High-Speed Rail Is at a Critical Juncture

High-Speed Rail Is at a Critical Juncture M AC TAy lo r • le g i s lA Ti v e A nAl y sT • M Ay 10, 2 011 An LAO RepOR t 2 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t exeCutIve SummaRy California’s proposed high-speed rail project challenging choices about whether to continue with would link the state’s major population centers, a project that, despite the problems outlined above, including Sacramento, the San Francisco Bay could have some reductions in other spending for Area, the Central Valley, Los Angeles, the Inland transportation improvements as well as air quality Empire, Orange County, and San Diego. The and other environmental benefits. If the Legislature most recent cost estimate for completion of the chooses to go forward with the high-speed rail first phase of the project is roughly $43 billion. In project, we have concluded that two key steps November 2008, voters approved Proposition 1A, could be taken now to improve the likelihood of its which allows the state to sell $9 billion in general successful development. First, the Legislature needs obligation bonds to partially fund the development more time and greater flexibility to make critical and construction of the high-speed rail system. In decisions relating to the project. This would require addition, the state has received roughly $3 billion modifications to the federal restrictions that have from the federal government for its construction. been imposed on the project regarding the timing The California High-Speed Rail Authority (HSRA) of the expenditure of these federal funds, as well as recently approved plans to begin construction in to a federal administrative decision to require that fall 2012 on a portion of the system costing roughly they all be spent building an initial section of the $5.5 billion through the Central Valley that spans rail line in the Central Valley. Second, significant from north of Fresno to north of Bakersfield. The improvements are needed in the way both day-to- Legislature will likely be asked to appropriate much day and longer-term strategic decisions are made. of the funding for this initial segment in 2012-13. We have concluded that the current governance A Number of Problems Threaten Successful structure for the project is no longer appropriate Development of High-Speed Rail. In this report, and is too weak to ensure that this mega-project is we describe a number of problems that pose coordinated and managed effectively. threats to the high-speed rail project’s successful LAO Recommendations. We recommend development as envisioned by Proposition 1A. For that the Legislature take the following actions to example, the availability of the additional funding increase the likelihood that the high-speed rail assumed in a 2009 business plan as necessary project will be developed successfully: to complete the project is highly uncertain and • Fund Only Needed Administrative federal deadlines and conditions attached to the Tasks for Now. We recommend that the funding already provided to the state would limit Legislature reject the administration’s the state’s options for the successful development 2011-12 budget request for $185 million in of the system. In addition, the existing governance funding for consultants to perform project structure for the project is inadequate for the management, public outreach, and other imminent development and construction stages work to develop the project, and only and the Legislature lacks the good information it appropriate at this time the $7 million in needs to make critical multi-billion dollar decisions funding requested for state administration about the project that it will soon face. of the project by HSRA. Legislative Actions Could Improve Likelihood of Project’s Success. The Legislature faces some www.lao.ca.gov Legislative Analyst’s Office 3 An LAO RepOR t • Seek Flexibility on Use of Federal Funds. viable on its own. The HSRA would be We propose that the Legislature direct authorized to subsequently seek a budget HSRA to renegotiate the terms of the augmentation to fund the development of federal funding awarded to the state by whatever segment the Legislature approves the Federal Rail Administration (FRA). based upon these new criteria. We believe the state must obtain relief • Improve the Way Project Decisions Are from the current federal restrictions on Made. We recommend that the Legislature the project if it is to be developed success- pass legislation this session that shifts fully, and therefore that the Legislature the responsibility for the day-to-day and should proceed with the project only if strategic development of the project from this flexibility is obtained from the federal HSRA to the California Department of government. Transportation (Caltrans). A new and • Reconsider Where Construction of the separate division of Caltrans dedicated Line Should Start. If the federal flexibility to the high-speed rail project would be proposed above is obtained, we recommend better positioned, if equipped with the that the Legislature further direct HSRA appropriate project delivery tools, to to reevaluate which segment or segments manage the development of the system in should be constructed first based on this phase. In addition, we recommend that criteria determined by the Legislature, the Legislature remove decision-making such as potential statewide benefits from authority over the high-speed rail project building a particular segment and whether from the HSRA board to ensure that the a selected segment could generate the state’s overall interests, including state ridership and revenues to be financially fiscal concerns, are fully taken into account as the project is developed. 