Seven Deadly Financial Facts For California’s High Speed Rail Authority

Stop CHSR

Stop CHSR

Last week a 20 page briefing paper entitled “Seven Deadly Financial Facts for California’s High Speed Rail Authority” was distributed by The Community Coalition on High Speed Rail (CC-HSR).
“CC-HSR is a grassroots, nonprofit corporation, managed by business and neighborhood leaders. CC-HSR represents businesses and residents in the communities located along the Caltrain alignment (Mountain View, Palo Alto, Menlo Park, Atherton, Belmont, and  Burlingame).”
Quoting from their Briefing Paper.

The California High Speed Rail (CHSR) project’s financial legitimacy rests on AB3034’s clause demanding no local, state or federal operating subsidy.
Despite the project’s supported social, political and environmental benefits, it is to be operated by the private sector, therefore subject to the need to be ‘cash positive’ as measured by private sector accounting rules. The project already has multiple subsidies with more to be triggered should it actually begin construction. Despite CHSRA’s claims of operating surpluses from the initial operating year, even under their best scenario, the project will generate at least $4 billion of cumulative negative cash flow in its first years of operations. If realities about revenue shortfalls or increased operating expenses affect operations, this cash flow deficit could be as high as $50 billion in the first fifteen years of operations–essentially never decreasing.

Even using CHSRA’s cost estimates, which are certainly challengeable, thirty years of debt servicing on only the Borden-Towards-Bakersfield section will cost the state over $5 billion. Servicing the debt on the Phase One plan would cost the State and local governments over $1 billion a year for 30 years. Californians of middle income or modest means will carry a disproportionate portion of the burden of the CHSRA’s unrealistic and unsustainable financial plans.”

FACT ONE- A Law Determines The California High-Speed Rail Project’s (CHSR) Financial Legitimacy–The financial legitimacy of the proposal to build high-speed in California must be measured against Section 2704.08 (J) in Assembly Bill 3034 of August 2008 which says “The planned passenger service by the authority in the corridor or usable segment thereof will not require a local, state, or federal operating subsidy.” It is the authorities legal burden to prove they have the financing to build any corridor or useable segment and the revenues and costs (operating and financial) projections are such that the segment will not require an operating subsidy. This statement becomes the point of departure to explore whether the financial plans made available to the public in the Authority’s 2008 and 2009 business plans actually meet that ‘no operating subsidy’ benchmark.

The AB 3034 provision propels the Authority into a unique situation. No US public transit or passenger rail system operates without either a subsidy to its capital development phase (construction plus equipping the system) or a subsidy to its operations; or most likely, both. A study of twenty-six US transit systems showed that fare box revenue ratios (revenue from the fare box as a percentage of operating costs) averaged about 40%. That means about 60% of those systems’ costs were subsidized. Although not strictly comparable, if the CHSR were to achieve even a 50% fare box revenue ratio, it would cost California taxpayers $2,871,000,000 or nearly $3 billion, per year by the fifteenth operating year (HSR’09 p. 71-72).

To analyze the high-speed rail project’s finances, and to then conclude it would need any operating subsidy at all, and yet continue the project would negate promises made to voters of Prop 1A in November 2008 and violate the project’s underlying legal status.”

Gilbert comments. My next HSR post will focus on FACT TWO. “Because The Private Sector Is To Operate The System, Private Sector Accounting Principles Must Prevail.”

While I have your attention let me jump ahead to fact 7.5 where it reads Wealthy Bondholders Not Only Get To Ride, They Get The Tax Breaks-

“Another subsidy to the wealthy is through their tax exempt investments in the Prop 1A bonds. Many  poor and middle class Californians must have voted for Prop 1 A for it to have won that election. As one of the few tax shelters left for high-net-worth investors, tax-exempt bonds are subsidies to the large institutions and wealthy individiuals. This is both a subsidy and a transfer of wealth from the State’s redistributive policies such as for public education, health or social services. Instead of collecting the taxes that accrue from the investment  in CHSR, the exemption is generally to institutional buyers or people with enough savings to purchase GO bonds in tranches of at least $5,000 each. If  fares for the train end up costing even as little as the Authority claimed in 2009, $105 one way between SF and LA, that would be a double insult for families of modest means–a train for the wealthy paid in part by allowing the wealthy to exempt taxes on their California-guaranteed bond investment.

Perhaps it’s time to reconsider the CHSR project. In  a state with the nation’s second highest indebtedness, and nearly highest tax burden, the new debt servicing costs and subsequent taxes to support CHSR’s operations–plus their disproportional impacts on the less affluent–might not ‘sit well’ with the populace.”

In closing  part one. This HSR issue is huge. We need to win the hearts and minds of California’s taxpayers, especially in light of the tough challenges faced by our new governor. The last think he needs on his plate today is the potential for ever increasing bonded indebtedness while trying to reduce our massive deficit.
The action item for everyone reading this report is to contact your elected officials from city hall to Sacramento and urge them to apply the brakes.
As you can see from my source document there is opposition to CHSR in the Bay area, not just those of us living in Orange County.


About Larry Gilbert