California’s High-Speed Rail Project With the announcement that California would be committing…

California’s High-Speed Rail Project

With the announcement that California would be committing $4.3 billion to the construction of a 29-mile rail link between the towns of Fresno and Madera in the state’s Central Valley, California’s 20-year-old quest for a high-speed rail line was finally coming true. The California High-Speed Rail Authority (CHSRA), first established in the mid-1990s, had long pursued the goal of linking the San Francisco Bay metropolitan area in the north to the cities of Los Angeles and San Diego in the south. Under the administration of President Obama, the federal government set aside money from a stimulus package to fund high-speed rail initiatives in several states, including Wisconsin, Florida, Ohio, Illinois, and California. The election of Republican governors in Ohio and Wisconsin led to a rethinking of the projects in those states, which ultimately refused the seed money grants from Washington, suspicious that the rail projects were both unnecessary and likely to be subject to huge cost overruns, for which state taxpayers eventually would be held responsible. As a result, Transportation Secretary Ray LaHood reclaimed $1.2 billion from those states to be presented to 13 other states. One of the states that stood to benefit most from this redistribution of federal money was California, with its ambitious, and many argue, ultimately foolhardy decision to support a massive transportation project to link its cities with high-speed rail. The history of CHSRA’s drive to create high-speed rail is a fascinating one, with supporters and critics in equal measure. As part of its initial pitch for the project, CHSRA argued that the system would lead to multiple benefits. For a one-way $55 ticket, passengers in Los Angeles would be able to travel to the Bay Area in less than 3 hours or reach San Diego in 80 minutes. Estimating that 94 million passengers would use the rail system each year and that its development would generate hundreds of thousands of permanent jobs, CHSRA used these projections to help convince state voters to approve a nearly $10 billion bond issue and support the project in a 2008 referendum. Other advantages the organization cited included the reduction of pollution and fossil-fuel use by diverting millions of people to the rail line who otherwise would use automobile or air travel between cities. With revised estimated cost of at least $69 billion, the overall project would first operate trains up to 220 mph along a 520-mile route between Anaheim and San Francisco. Extensions to San Diego and Sacramento would be built later. A total of $3.18 billion in federal funding has been approved for the state’s bullet train proposal so far, the largest amount for any pending rail project in the nation. With matching state funds, the amount available for construction is about $5.5 billion, according to CHSRA. Since its approval, a number of events have led insiders to reconsider the wisdom of pursuing the rail project. First, based on other high-speed rail projects, CHSRA has revised its projections for ridership downward, suggesting that the project will serve 39 million passengers by its tenth year of operation, which is about 40% of its original estimate prior to getting funding approval. Second, another change in the original business model is that projected ticket prices have been raised to $105 for a one-way trip, although critics suggest that actual prices, based on comparable costper-mile data from Europe and Japan, are likely to be closer to $190. A third concern relates to the decision to start the project with a 65-mile link between two small Central Valley communities; that is, though the high-speed rail project is specifically designed to join major metropolitan areas, the first pilot stage is to be constructed along the route that is the least populated segment of the line. This decision sits poorly not only with rail critics, but also with rail supporters, who recognize the need to make a more significant statement in order to answer other objections of critics. “It defies logic and common sense to have the train start and stop in remote areas that have no hope of attaining the ridership needed to justify the cost of the project,” U.S. Representative Dennis Cardoza (D., Calif.) wrote in a letter to Transportation Secretary Ray LaHood. A fourth closely questioned element in the project is the projected final price. Though CHSRA and state officials hold to the latest $69 billion price tag (a figure that has doubled since the original $33 billion estimate approved by voters in 2008), others, including the transportation consultants at Infrastructure Management Group, have suggested that this figure, based on historical data, grossly underestimates the final cost, while inflating the likely number of passengers. Economists suggest that a more likely range for the final cost of the project would be anywhere from $100 to $250 billion, and a more reasonable estimate of annual passenger traffic is in the range of 5 million. If these numbers are close to accurate (and they are disputed by CHSRA), they point to a project that cannot ever hope to pay for itself, will require long-term annual subsidies, and will place the already cash-strapped state even deeper into a financial hole. The state, which recently averted a budget crisis when it agreed to cut $15 billion in public spending, says it will match federal spending dollar for dollar and also hopes to secure private-sector investment. However, with unemployment in California remaining steady at nearly 8%, these claims are being called into question. A recent study by three economists found the CHSRA business model to be deeply flawed, concluding that it relies too heavily on federal grants and does not adequately address risks posed by fluctuating ticket prices. “When an investor looks at an assertion by the CHSRA that says you’re going to earn an operating surplus of $370 million in the first year of operations and $1.5 billion profit by the third year, they shake their heads and smile,” said William Grindley, former World Bank analyst. “It doesn’t pass the smell test.” This new study calls CHSRA’s revenue estimates “unreasonably optimistic” and is confirmed by a 2013 study by the Reason Foundation suggesting that CHSRA could require over $350 million in annual subsidies to stay in business. One key linchpin to attaining sustainability, for example, is CHRSA’s ability to secure billions of dollars in additional funding from the federal government. For its part, CHSRA acknowledges that the project hinges on additional funding coming from the federal government but believes that making a good faith effort to produce a workable rail network is critical for securing additional money. Recent court decisions have put the brakes on the project as well. The California 3rd District Court ruled that the state could not continue to sell bonds supporting the project as the CHSRA had failed to comply with its own guidelines regarding funding. Voters were originally told that state financial exposure would be l imited and that the federal government and private investors would put up most of the money— promises that so far have failed to materialize. However, Washington has committed only a few billion dollars and there is absolutely nothing else the state can expect from the federal government to support the project. The court ruled that the state’s attempt to sell $6.8 billion in bonds to fund the project violated the original provisions of the 2008 referendum. Jerry Brown, California’s governor, has vowed to continue the court battle as long as it takes to get the bonds approved. However, in the meantime, the project is stalled for lack of funding to continue building the phase one, 29-mile stretch of track. The project also faces a ticking clock: If the federal grant money is not used by a specific date, it will be reclaimed by Washington. As of now, one could argue that the project’s future is simply a debate between “dueling economists”; however, there is no question that the future of California’s high-speed rail is uncertain. Will the outcome be a case of the best intentions meeting economic realities? Only time will tell.26

Questions

1. Assess the benefits and drawbacks of the highspeed rail project. In your opinion, do benefits outweigh drawbacks, or vice versa? Why? Justify your answer.

2. What are the implications of starting a project based on tenuous projections that may or may not come true 10 years from now?

3. Could you justify the California high-speed rail project from the perspective of a massive public works initiative? In other words, what other factors enter into the decision of whether to pursue a high-speed rail project? Why are they important?