4 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t BaCkgRound The HSRA is responsible for planning and to come from the federal and local governments, as constructing an intercity high-speed train that well as the private sector. The HSRA’s most recent is fully integrated with the state’s existing mass cost estimate for completion of the first phase of transportation network. The train system would the project as defined by Proposition 1A, from San link the state’s major population centers, including Francisco to Los Angeles and Anaheim via the Sacramento, the San Francisco Bay Area, the Central Valley, is roughly $43 billion. The HSRA Central Valley, Los Angeles, the Inland Empire, recently approved plans to begin construction in Orange County, and San Diego (as shown in fall 2012 on a portion of the system through the Figure 1). The California High-Speed Rail Act Central Valley that spans from north of Fresno to of 1996 (Chapter 796, Statutes of 1996 [SB 1420, north of Bakersfield. It is estimated this portion Kopp]) established HSRA as an independent will cost roughly $5.5 billion. The Governor’s authority consisting of a nine-member board January budget plan proposes to allocate appointed by the Legislature and Governor. In $192 million for HSRA activities for 2011-12. addition, the HSRA has an executive director, appointed by the board, and a staff of less than 20. Most work is carried out by Figure 1 consultants under contracts High-Speed Rail Segments by Phase with HSRA. In November Sacramento 2008, voters approved Oakland Proposition 1A, which San Francisco Phase 1 Merced allows the state to sell San Jose Phase 2 $9 billion in general Fresno obligation bonds to partially fund the development and construction of the Bakersfield high-speed rail system. In addition, the state has Palmdale received roughly $3 billion from the federal government Los Angeles for the cost of construction. Anaheim The remaining funding for San Diego the system’s construction and operation is anticipated www.lao.ca.gov Legislative Analyst’s Office 5 An LAO RepOR t a numBeR of PRoBlemS tHReaten SuCCeSSful develoPment of HIgH-SPeed RaIl California’s high-speed rail project is quickly plan in early 2010 we concluded that its funding picking up pace, with plans to spend billions of assumptions are optimistic and that it is unclear dollars in the next few years. A number of serious how the state will be able to secure the necessary problems, however, threaten the successful devel- funding to complete the project. Specifically, we opment of the high-speed rail project. They include: found that the business plan includes unrealistic assumptions about the receipt of federal funds to • The availability of the funding necessary build the project, no discussion of the challenges for the new system is highly uncertain. of additional General Fund debt-service costs, as • Federal project requirements limit the well as a lack of identified sources for the other state’s options for development of the funding assumed in the business plan to complete system. a high-speed rail system. In addition, the plan indicated the potential need for a state operating • The HSRA’s structure and staffing levels are subsidy, which would be contrary to explicit provi- inadequate for its changing role. sions in Proposition 1A. We discuss these potential • The Legislature lacks good information for problems in more detail below. decision making. Federal Funding Assumptions Appear Unrealistic. The HSRA’s latest business plan availability of the assumes the state will receive $17 billion to funding necessary Figure 2 for new System Proposed High-Speed Rail Funding for Highly uncertain Development and Construction The 2009-10 Budget Act required HSRA to Secured Funding Unsecured Funding submit to the Legislature Federal Funds a revised business plan by December 15, 2009, Federal Funds State Bond Funds as well as a review of this plan by our office. Figure 2 shows the project’s anticipated funding sources as described in the business plan, as well as what portion of this funding Local Funds Private Funding has been secured as of April 2011. In our Estimated Cost: $43 Billion review of the business 6 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t $19 billion from the federal government for costs for other state programs or increasing construction of the high-speed rail system. To date, revenues to offset these costs. HSRA has secured roughly $3.6 billion in federal Basis for Assuming Other Funding funding for development of the project. Of that, Contributions Is Unclear. The 2009 business roughly $3 billion is dedicated to the construction plan assumes that $14 billion to $17 billion of the of the system; $400 million was given to the project’s construction costs would be paid with developers of the San Francisco Transbay Transit funds from local agencies and private partners. The Center, one of the planned high-speed rail stations; bulk of this funding is expected to come from the and nearly $200 million will be used by HSRA private sector when the state enters into some form for project-wide preliminary engineering and of public-private partnership (PPP), or contractual environmental clearance work. The HSRA indicates agreement with private partners to complete and that without additional significant federal support operate the high-speed rail system. The amount of beyond that provided to date, the project cannot funding available from these sources will be highly be completed. Given the federal government’s dependent on the business model chosen for the current financial situation and the current focus system. For example, if HSRA ultimately decides to in Washington on reducing federal spending, it is share the tracks built for the new train system with uncertain if any further funding for the high-speed commuter rail operators in certain metropolitan rail program will become available. In contrast areas, those local agencies might have an incentive to the interstate highway system, which was to contribute local revenues to the construction constructed with the dedication of