High–Speed Rail Authority

The High–Speed Rail Authority was statutorily established to develop a high–speed rail system in California that links the state’s major population centers, including Sacramento, the San Francisco Bay Area, the Central Valley, Los Angeles, the Inland Empire, Orange County, and San Diego. In November 2008, voters approved Proposition 1A, which allows the state to sell $9 billion in general obligation bonds to partially fund the development and construction of the high–speed rail system. The bond funds are available upon appropriation by the Legislature. (Proposition 1A also authorizes $950 million in bonds for the improvement of other passenger rail systems in the state.)

Proposition 1A specifies the first phase of the high–speed rail project to be the corridor between the San Francisco Transbay Terminal and the Los Angeles Union Station and Anaheim. Bond funds may be used to develop other specified corridors if doing so does not adversely impact the construction of this first phase of the project. Bond proceeds can be used for no more than 50 percent of construction costs. Thus, at least one–half of construction funding for each segment must come from some other sources—including federal, state, local, or private funds. Up to 10 percent of the bond money may be used for environmental reviews, planning, preliminary engineering and design, and up to 2.5 percent of the bonds may be used for administrative costs. Proposition 1A establishes requirements that the authority must meet before it can request, and subsequently encumber, bond funds for specified capital costs.

High–Speed Rail Business Plan Lacks Specific Information

Chapter 267, Statutes of 2008 (AB 3034, Galgiani), required the authority to submit an updated business plan for the high–speed train system to the Legislature by September 1, 2008. That plan must include a description of the anticipated system as well as primary benefits; a forecast of anticipated patronage, operating, and capital costs; an estimate and description of the federal, state, local, and other funds necessary for completion; a proposed timeline for the construction of the eligible corridors in the system; and a discussion of foreseeable risks and mitigation strategies.

In June 2008, an oversight report by the Senate Transportation and Housing Committee recommended that the business plan be similar to a financial prospectus prepared for investors in new stock or bond offerings and not an advocacy document. In the report, the committee proposed that the plan include a financial strategy that clearly explains how the authority plans to fund the completion of the project. It also urged that the plan detail all the potential benefits of the system as well as the types and level of risk the state would be assuming for such a project.

The authority released the business plan on November 7, 2008. Our review shows that, while the document includes, to some degree, each of the statutorily required elements, the information provided is very general and does not provide specifics that are included in typical business plans. In fact, the plan claims to be only “an outline of the most recent economic and financial studies that, taken together, constitute the most current update.”

Figure 15 highlights some of the questions that remain after our review of the plan. For instance:

• What are the anticipated service levels for each segment of each corridor at inception, and at what level of service will each segment break even with operating or overall costs?
• What steps are being taken to secure the additional funding necessary for completion, at the local and federal level, as well as for private funding?
• When is each segment expected to have environmental clearance, and when is construction planned to begin?

Lacking detailed information such as this, the Legislature really has no better sense than prior to the plan’s submission as to how the authority plans to accomplish its objective.

Require Submission of More Details. As the authority continues to develop the high–speed rail system, it is essential that the Legislature have a clear understanding of how the state is proceeding with the project and, most importantly, the risks it may be assuming and how those risks would be mitigated. So that the Legislature would have the necessary information, we recommend that the Legislature require the authority to expand upon its business plan and submit information to include specific elements missing from the original document before appropriating any bond funding for 2009–10. At a minimum, the supplemental information should include (1) further system details, such as route selection and anticipated service levels; (2) a thorough discussion describing the steps being pursued to secure financing; (3) a working timeline with specific, achievable milestones; and (4) what strategies the authority would pursue to mitigate different risks and threats.

Additional Accountability Measures Should Be Adopted

All Proposition 1A funding requests to pay specified capital costs must meet certain accountability requirements. These measures include the establishment of an independent peer group to review the authority’s plans before the Legislature appropriates any funds. Also, before committing (encumbering) any funds, the authority must submit to the Legislature a detailed financial plan for the corridor (or segment) with a review conducted by an independent financial services firm that confirms the plan’s viability. However, current statute governing the project does not include any accountability requirements relative to the noncapital expenditures nor ensure the funds are being spent effectively.

