Los Angeles Economy & Jobs Economic Update – May 30, 2017
CA High Speed Rail – Politics and Money
- CA State Senator Jim Costa (current Democratic Congressman) wrote legislation creating CA’s High-Speed Rail Authority to plan a 500-mile route between San Francisco & Anaheim.
- Senator Costa authors a $10 billion state bond initiative to finance the project.
- Proposition 1A Bond Act: the high-speed rail project has to be financially viable; trains have to operate (without subsidy) every five minutes in either direction during the day; and funds for each segment of the route need to be identified before work on the leg in question can commence. Above all, trains have to make the 520-mile (840-km) journey between the Los Angeles basin and the San Francisco in two hours and 40 minutes, reaching speeds of 220 mph (350 kph). As for ridership, the rail authority reckoned some 65m to 96m passengers per year would be traveling the route by 2020. The basic fare was to be $55 one way.
- The rail authority promises voters that the train wouldn’t require a subsidy and that the feds and private sector would pick up most of the $33 billion tab. Fifty-five percent of CA voters approve the initiative in November 2008 and not long afterward, the authority raises the price of the project to $43 billion.
- President Obama directs $2.4 billion in stimulus money to CA.
- The White House offers an additional $900 million, provided that the $3.3 billion sum be spent in the sparsely populated Central Valley.
- Farmers in the Central Valley and governments in the Valley’s Kings County and the cities of Palo Alto, Menlo Park and Atherton sue the rail authority for not adequately addressing the train’s environmental impacts. Gov. Brown proposes shielding the train from such environmental lawsuits but abandoned the idea after the Sierra Club pushes back.
- A updated review puts ridership at a more realistic 30m passengers a year, with an end-to-end ticket price of $89. Meanwhile, the overall cost of the project had soared to $98 billion. And instead of going into service by the end of the decade, the high-speed railway would not be ready until 2033.
- An uproar ensues prompting a shakeup. The new costs are subsequently pegged at around $68 billion for the first phase of the network, with an opening date in 2029 – almost a decade later than originally promised. A second phase, involving track extensions to Sacramento in the north and San Diego in the south, would follow if and when money became available.
- CA legislature authorizes $4.7 billion in bonds to start construction, but private investors refused to plunk down money without a revenue guarantee (subsidy) from the state.
- A string of Field and Los Angeles Times polls show that voters would block the train by a two-to-one margin if it were put up for a referendum. At the same time in Washington, Secretary of Transportation Ray LaHood threatened to claw back federal funding if Sacramento didn’t green-light construction before summer’s end because Republicans were threatening to claw back the money if they took the White House and Senate in November. Governor Brown used that threat to demand that legislators authorize $2.7 billion in state bonds before they adjourned. He sweetened the deal for Bay Area and L.A. legislators by adding $2 billion for regional rail projects. Included was $700 million to bail out—”modernize”—Silicon Valley’s insolvent Caltrain.
- Taxpayers start paying interest on the rail bonds—about $380 million annually for the next 30 years.
- Critics in the CA state Legislature said they would redouble efforts to seek new oversight of the project, approving a bill by the Assembly and Senate, but it is ultimately vetoed by Governor Brown.
- The project then overcomes a serious challenge, which would have taken bonds issued to help pay for the railway and reallocated the money to water projects. Challengers of the project could not collect enough signatures to put the proposition on the November ballot, the backers postponed the measure for two years. Had it been successful, the proposal would have dealt a death blow to the high-speed rail project by deleting its biggest single source of funding.
- A major law suits that threatened to derail the project was thrown out by a superior court in Sacramento, concluding that there was no evidence that the CA High-Speed Rail Authority had failed to meet its statutory obligations, as the plaintiffs alleged. The court, nevertheless, left the door open for the case to be reheard at some future date.
- A new draft business plan has now trimmed the cost of the first phase to $64 billion.
- Governor Brown Jerry Brown pushes the legislature in Sacramento into allocating the project 25% of the state’s annual “cap and trade” proceeds from auctioning off carbon credits to big polluters, which are currently worth around $1 billion a year. As a result, the rail authority has now identified the $21 billion required for building the project’s initial leg (San Jose to the Central Valley). It still needs a further $43 billion before it can start work on extending the line north to San Francisco and south towards Los Angeles.
- The L.A. Times reports that the confidential risk analysis by the Federal Railroad Administration said that the total cost of building a 118-mile initial segment from Merced to Shafter could rise from an original budget of $6.35 billion to a range of $9.5 billion to $10 billion. The report cited significant delays in land acquisitions and environmental approvals, warning that the construction work could be delayed by as much as seven years past its original completion date of this year. In disputing the story, the rail authority letter cites its own plan to build the partial segment for $7.8 billion, which would include electrical wiring, signalling systems and track. But the federal risk analysis showing a higher cost covers less work.