funding from of the project because the improvements would the federal excise tax on gasoline, federal funding ultimately benefit the operations of local systems. for high-speed rail is not supported by a dedicated This would not be the case, however, if the business revenue stream and therefore must compete with model chosen by HSRA did not share the tracks and other annual federal funding priorities. instead maintained the rail line purely dedicated State Would Incur Major Additional Debt to its own trains. The HSRA could choose not to Service Costs. The 2009 business plan assumes that share tracks for a variety of reasons, such as safety $9 billion in state funding for the project will come concerns or a determination that it needed all the from the sale of general obligation bonds approved rail capacity for its own service. The current HSRA by voters in Proposition 1A. The debt service business plan does not provide any details about the payments on general obligation bonds are typically business model and how, as it now assumes, it will paid for from the state’s General Fund. We estimate attract substantial funding from local agencies and that, should the state sell all of the $9 billion in private partners to build the system. voter-approved high-speed rail bonds, the state’s Potential Need for Operating Subsidies Could total principal and interest costs for repaying the Lead to General Fund Cost Pressures. The HSRA’s debt would be $18 billion to $20 billion. This would business plan indicates that the initial costs of require annual debt service payments of roughly operating a high-speed rail system may exceed $1 billion for the next two decades. Due to the dire $1 billion per year. However, Proposition 1A condition of the state’s General Fund, adding such requires HSRA to submit a funding plan which costs for debt service in the near future means that certifies that, once complete, the planned high- the Legislature would have to consider reducing speed rail passenger service will not require a local, state, or federal operating subsidy. This certification www.lao.ca.gov Legislative Analyst’s Office 7 An LAO RepOR t must occur prior to requesting any appropriation of stimulus legislation, titled the American Recovery the $9 billion in state bond funds for capital costs. and Reinvestment Act (ARRA). The FRA initially Notwithstanding the provisions of Proposition 1A, required that the state obtain environmental the state could discover during development or clearance of the segment of the project financed after construction has been completed that the with ARRA funds by September 2011. (In this system needs such a subsidy in order to operate. report we use the terms segment, corridor, and If the train does not attract the number of riders route interchangeably without regard to potential projected, for example, operating revenues would technical distinctions in state law.) In addition, the likely be less than expected. The train line would FRA required that the ARRA funds be expended then need funding from some other source to by 2017 and indicated that the state must forfeit any operate. Absent the identification of another ARRA funds that are unspent by that time. (The source of operating funds for the train system, remaining $715 million of federal funding awarded this situation could place an additional financial to California for high-speed rail purposes is not pressure on the state’s General Fund. subject to the same deadlines as the ARRA funds.) In November 2010, the FRA announced that federal Project Requirements it will require all federal funds for construction limit State’s options awarded to the state as of that time be spent on As noted earlier, the state so far has received a a segment of the rail line planned for the state’s commitment of $3.6 billion of federal funds for the Central Valley. According to FRA, this decision development of the state’s high-speed rail system. was driven by the deadlines discussed above. The FRA, which is responsible for administration Specifically, FRA concluded that the segments most of federal railroad assistance and rail safety likely able to meet the 2017 deadline for expen- programs, has attached specific requirements to the diture of ARRA monies were in the Central Valley roughly $3 billion portion of that funding which in part because, at the time, there was little public was designated specifically for construction of the opposition to this portion of the project which high-speed rail line. Below, we discuss some of the potentially could slow the project down. challenges for the project created by these federal Largely as a result of these federal deadlines restrictions. and requirements, HSRA decided in December Federal Funds Deadlines and Requirements 2010 to begin the construction of the statewide Led to Risky Decisions. A large portion of the system within the Central Valley. This decision federal funding dedicated so far to California’s by HSRA, however, represents a big gamble that high-speed rail project came with strict deadlines additional monies will eventually become available that may be difficult for the state to meet. Moreover, from the federal government or other sources to federal authorities are also requiring that nearly all connect the Central Valley line to other major of these funds be spent building an initial section urban areas of California. The authority acknowl- of the train line in the Central Valley that, by itself, edges that operation of the Central Valley segment would have insufficient ridership and revenues to by itself is infeasible because the potential ridership stand on its own. of a high-speed rail line within that segment alone About $2.3 billion of the $3 billion in federal would be insufficient to operate the system without funds awarded to the state for construction of the a substantial subsidy. rail system come from the 2009 federal economic 8 