Federal Funding we were told that “Federal funding is projected to provide 25-33 percent of the construction costs–from $10 to $12 billion.
That flyer also states that “by law, state funds will not be made available until matching funds from additional non-state sources are obtained.”
CHSRA projected “public-private partnerships will comprise $4.5 to $7 billion of initial investment opportunities, including project debt financing, vendor financing, system operations and private ownership.”
Time out! How much Federal funding did the governor just apply for?
At the recent conference in LA it was reported that “governor
Schwarzenegger said California deserved to get more than half of the $8 billion in federal stimulus money set aside for high-speed rail development because it is further along in planning than other states and is ready to break ground in 2011, a year before the federal deadline for getting the money.” Note: His application for $4.7 billion is less than half of the needed Federal funding as projected by CHSRA which is quoted above.
Also, (governor) Schwarzenegger said “those stimulus dollars will go further in California than in any other state because California has pledged to match — dollar for dollar — all money received” from the federal government….
Note: Another illustration of spin. By law, we must come up with “matching funds” as stated above.
I get dizzy every time I read another comment on their biased flyers. Case in point.
“California’s high-speed train system will generate $1 billion in annual revenue surplus and require no taxpayer operating subsidies.” Notice the failure to spell out a timeframe for this windfall. I’m not from MO but pleeeze. No subsidy? And while the concept of public-private surely has merit, are you saying that investors are not looking for a reasonable ROI on their investment?
In my Oct 5th report I quoted Martin Engel, transportation commissioner from the city of Menlo Park, who said that “the ticket price that is most frequently quoted is $55 one way from SF to LA (in 2030).”
Let me bring us to my east coast roots or it routes where you can currently ride the Amtrak high speed Acela train.
“WASHINGTON – Beginning March 3, Amtrak will offer a new low fare on its premier Acela Express trains, saving passengers up to 25 percent on previous lowest fares. Now available for purchase, Acela Business class tickets will be priced as low as $99 between Washington, DC (WAS) and New York (NYP), and $79 between New York and Boston (BOS).The new low fares are available for purchase now for travel between March 3 and June 26. A 14-day advance purchase policy applies, and availability is limited. The tickets are one-way and nonrefundable, but can be exchanged. Tickets purchased at the low fare are not eligible for an upgrade to First class accommodations. Until now, the lowest fare available on Acela between WAS and NYP was $133, and $93 between BOS and NYP.”As Amtrak becomes an increasingly popular way to travel, these new low fares on Acela will make our flagship service more affordable for business and leisure travelers,” said Emmett Fremaux, vice president of marketing and product management.’
Let’s now do the math. The distance between SF and LA is roughly 350 miles with a projected 2030 fare of $55 while the distance between DC and NYC is only 225 miles yet the 2009 cost of that ticket is $133. NYC is 220 miles south of Boston yet the 2009 Acela fare for that run is $93. Whose pulling the wool over your eyes?
Here is another report on the Acela high speed trains. ”
Cost: The lowest fare found on Acela Express was $88 each way from New York to Boston. Between Washington D.C. and New York, we found $146 each way on Acela.”
“Travel Time: For Acela Express service, plan on about three hours between Washington D.C. and New York, about seven hours between Washington D.C. and Boston and about three and a half hours between New York and Boston.”
When you read reports of speeds exceeding 200 mph you might inquire if those are express trains that do not stop along the proposed route. i.e. One train will travel from Sacramento to Irvine making the following possible stops. Stockton, downtown Modesto, downtown Merced, Fresno, Visalia, Bakersfield, Palmdale airport, Sylmar, Burbank, LA, Norwalk, Anaheim and Irvine.
Amazing. Voters in California are upset that the state legislature and our governor cannot balance a budget yet vote for Bond Measures that must be paid off with our tax dollars for decades to come that might have been utilized to save programs.
It’s like having a credit card that says buy now and pay later. Go figure.
