High-speed rail project: A serious financial drain on California

Photo: Rich Pedroncelli

From the East Bay Times:

The board that oversees California’s $64 billion high-speed rail project approved plans Tuesday that pave the way for the first major sale of voter-approved construction bonds for the project in years, as opponents announced the filing of another lawsuit that could again stall its construction.

The high-speed rail board approved $3.2 billion in funding Tuesday for two segments: $2.6 billion for a 119-mile leg connecting Fresno to Madera and $600 million to electrify a 55-mile stretch of existing Caltrain tracks in the San Jose Peninsula that will eventually connect with high-speed rail. The money is needed so the state meets its obligation to “match” federal funding but had been tied up in litigation for several years.

The funding will come from nearly $10 billion that voters approved for a California high-speed rail project as part of Proposition 1A in 2008, then projected to cost $40 billion...

Rob's comment:

When all those "nearly $10 billion" bonds---actually, $9.95 billion---are sold, they will cost state taxpayers dearly:

While the measure allows for bonds to be issued with a repayment period of up to 40 years, the state's current practice is to issue bonds with a repayment period of up to 30 years. If the bonds are sold at an average interest rate of 5 percent, and assuming a repayment period of 30 years, the General Fund cost would be about $19.4 billion to pay off both principal ($9.95 billion) and interest ($9.5 billion). The average repayment for principal and interest would be about $647 million per year (emphasis added).

What is happening now is exactly what the project's critics warned about years ago. From The Financial Risks of California’s Proposed High-Speed Rail Project, October 2010:

...Twenty-three months after Prop 1A no private lenders have come forward with an arms-length proposal for the $10-12 billion earmarked from that source. To not have secured one private lender’s commitment in a state that houses the world’s largest and most successful risk capital companies speaks volumes. Why the CHSRA finds itself in this predicament after spending over a quarter-billion dollars of State of California monies is answered by one word: credibility. 

The Authority successfully sold voters on a new mode of transport that would cost ‘only’ $33 billion and would allow them to travel in less than three hours from Los Angeles to downtown San Francisco at a cost of $55 for a one-way ticket. A year later the capital costs had risen by $10 billion and the publicly advertised ticket price was $105. Similarly, the financial model went from ‘not costing taxpayers a penny’ to the need for a legally prohibited subsidy, now called a revenue guarantee. Those changes gnawed at the CHSR project’s credibility. 

Many rail experts had long questioned the plausibility of what the CHSRA was selling. The next credibility gap came when hard questions were asked about the Authority’s ridership model. To independent transport economists the forecast of 39 million annual riders for a de novo system in its tenth operating year stretched beyond their imagined possible outcomes. 

Ridership forecasts on both transit and high-speed rail mega projects around the world are known to be overestimated, and most with serious financial consequences. Since the CHSR must operate without a subsidy, the predictions should have been on the conservative side. To propose that four of every five Californians would ride the CHSR in 2030 is not plausible. Consequently, the CHSRA has faced challenges in both the popular and professional press for the credibility of their ridership forecasts. 

CHSRA’s ticket pricing assumptions were also scrutinized. We found that by using higher than publicly available price estimates for air transport and then pegging the CHSR ticket price at 83% of the average air ticket price, the CHSR model could always achieve a price advantage over air travel options. But these assumptions do not reflect the reality of personal or corporate budget choices, nor does the CHSRA’s model reflect realistic choices for driving with several passengers. 

To achieve the forecasted ridership levels, the system would need more passengers and a cheaper per ticket cost. But assuming a higher than realistic airfare, and pegging the CHSR ticket at a percentage of that higher airfare is not a credible approach. We know that every high-speed rail system in the world is subsidized. Only two segments worldwide, one in France and one in Japan, supposedly break even. 

By looking at the ticket prices for five routes in Japan, we found that the CHSRA’s ticket pricing model used the same per passenger mile rates as Japan’s Shinkansen system---$0.24/mile. The only supposedly break even French TGV segment, Paris-Lyon, charges $0.399/mile, two-thirds higher than the CHSRA’s pricing model input. One might build CHSR, but in order to be profitable ticket prices would have to be much higher---80% higher---and higher ticket prices mean fewer passengers will ride. Fewer passengers mean even less probability to operate without the prohibited subsidy[see pages 8 and 9]. 

Assumptions about the CHSR’s revenues and operating expenses, coupled with their ridership forecasts, produced their projected operating surpluses---claimed to be $370 million in their first operating year, 2020. Since there is no publicly available edition of the CHSRA’s financial model, we constructed one based on the same revenue and expense assumptions provided in their 2009 Business Plan. 

As the Authority did, we also focused on cash flows. Our model tells us that unless the full $18-19 billion is a non-repayable gift from the people of the United States, and the CHSR achieves 100% of its revenue and operating cost forecasts, the project will never achieve positive cash flow. This finding stands in stark contrast to the Authority’s October 12, 2010 assertion of an operating surplus in its first year of carrying passengers. 

Similarly, any other mix of bond or equity financing to cover a portion of the $18-19 billion will cause the CHSR project to accumulate negative cash flows with grim consequences for the State’s treasury. 

Other forensic analyses of the CHSRA’s finance statements showed that insurance, inflation, labor, maintenance and fuel costs were either poorly calculated or assumed to be minimal in contrast to generally accepted accounting practices. Likewise, CHSRA treated all operating expenses as variable expenses, in contradiction of real world experience and standard accounting practices. These findings again stretched the credibility of the CHSRA’s assertion that it would achieve an operating surplus...

Rob's comment:
The only hope state taxpayers have: If Gavin Newsom is elected Governor of California, he may kill the project.