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t It now appears, however, that this risky integrated with the state’s existing intercity rail decision by HSRA was based on faulty assump- and bus network. As described earlier, HSRA tions. After HSRA approved the Central Valley consists of a nine-member board (five members section, the FRA dropped the September 2011 appointed by the Governor, two appointed by the deadline for environmental clearance work. Senate Rules Committee, and two by the Speaker Moreover, the assumption that construction of the of the Assembly), an executive director appointed Central Valley segment could move quickly because by the board, and staff to support the project. of a lack of public opposition has already proved Voter approval of Proposition 1A in 2008 shifted to be unfounded. Significant local opposition has its role from development of the system to one of arisen, relating largely to concerns over how the overseeing the construction of what experts often alignment of the tracks could affect agricultural refer to as a “mega-project.” The HSRA is now operations, which has cast into doubt whether the responsible for delivering one of the country’s 2017 deadline for expending all the ARRA funds largest transportation infrastructure projects. The can be met. timeline in Figure 3 shows how HSRA’s role and annual funding levels have changed since 1996 and HSRa Structure and Staffing levels are proposed to significantly change in the future. Inadequate for Its Changing Role As the figure indicates, annual funding levels for The HSRA was initially created in 1996 to the project have been relatively low compared to the direct the development and implementation large increases in expenditures anticipated in the of a California high-speed rail line that is fully near future when the project begins construction. Figure 3 Proposed Timeline and Cost of High-Speed Rail Implementation Annual Expenditures (In Billions)a $9 Projected 8 7 6 5 4 Revenue Service 3 To Begin Draft 2 HSRA Environmental Proposition 1A Construction Operating Established Impact Report Passes Begins Concession 1 Awarded 1996 2005 2008 2012 2014 2020 Study/Promotion Transition Development/Construction Oversight/ Regulation aBased on the California High-Speed Rail Authority (HSRA) 2009 Business Plan. www.lao.ca.gov Legislative Analyst’s Office 9 An LAO RepOR t However, our analysis indicates that HSRA’s of the line into a more urban area do not materi- operational structure and staffing practices have alize. Moreover, HSRA pledged at the time to not kept pace with the project’s changing demands. provide a dollar-for-dollar match of ARRA funds Below, we describe how these problems could even though no match was required, committing hinder the effective management and oversight of more state bond dollars and debt-service payments the high-speed rail project. than necessary to secure the federal funding. Structure of HSRA Board Is Problematic. Another concern is that, under the current To date, the Legislature’s major role in the devel- statute that created HSRA, appointees to the board opment of the high-speed rail project is the appro- are not required to have the specific expertise priation of funding each year. State law otherwise that would be helpful in the management of a grants the HSRA board considerable authority over construction project of this magnitude, such as the project, including the award of multi-billion a background in engineering or construction dollar contracts and concessions as well as the management, infrastructure finance, or rail system choice (within voter-approved parameters) as to management. when and where the train will be constructed and Heavy Reliance on Consultants May eventually operated. Increase Risks to State. Before the passage of The considerable autonomy granted to the Proposition 1A, the HSRA maintained a staff of HSRA board under current state law, however, roughly seven positions and conducted oversight of does not ensure that the board keeps the overall a relatively small number of consultants developing best interests of the state in mind as it makes the general approach for building the high-speed critical decisions about the project. Upon their rail system. After the voters approved the bond appointment to the panel, board members receive funding for the project, the number of consul- four-year terms and are not subject to direction tants working on its implementation increased by the executive branch. Nor are gubernatorial significantly. At the time we prepared this analysis, appointees to the board subject to a legislative the HSRA operated with a staff of approximately confirmation process. This relative lack of account- 19 filled positions and a team of consultants that ability to either the executive or legislative branches is the equivalent of 604 positions. While HSRA creates a risk that the board will pursue its primary is authorized to have a staff of 40, vacancies have mission—construction of the statewide high-speed persisted largely because of hiring freezes imposed rail system—without sufficient regard to other state in recent years in response to the state’s severe fiscal considerations, such as state fiscal concerns. difficulties. If all of the authorized state positions Arguably, some board decisions, such as its were filled, the ratio of state employees to consul- selection of the Central Valley segment as the tants would be 1 to 15. As things stand, with only starting place for construction of the system, 19 state workers actually in place, the ratio is 1 state have already demonstrated such weaknesses in employee for every 33 consultants. the structure of the board. While that decision at Representatives of the HSRA contend that the urging of federal authorities did advance the successful oversight of this type of project is not primary mission of the board to complete the high- dependent on the number of state workers