Let me close by reporting that the majority of voters in both Riverside and San Diego counties opposed Prop 1 A last year yet may see state funding shortfalls based on this massive project that will surely be way over budget if it ever get’s rolling.
Keep it coming Larry! I am going to run for State Controller and I greatly appreciate you putting the facts together on this issue!
You are aware that you can extrapolate from ARRA requests to see that cost estimates for the Anaheim section have gone up from $1.994 billion in the November 2008 Business Plan to about $5 billion. The only question is why this hasn’t hit the papers yet.
Some facts about CHRSA that you might find of interest. I live in Menlo Park, the city that Kopp and Dirdion and their CHRSA flunkies want to cut in two with a 40 ft. high berm for HSR. Send me an e-mail address and I will send a better formatted Word file with the following:
About the Author: Elizabeth Alexis worked as an investment banker for several years, graduated from Yale and has completed course work for a PHD in Economics from Stanford
2008 California High Speed Rail Authority Business Plan Comments
June 7, 2009
Prepared by Elizabeth Alexis (ealexis@gmail.com)
Page 1 of 7
Comments on the 2008 California High-Speed Rail Authority Business Plan
The California High Speed Rail Authority (“CHSRA”) has made a number of promises to the California State legislature and the public.
1) The project will not require any additional public funding on the state level beyond the $9 billion bond that taxpayers recently approved.
2) Operating profits will finance the construction of phase 2 extensions up to Sacramento and down to San Diego as soon as phase 1 segments (the San Francisco to Los Angeles/Anaheim portion) are complete in 2020.
3) The one-way cost of a ticket from San Francisco to Los Angeles will be $55.
Unfortunately, the current CHSRA 2008 Business Plan itself does not support these contentions.
Based on the proposed construction schedule, the $9 billion in bonds authorized by the passage of Proposition 1a in November are only worth $6.9 billion in 2008 dollars, leading to a $2.1 billion funding shortfall.
The contingency reserves included in construction cost estimates may not sufficient.
There are no reserves for operational ramp-up, even though the operational plan acknowledges that only 2/3 of the trainsets will be required for the first year of full operation.
Costs of servicing revenue bonds will use up a substantial portion of net operating revenues but are not included in any calculation. Even after 10 years of full operation, only $239 million would be available annually for expansion to Sacramento and San Diego after accounting for the costs servicing the revenue bonds.
The actual fare used in the Business Plan for a San Francisco to Los Angeles one-way ticket is $68. The $55 fare was a 2005 number.
The Business Plan itself demonstrates that a fare of $104 results in higher net revenues and lower capital costs. If the state is committed to a lower fare structure, that will place significant limitations on the types of private investment the project will attract. Even if the fares are set by a public entity, there will be tremendous pressure to maximize operational revenues by setting fares at the higher level.
There are other substantive issues with the Business Plan but, at a minimum, the plan should lend support to the expectations that have been set. The success of this project hinges critically on the continued support from the public and the legislature. The gap that currently exists between the expectations and the Business Plan poses a threat that needs to be addressed.
The Business Plan assumes that California will be able to increase the notional amount of bonds for inflation, but the bond authorization has no inflation protection
2008 Business Plan Comments
Draft June 7, 2009
Prepared by Elizabeth Alexis (ealexis@gmail.com)
Page 2 of 7
The plan is entirely in terms of 2008 (inflation-adjusted) dollars. For many parts of the Business Plan, this is very appropriate.
Using real dollars is a problem for one aspect of the plan. Proposition 1A authorized $9 billion in general obligation bond issuance. Not $9 billion, increased for inflation, but $9 billion regardless of when the bonds are issued.
The current figures mixes together some costs and funding sources that can be adjusted for inflation and funding from the bonds that cannot. This is inaccurate. If there is ANY inflation between 2008 and the year of expenditure of the bond funds, there will be a shortfall.
The result is that the money raised from the sale general obligation bonds may be a smaller portion than currently planned of the overall financing.