- Rep. Jeff Denham (R-Turlock), chairman of the House rail subcommitee, said he would call for hearings and an audit of the project in the near future. The CA Rep. Congressional Caucus’ all sign a letter to push to have the federal government audit HSR. The feds allocated $3.5B to the project and most of it has been spent. It would be the Inspectors General or GAO who would do the report.
- CA state Senator Andy Vidak, a Central Valley Republican, asks for the Joint Legislative Audit Committee to authorize the CA state auditor to immediately initiate an audit of the rail authority, the first in several years. A similar request by Vidak was voted down last year.
- Proponents of the project pushed back stating that CA’s economy can handle the additional costs – even more than $100 billion – by increasing sales taxes or making firm commitments fro additional future funding from the state’s general fund.
- The head of the Authority steps down and the project succeeds in winning $1.25 billion through the sale of state bonds. To date the rail authority said it had spent or secured more than $20 billion to date and hopes to begin running limited train service between Bakersfield and the Bay Area in 2025.
- California’s High Speed Rail Authority gets clearance to proceed with a $2 billion plan to electrify Caltrain tracks between San Francisco and San Jose. The state Department of Finance on Friday approved the expenditure of $600 million in voter-approved bond money. The approval follows the Trump administration’s decision to fully fund a $650 million grant for the project.
- Governor Brown sends President Trump a letter asking to “delegate to the state authority” under the National Environmental Policy Act. Mr. Brown cited an executive order by Mr. Trump directing the White House Council on Environmental Quality to identify “high-priority” public works and expedite procedures for “completion of environmental reviews and approvals for such projects.” The state high-speed rail authority has complained that construction is being delayed in part due to revisions by the Federal Railroad Administration to its environmental documents. The FRA has provided $3.2 billion in seed funding for the 500-mile train, and an internal FRA analysis last November found that the first 118-mile stretch through the Central Valley was running 50% over budget and seven years behind schedule. But according to the FRA report, the biggest delays have been caused by the California rail authority’s late paperwork. Environmental litigation has also snarled construction, and the rail authority claims it need not comply with the California Environmental Quality Act (CEQA). In 2014 the federal Surface Transportation Board exempted the bullet train from CEQA, but a California appellate court subsequently held otherwise. The authority is now arguing before the California Supreme Court and Ninth Circuit Court of Appeals that federal environmental review pre-empts CEQA.
(Best Stated in a Economist Magazine Article)
With the rail authority’s finances resolved for the time being, opponents are focusing instead on the project’s legal requirement to cover the distance between Los Angeles and San Francisco in two hours and 40 minutes. The rail authority claims that such a time remains doable, though cost-saving measures have forced the high-speed train to share tracks with slower-moving freight and commuter services in the Los Angeles basin and the Bay Area. What also remains in doubt is just how many people will actually ride the high-speed network.
In revising its revenue model, the rail authority has incorporated findings from surveys on rider preferences, along with forecasts of California’s likely population, housing and employment growth. The data were then crunched using Monte Carlo simulations to minimize the risks of being wrong. The analysis suggests that, based on a confidence level of 50%, the service will have some 28m passengers by 2029, generating $1.3 billion of revenue. However, as thorough as this analysis is, unanswered questions remain.
As sprawling as it is, the Los Angeles basin has a population of just 18m. The nine counties surrounding the Bay Area have a little over 7m residents between them. The farming communities astride the proposed high-speed rail line through the Central Valley have a combined population of around 1m. In short, California’s high-speed railway is attempting to do what the Tokaido Shinkansen (Japan’s HSR) does, but with a third of the number of potential passengers, on a route that is half as long again. California’s taxpayers will pay dearly for Mr Brown’s high-speed legacy.
Recent Articles Referencing Russell Goldsmith’s Comments on CA’s High Speed Rail Project
Los Angeles Business Journal
Range of Firms Looks to Ride Rail-Line Contracts
TRANSPORTATION: Tutor Perini, Parsons among takers of $1 billion in local projects.
Friday, May 19, 2017
While not a single piece of earth has been turned over in Los Angeles County for the $64 billion California high-speed rail project, scores of local companies are already reaping more than $1 billion from the controversial plan. Two major L.A. engineering and construction firms form the majority of the prime contracting team on the first 32-mile segment of the rail project, which after nearly two years of delays is now under construction in the Central Valley. Tutor Perini Corp. of Sylmar has a 50 percent stake in the $1.3 billion contract, and Parsons Corp. of Pasadena, has a 25 percent stake.
They are among the dozens of other local companies large and small that have won contracts for everything from preliminary design and land acquisition services to construction materials and equipment supply. Forty-six small businesses either headquartered in the county or with significant offices here have received high-speed rail contracts and subcontracts, according to data obtained from the California High Speed Rail Authority. “The sheer size of this rail project puts it in the top echelon of projects for contractors and workers alike,” said John Hakel, executive director of the Southern California Partnership for Jobs, a nonprofit comprising contractors and labor unions that promotes infrastructure development for the region.