available speed rail project, it raises concerns that the board to oversee its consultants but rather on the ability did not sufficiently consider the fiscal risks to the of staff to manage certain necessary functions, state if additional monies to complete construction such as contract management and oversight, 10 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t financial and operational plan development, and shared critical information with the Legislature. risk management. According to HSRA staff, similar For example, while HSRA has provided an estimate mega-projects worldwide have succeeded with of the cost of the part of the line between San between 60 and 80 staff fulfilling these critical Francisco, Los Angeles, and Anaheim, it has not functions. Recent state reviews, however, challenge provided its estimate of the total cost of all phases the authority’s contentions. For instance, in 2010, of the project that go beyond this route. Below, the State Auditor found that although HSRA we discuss some of the information gaps that are generally followed state requirements for awarding making it more difficult for the Legislature to make contracts, its processes for monitoring the perfor- decisions about the project. mance and accountability of its contractors are Project Lacks a Detailed Business Plan. inadequate. In addition, the auditor found that Our review indicates that the Legislature lacks HSRA paid at least $6.9 million in invoices from a detailed business plan to guide multi-billion- its consultants without verifying that the work dollar decisions it must make about high-speed reflected on the invoices was actually performed. A rail projects. Such a plan would include, at a review by the state Office of the Inspector General minimum, updated cost estimates, anticipated included similar findings and raised additional funding amounts and sources adjusted to reflect concerns about HSRA’s ability to oversee the current political and economic realities, a range consultants on the project. Based on these findings, of forecasted ridership and revenue estimates, a it is questionable whether the current number of proposed business model, and a discussion of risks state employees at HSRA can effectively manage the project may encounter. The existing business such a large team of consultants. plan was prepared in 2009 and, while it included all of the information that was statutorily required at the legislature lacks good the time, it lacks adequate detail for the Legislature Information for decision making to use to make major funding decisions. The lack of In general, the availability of good data leads detail prompted the Legislature to adopt budget bill to better decision making. However, our analysis language in 2010 requiring HSRA to provide this indicates that the Legislature suffers from a lack of kind of information. However, this language was good information that is needed to make decisions later vetoed from the budget bill by the Governor. about the appropriation of funds for the high-speed The HSRA has committed to providing an updated rail project. Given the very large size of this project, business plan in October 2011. At the time this its extended construction timeline, and the novelty report was prepared, however, the Legislature had of this type of project for California, it is reasonable received little of the information it needs to decide that some key project decisions must be based on what activities it should fund in the 2011-12 budget the best available analysis and assumptions rather plan and beyond. than hard numbers. For example, it is unlikely Cost Estimates Outdated and Likely that any ridership or revenue forecast is going Understated. Based on our analysis, the high- to give a definitive, reliable answer to whether speed rail project is likely to cost much more than the high-speed rail system can be successfully the $43 billion originally estimated by HSRA for completed and operated without significant state the first phase from San Francisco to Anaheim. support. However, in other cases, HSRA has not That estimate was prepared in 2009 based on very www.lao.ca.gov Legislative Analyst’s Office 11 An LAO RepOR t preliminary information concerning which align- estimate for the 100-mile segment discussed above, ments would be selected for the track and what the construction would cost about $67 billion. This design of the system would look like. extrapolation of costs, however, is based on the For example, based on the state’s agreement cost increase for a relatively straight-forward and with FRA, the cost of the initial construction uncomplicated segment of the proposed rail line. It segment between Fresno and Bakersfield alone is possible that some of the more urban segments is now estimated to be $4.5 billion, which is could be even more significantly underestimated. 57 percent greater than was assumed in the original The uncertainty surrounding the eventual cost of plan. As shown in Figure 4, the costs for program the system represents a significant challenge to the management, final design, and construction are Legislature’s ability to make sound decisions about each significantly higher for the 100-mile Central appropriation for the project. Valley segment now planned for construction Figure 4 than compared to the Comparison of Costs for Fresno to Bakersfield Segment full 120-mile segment (Dollars in Millions) originally proposed from 2009 Estimate 2011 Estimate Fresno to Bakersfield. Fresno to Initial Construction Bakersfield Segment (This initial construction Estimated Length of Segment in Miles 120 100a segment estimate also Project Component does not include the cost Program Management $361 $667 of completing the line Real property acquisition and early work 603 583 into Bakersfield, nor Final design and design-build construction 1,879 2,912b contracts the $200 million station Project reserves and unallocated