The financing plan needs to discount the value of the monies available from state bonds for anticipated inflation.
Using the inflation number of 5% that CHRSA Board Member Rod Diridon has stated in recent public remarks and the schedule for using the bond proceeds in the Business Plan, the value of the $9 billion in bonds that will eventually be sold is closer to $6.9 billion in 2008 dollars. This leaves a gap in the financing plan of $2.1 billion.
The good news for the taxpayer that the cost to them in 2008 dollars will be much lower than the $9 billion headline number is obviously offset by the challenges of finding additional funding.
Recommendation: Figure 26 on page 21, figure 27 on page 22 and relevant calculations should either discount funds from state bond amounts or inflate all other numbers and leave state bond amounts constant. It would also be helpful to have a sensitivity analysis for inflation rates and changes in construction dates.
No reserve for operational ramp up
While phase 1 of the project, the route from San Francisco to Los Angeles/Anaheim, is planned to be fully in operation by 2020 with certain segments in operation prior to that date, the Business Plan does not reveal operational cashflow information prior to 2030.
While the eventual sustainability of the system is important for many reasons, there should be a year- by-year estimate of cashflow starting with the first year of revenue operation. While this exists for capital expenditures, it is missing for operational expenses.
All new high-speed rail systems have taken a number of years to reach full capacity. The Business Plan anticipates this by only requiring 2/3 of the eventual number of trainsets to be purchased by 2020. The remaining trainsets would be bought over the next five years.
2008 Business Plan Comments
Draft June 7, 2009
Prepared by Elizabeth Alexis (ealexis@gmail.com)
Page 3 of 7
It is very likely that there would be losses incurred in the first couple of years during ramp up. The Business Plan itself notes that segments will become “‘self supporting’ over time and not require an ongoing operating subsidy”. [Emphasis mine] There is a clear implication that there will be an additional cost for system ramp up1.
The lack of a reserve for the initial years of revenue service is problematic for several reasons. First, it obviously creates a funding gap. Second, the failure to assume some time to ramp is a well-known reason that many transit systems fail to live up to expectations. The reaction is often to hike prices and cut service to minimize losses, which then limits the eventual success of the system.
Recommendation: include an operational net revenue estimate starting with first year of revenue service. Include an operational reserve for first year(s) of operation.
Net revenue calculations do not include the $500 million to $1 billion annual cost of revenue bonds.
Public Private Partnerships (P3) are expected to provide $6.5 – 7.5 billion in financing for High-Speed Rail. While the funds from P3 are likely to be loans of some kind, the costs for servicing that debt have not been quantified.
The form of the various financing mechanisms discussed in the Business Plan and at CHSRA board meetings may play an important role in terms of aligning contractors incentives with those of the California taxpayer and providing an avenue for funding that would not require voter or even possibly legislative approval.
The function, however, is the same as bonds. Some forms of P3 like revenue bonds are explicitly bonds and others like vendor financing of trainsets are loans. Private entities would lend money upfront, but would then expect their money back with interest. In addition, according to the Business Plan, payback from profits would require state guarantees because of the green fields nature of this project (as to opposed to a project like an existing toll road where much more certainty exists about revenues).
Specific language was even added to the legislation passed last year that put High-Speed Rail on the ballot (AB 3034) to allow for interest and principal payments for revenue bonds. The language makes clear that these payments would be prioritized above expansion of the system.
“Revenues of the authority, generated by operations of the high-speed train system above and beyond operating and maintenance costs and financing obligations, including, but not limited to, support of revenue bonds, as determined by the authority, shall be used for construction, expansion,
1
2008 Business Plan Comments
Draft June 7, 2009
Prepared by Elizabeth Alexis (ealexis@gmail.com)
Page 4 of 7
improvement, replacement, and rehabilitation of the high-speed train system.” [Emphasis mine]
So while the costs of servicing revenue bonds or other types of P3 funding were clearly anticipated by the CHSRA, the costs are never quantified in the Business Plan2.