Even as the contracts spread to L.A.-area firms, however, doubts and controversy continue to plague the massive project, both on a statewide level and in Los Angeles, where a dispute over the route in the northeast San Fernando Valley has been brewing.
“This bullet train is an enormous, misguided, and wasteful expenditure California cannot afford and can’t even calculate accurately,” Russell Goldsmith, chief executive of City National Bank and chairman of RBC’s U.S. wealth management business, said in a statement. “California should instead be investing in more urgent and productive priorities like its water and transportation infrastructure, its public schools and universities, and its pension and health care requirements.”
Ron Tutor, chief executive of Tutor Perini, which has close to 500 people working on the first segment, a Fresno to Madera branch that is slated to be completed by the summer of 2019, took issue with Goldsmith and other critics of the rail project, saying it is vital to close the U.S. infrastructure gap. “Everybody agrees that our infrastructure is woeful and pathetic when compared with other parts of the world, and this project will help us catch up,” he said. Still, critics persist. Republican legislators have continually backed measures to either place a repeal initiative on the ballot or scrap other state funding for the project, though none of those measures has moved forward. A recent legal challenge was defeated when a tentative court ruling allowed the state to spend $1.25 billion in voter-approved bond money. Topping all of this off, the authority’s chief executive, Jeff Morales, stepped down last month after five years. Lining Up
Meantime, local companies remain bullish on the project. “We have bid and will continue to bid on every area of this project that’s available,” Tutor said. Also working on the project are downtown engineering giant Aecom and G&C Equipment Corp. According to Gene Hale, president of G&C, a 23-employee Gardena construction equipment supply firm, this project has helped boost his firm’s profile, even if he has only five people working on a subcontract for the first segment. He said the work is valued at $10 million to $20 million.
Aecom has won several design and route study contracts for the rail line over the past decade worth a cumulative total of well over $100 million, including a current $32 million contract to study the route through the Altamont Pass between Oakland and Stockton. The high-speed rail line is among a number of massive infrastructure projects either under way or in the works in the region. There is also a $2 billion-plus football stadium under construction, a project with which Aecom is involved. “It’s a golden time for folks in the construction industry to use as much manpower as they can get ahold of,” Hakel said. But what distinguishes the high-speed rail venture from these other projects is that it’s being built in so many segments over so many years – the first phase, from San Francisco to Anaheim, is slated for completion in 2029.
“That allows a community of companies that does work on one segment to carry that over into work on future segments,” Hakel said. Tortured history Getting the project to this point has been a long, slow road impeded by cost overruns and opposition. The rail project, which was endorsed in 2008 by voters who approved the issuance of $9.95 billion in bonds, was originally envisioned as a means to carry passengers from Southern California to the Bay Area and Sacramento at speeds of up to 220 miles per hour, with the trip from Los Angeles to San Francisco taking less than 2½ hours.
The Los Angeles Business Journal
High Speed, High Stakes
Friday, May 19, 2017
It’s not often that California’s business community finds itself at odds with the policies of the state’s Republican politicians, but the controversial high-speed rail project has found a way to drive a stake between their often-aligned interests.
When you consider that the project’s budget has doubled over the last decade to $64 billion and travel time estimates between Los Angeles and San Francisco have risen by an hour to 3 ½ hours, the concerns of GOP senators and other critics, such as City National Bank Chief Executive Russell Goldsmith, seem rational. Republican legislators have continually tried to repeal or scrap funding for the project, to no avail. However, they were able to convince the California High Speed Rail Authority to shrink cost estimates to $64 billion after they had ballooned to nearly $120 billion.
But California businesses – including nearly 50 in Los Angeles alone, with more likely to follow – are set to reap billions of dollars after winning contracts to help build parts of the system. That money will go toward hiring thousands of employees for badly needed middle-class jobs over the next decade here and across the state. Those numbers help business groups, including the Los Angeles Area Chamber of Commerce, get behind the effort. Yet their support hasn’t been nearly as vocal as it was for passage of Measure M, and that is telling.
While the potential economic benefits to business of high-speed rail are hard to ignore, there remains great risk that the bills for ever-ballooning costs will end up in the hands of taxpayers. If delays continue thanks to budget squabbles and additional legal challenges and community objections, all of us would be left with outturned pockets and no tangible results to show for it. What should perhaps be most disconcerting is that tickets on high-speed rail trains would only save riders 15 percent off of airline fares, which is unlikely to convince many people to choose that option given the much longer transit time. While throwing the high-speed baby out with the bathwater seems like too drastic a measure, perhaps some further revisions are in order.