Require Adoption of Project Evaluation Criteria. According to its business plan, the authority plans to spend the majority of the bond proceeds on the front end of the project. This means that the bond funds would be exhausted well before the entire system is constructed, with the expectation that other fund sources would pay for its completion. As such, it is important that the funds be spent on projects that benefit the state’s overall transportation system should the high–speed train program be delayed or suspended.

Statute requires that, in selecting which corridor or segment thereof to begin construction, the authority is to give priority to the ones expected to require the least amount of bond funds as a percentage of total construction costs. However, there are hundreds of individual projects to be constructed within each segment of the proposed high–speed train corridor, from grade separations to multitrack stations. In order to maximize the benefits of the high–speed system, the authority should prioritize individual projects according to the overall mobility solutions they provide.

For example, grade crossings that benefit the overall flow of traffic in a major metropolitan area should be designed and built before other projects that exclusively benefit the high–speed train, such as remote, dedicated tunnels. Before any capital construction costs are incurred, the authority should provide guidelines to evaluate and select projects that maximize mobility along the corridor. This would minimize the amount of funds spent on projects with limited benefits should the entire system not be completed. Accordingly, we recommend that the Legislature require that the authority adopt project selection and evaluation criteria to ensure that bond funds are used efficiently and that they deliver projects with immediate mobility benefits.

Require Annual Reports and Periodic Audits. Once money has been appropriated and committed to the construction of a particular segment of the system, there is no accountability to ensure that the funds are being spent effectively. In order to maintain accountability of bond funds and track the overall progress of the project, we recommend the enactment of legislation directing the authority to provide an annual report to the Legislature at the time the authority submits its annual budget proposal. Similar reports have been prepared for the state’s intercity rail routes and the Toll Bridge Seismic Retrofit Program. Based on these examples, this report should include, at a minimum:

• A work plan identifying work accomplished and anticipated in the budget year.
• Program funding status and projected funding sources for the budget and future years, by segment.
• Future contract obligations and expected schedule of costs.
• A program schedule including baseline comparisons from prior years and any projected timeline adjustments.
• Any changes in assumptions used in the system’s planning and financial projections or technological advancements that may improve or hinder the progress of the project.

In addition, because the work on this project is to be completed by contractors, the Legislature should require periodic independent audits of each contract to be funded with bond proceeds.

Hold Joint Legislative Hearings. Beyond requiring project specific information through annual reporting, we further recommend that the policy committees and budget subcommittees of the Legislature hold periodic joint hearings in which the authority reports on the use of bond funds, the availability of other funds, and the timeliness of project delivery. This would enable the Legislature to assess whether the program is being carried out effectively and provide meaningful oversight over the bond funds.

2009–10 Budget Proposals

The Governor’s budget requests $125.2 million in Proposition 1A bond money to fund the authority’s activities in 2009–10. Because all system development work will be performed by consultants, $123 million is requested for consultant contracts. The remaining $2.2 million is requested for administrative costs. Figure 16 lists the contracts to be funded in 2009–10.

Little Justification Provided for Contract Amounts. While the general types of proposed contract work appear reasonable, the authority’s budget requests provide almost no justification for the specific amounts requested for each contract. Specifically, no information was provided on the work to be accomplished over the budget year, nor how that work fits into the total development of the system. Without this information, there is no basis for recommending approval of the authority’s requests for contract payment funding. Accordingly, we withhold recommendation on the request pending receipt of supplemental information on the amount of work to be accomplished in the budget year, by contract, and how each fits into the overall development of the system.

Deny Request for Additional Positions. In the proposed budget, the authority is requesting $258,000 and two staff to be added to the currently authorized 9.5 positions. The new staff would be structural engineers with experience in structure design in California. The authority is requesting these engineers to provide an additional review of project design documents for compliance with state and federal requirements.

In concept, the request has merit. Using such staff to review design documents should reduce the state’s risk and help avoid future project delays. However, at this early stage in the system’s development, it is unclear whether there is enough work for two full–time engineers. One alternative is for the authority to contract with Caltrans and thus pay only for the work that actually materializes. Caltrans has a number of structural engineers on staff with legal compliance expertise that could provide the authority with the needed services.

Accordingly, we recommend the Legislature deny the request for adding engineer staff but provide the funding for the authority to contract with Caltrans to perform any necessary review of documents for legal compliance until such time that workload indicates it is more efficient to have in–house engineers.