Depending on a number of factors, these costs will be a substantial amount – anywhere from $500 million to $1 billion per year.
The decision not to quantify the debt servicing costs means that the net revenues presented in the Business Plan are significantly overstated and potentially misleading.
HST Ridership
Fee Structure 50% of Airfare (millions)
HST Ridership
Fee Structure 77% of Airfare (millions)
Revenue $2,355 $2,562
Operations & Maintenance Costs $1,284 $1,160
P3 Financing Costs $834 $723 Net Revenues, excluding financing $1,071 $1,402 Net Revenues, including financing $237 $679
Less than half the publicized net revenues will be available to fund capital expansion. Using the 50% of airfare fee structure, the system after being operational for more than 10 years would only generate $237 million in excess revenues for new construction.
If eventual system profitability falls short of the 45-55% net operating margins currently assumed, High-Speed Rail might require operating subsidies as the revenue bonds will likely require guarantees from the state.
Even if the network meets its ambitious goals, net revenues would not likely cover debt servicing costs in the first several years of operation. While there are several ways to handle this situation, the Business Plan does not address this issue at all.
Recommendation: update figure 16 on page 17 to include an expense category for P3 financing costs. Use the new net operating revenue numbers for cashflow analysis overtime. Determine strategy to cover debt repayment in early years of operation and include the impact in any cashflow analysis.
Significant known costs not itemized in construction estimates
2 They are mentioned once in passing during a discussion of net operating revenues but they are not quantified. This is surprising as they can be easily calculated, given standard market assumptions, and they are a substantial (more than 50%) portion of the expected net operating revenues.
2008 Business Plan Comments
Draft June 7, 2009
Prepared by Elizabeth Alexis (ealexis@gmail.com)
Page 5 of 7
The capital cost estimates prudently include a significant contingency reserve. A construction contingency reserve typically accounts for unforeseen circumstances. In this case, however, the reserve is expected to cover both the traditional types of unexpected expenses inherent to construction as well as expenses that would typically be itemized, even for a project at this early stage of design.
The cost estimates in the Business Plan are derived from the earlier round of environmental review. Policy decisions were made then to exclude the calculation of certain project costs deemed not relevant for the purposes of determining the feasibility of a route, even when cross-sections and initial engineering work clearly indicated additional cost categories.
In a brief filed as part of ongoing litigation, CHSRA indicated that while costs for things such as acquisition of land for staging construction were not explicitly included in the construction estimates, they were accounted for as part of the contingency.
There are so many such items that it calls into question whether the contingency reserve will be sufficient to cover all the costs.
The basic plan for the San Francisco- San Jose corridor is to add two or more tracks to the existing Caltrain commuter train corridor. A commitment has been made to keep Caltrain fully operational during construction.
The current construction contingency reserve is approximately $800 million for the corridor.
Not itemized in the San Francisco-San Jose corridor:
Payment for key elements of the Caltrain 2025 plan as per a Memorandum of Understanding dating from 2004. (>$1 billion)
Cost of rebuilding 122 existing train crossings. While the costs of construction of 47 new automobile grade separations are included in estimates, the CA Public Utilities Commission website lists an additional 122 train crossings in the Caltrain corridor. Many of these will need to be substantially rebuilt to accommodate additional tracks. In some cases this will be fairly minor but in other cases, like the San Antonio Road interchange in Mountain View, there will be significant costs incurred. (>$500 million)
Costs for acquiring Right-of-Way (ROW). There are certain sections of the Caltrain ROW that are narrower than the project requirements. There no costs for acquiring ROW in the cost estimates. (?)
Costs for temporary ROW during construction. While CHSRA has acknowledged that current plans would require additional ROW during construction, they have explicitly stated this would be covered by the construction contingency. (?)
Reconfiguration of 19 Caltrain stations. All commuter stations for which there is no expected High-Speed Rail station will need to be substantially reconfigured to accommodate two extra tracks. (>$400 million)
2008 Business Plan Comments
Draft June 7, 2009
Prepared by Elizabeth Alexis (ealexis@gmail.com)
Page 6 of 7
While it is possible that the contingency is overly generous for other sections, a review to ensure that the contingency amount is appropriate is in order.
Recommendation: explicitly list known but not estimated expenses included within the contingency.
The Business Plan assumes a one way fare in 2008 dollars between SF and LA of $68-$104, not $55
According to the Ridership and Revenue forecast, the source document for the Business Plan, the fares used to generate the revenue forecasts were $68 and $104 for the 50% and 77% of average airfares pricing structures respectively. The widely quoted $55 fare was a 2005 number.
While the Business Plan itself is careful not to mention any particular fare, the California taxpayer is clearly under the impression that a $55 fare is planned.
This is reinforced by media interviews by CHSRA board members. For instance, Quentin Kopp said in a National Public Radio interview on February 24, 2009:
“A trip from San Francisco to Los Angeles, which is about 410, 420 miles, will take two hours and 38 minutes with a one-way fare of $55. That’s about half to one-third the cost of a plane ticket for a comparable trip.”
This particular article was even posted under the news section of the CHSRA website.
The revenue projections are extremely sensitive to the fee structure. Extrapolating from the numbers that are provided, a $55 fare would only be 40% of average airfares and not result in positive net operating revenues.
Recommendation: The Business Plan should disclose actual numbers for the assumed fares. Board members and CHSRA contractors should be notified about the current numbers and use those in public remarks.
Ticket prices that are 40% higher than current assumed fare structure generate higher profits and require lower capital investment.
Based on the numbers in the Business Plan, a fare structure of 77% of airline fares ($104 for a one-way San Francisco to Los Angeles ticket) will provide net operating profits that are much higher than the widely advertised fare structure of 50%, as well as require $1 billion less in capital expenditures for train sets.
While the Business Plan offers the raw numbers required to calculate the profitability of the two different fare structures, it does not actually include these important data points.
2008 Business Plan Comments
Draft June 7, 2009
Prepared by Elizabeth Alexis (ealexis@gmail.com)
Page 7 of 7
HST Ridership
Fee Structure 50% of Airfare (millions)
HST Ridership
Fee Structure 77% of Airfare (millions)
Revenue $2,355 $2,562
Operations & Maintenance Costs $1,284 $1,160
P3 Financing Costs $834 $723 Net Revenues, excluding financing $1,071 $1,402 Net Revenues, including financing $237 $679 One way fare from SF- Los Angeles $68 $104
There is obviously a tradeoff between higher operating profits that would allow more rapid expansion of the High-Speed Rail network and the higher numbers of passengers expected with a lower fare structure.
A policy decision needs to be made about whether the benefits of attracting more passengers is worth the roughly $30 per passenger reduction in net revenues.
A private operator or even a public one would be expected to choose the 77% fare structure if there were not specific restrictions or incentives to choose the less profitable 50% structure.
Many of the private firms interviewed about participation in the High-Speed Rail project expressed concerns if they were not able to set fares.
Recommendation: Choose one fare structure and calculate all numbers to be consistent with it. If the 50% fare structure is chosen, include suggestions of types of safeguards to ensure that this fare structure would be implemented.
More interesting data:
If California actually builds High Speed Rail, it will be stuck with a poorly planned rail system that will never come close to generating projected profits to pay off state bonds. This project will drive our financially troubled state over the edge into bankruptcy. Very simply California High Speed Rail will require billions of dollars in subsidies every year since it will never make a profit based on passenger ticket sales.
Here are some key facts about high speed rail in California:
• The California High Speed Rail Authority Business plan projects the system will pay off bonds by carrying 57,000,000 passengers per year along the first phase SF/LA segment. As a point of reference Amtrak carried 10,897,852 passengers in 2008 on Acela Express and all other service in the busiest travel corridor in the US. The Northeast Corridor has nearly twice the population (38 million for the Northeast vs. 21 million for SF-San Diego). The Northeast also has cities with centers meaning that when the train arrives, you can easily get to hotels, offices and convention centers by walking or using mass transit. SF is the only city in California with a center. Does anyone rational person think High Speed Rail in California can attract 5-times as many passengers as the Northeast Corridor?
• The 2008 California High Speed Rail Authority Business Plan (the latest version) is filled with major, glaring errors. Just one example is that the Directors of the authority have given speech after speech saying their revenue and passenger projections are based on a $55 one way fare. Yet the business plan uses a $68 fare for revenue projections. That is a 24% error. The business plan is filled with even bigger errors. Following is an independent analysis of the 2008 California High Speed Rail Business Plan prepared by a Stanford University economics PhD student. It provides details on hundreds of millions of dollars in “forgotten” items and just plain math errors that understate costs and overstate revenue.
• California voters approved (barely by 52% to 48%) $9 billion in general obligation bonds for High Speed Rail before any of the details about the plan were made public.Once the California rail bonds are sold, according to the legislative analyst, the state will have to start repaying $647 million per year starting in 2010. The only problem is that California doesn’t have $647 million for the bonds. The state is technically bankrupt as the 2010 FY budget was approved based on the understanding that an additional $1 billion would be cut from the prison system budget. That has not happened and the state is in violation of its own constitution which requires a balanced budget. Another $1 billion was “found” by using quasi-legal revenue recognition scams such as changing the date that estimated taxes were due from the last day of the 2009 FY to the first day of the 2010 FY.
Here’s what Amtrak reported:
“In FY 2008, Amtrak earned approximately $2.45 billion in revenue and incurred approximately $3.38 billion in expense. Amtrak’s Northeast Corridor is the busiest railroad in North America, with more than 2,600 trains operating over some portion of the Washington-Boston route each day.“
http://www.amtrak.com/servlet/ContentServer?c=am2Copy&pagename=Amtrak%2Fam2Copy%2FTitle_Image_Copy_Page&cid=1081442674300
Metro Area Population Tourist Rooms Sold (In millions)
Boston 4,522,858 11.7
New Haven 846,101
NYC/NJ 19,006,198 23.9
Philadelphia 5,838,731 10.2
Baltimore 2,667,117 6.6
DC 5,358,130 22.8
Totals 38,239,135 75.2
SF/Oakland 4,274,531 13.4
San Jose 1,819,198
LA 9,862,049 25.5
Anaheim/OC 3,010,759 13.9
San Diego 3,001,072 14.2
Totals 21,967,609 67
Source: US Census http://www.census.gov/popest/metro/CBSA-est2008-annual.html Source: Forbes Magazine http://tinyurl.com/m8j85t
Distances
Boston to DC 399 Miles
SF to San Diego 461 Miles
M. Mazner.
Thank you for the detailed information provided above.
I will make sure that Anaheim Mayor Pringle get’s to see this data which comes directly from the 2008 Business Plan not a figment of your imagination.
I also like your off-line comment about the 90 second passenger stops.
I need to document the max travel time of 2 hours and 40 minutes from SF to LA.
As that distance is around 350 miles, and this new train will travel at speeds exceeding 200 mph, that should be a piece of cake.
Piece of cake that is if you at the Bonneville Salt Flats in Utah with no other crossing traffic or in this case no train stops along the route.
After all a 2010 XFR Jag was clocked at Bonneville at 225 mph
Fact check. Thanks for the input. I will try to get the latest cost projections from LA to Anaheim as expressed by yourself above.
for more good facts that you’ll never hear from the Rail Authority check out: http://www.hsr-letsdoitright.com — it’s a community website from the SF Bay Area. Check out the tab labled: Get the Facts.
Folks. I did read the following in preparing the post but will now add that “examples of high speed train travel times” includes several destinations including “LA to SF at 2 hours and 38 minutes.” I don’t read that to lock in a max travel time for the trains.