contingency —c 309 planned for that city.) Total $2,843 $4,471 If the cost of building Increase in Project Costs 57% the entire Phase 1 system a The initial construction segment ends just outside Bakersfield. b were to grow as much Excludes the Bakersfield station included in the 2009 estimate. c Reserves and contingency funding are included in the estimated construction costs of the 2009 estimate. as the revised HSRA goveRnoR’S 2011-12 Budget Would move PRoJeCt aHead The Governor’s proposed budget for HSRA Legislature may be asked to appropriate billions of generally follows the schedule outlined in the most dollars in 2012-13. recent high-speed rail business plan. This proposal The budget plan includes $192 million to fund would fund HSRA at a level that is comparable to HSRA activities ($90 million in federal funds the level of funding it is receiving in the current and $102 million in Proposition 1A bond funds). year. The proposal is significant because it moves Almost all of the funding ($185 million) is for the project ahead as planned. As a result, the work that will be performed by consultants. This 12 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t includes contracts for program management, Major Budgetary Decisions Are Looming. The financial consulting, public outreach, and work Legislature will face some major decisions about on the development of the high-speed rail system. the appropriation of billions of dollars in state and In March 2011, the Legislature passed (but has federal funds beginning in 2012-13. In that fiscal not yet sent to the Governor) SB 69 (Leno), a state year, HSRA plans to enter into a number of large budget bill which would appropriate the $7 million design-build construction contracts which, in in funding for HSRA’s state administrative costs. contrast to traditional construction procurement This is an increase of roughly $1 million from the processes, award the design and construction of a current year’s administrative budget, primarily due project to a single entity. Some of the design-build to increased intergovernmental contract costs (as contracts could be worth more than a billion described below). dollars. The Legislature will likely be asked to Budget Proposes Increased Funding for State appropriate the state and federal funding for entire, Legal and Administrative Services. State law multiyear contracts in 2012-13 so that HSRA can requires that all state agencies use the Department award these types of contracts. of Justice (DOJ) as legal counsel, unless specifically This situation poses a dilemma for the exempted by law. As the project moves forward, Legislature. Because these huge appropriations HSRA is increasingly in need of legal support are not needed now, they are not formally before for activities such as the project’s environmental the Legislature as part of the 2011-12 budget plan process, land acquisition, and contracting for for HSRA. On the other hand, unless directed construction. Because of this, the budget includes otherwise, HSRA will proceed during the interim a request for additional funds for legal work with extensive development activities based on its performed by DOJ. In addition, HSRA contracts decisions about the project, such as its choice of with the Department of General Services (DGS) for the initial Central Valley segment for construction. accounting, administrative, and personnel services. If the Legislature has concerns about the path the While it is common for small departments to have high-speed rail project is on, it will diminish its such contracts, larger departments such as Caltrans opportunity to have meaningful input over such often have in-house, specialized staff to accomplish issues as the location of the first construction this work. segment if it waits until 2012-13 to do so. tHe legISlatuRe faCeS CHallengIng CHoICeS Given the significant challenges to the high- risks to the state. Unfortunately, at this time, there speed rail project, and the large and looming is little reliable information available to inform this budgetary decisions, the Legislature faces some decision. near-term challenging choices. Should the state Project Could Have Some Positive Outcomes. continue with the project as planned, slow it down The proposed high-speed rail system could have dramatically and attempt to address some of the some positive fiscal benefits. For example, HSRA problems that threaten its success, or stop the estimates that this project would alleviate the project completely? At the root of this decision is need to build 3,000 new lane-miles of freeway, and whether the significant potential benefits of moving 5 airport runways and 90 new departure gates—at forward with the project outweigh the significant a cost of nearly $100 billion—that would otherwise www.lao.ca.gov Legislative Analyst’s Office 13 An LAO RepOR t be necessary to accommodate intrastate travel Finally, some have argued that investing in by 2030. This is because the state’s population is high-speed rail infrastructure instead of other projected to grow steadily for decades and signif- modes of transportation could lead to improved icant investment in transportation infrastructure environmental outcomes, such as better air is expected to be needed to accommodate travelers quality. This is because the proposed system will between Northern and Southern California. In be electrically powered and not require fossil fuels theory, if those travelers choose the high-speed rail the way most automobiles and aircraft currently system instead of other modes, the project could do. However, other studies have suggested that the reduce the state’s overall infrastructure costs. project may not realize such improved environ- In addition, beginning construction of the mental outcomes, especially if levels of ridership project could have some positive effects on the were low to moderate. state’s economy. For example, the infusion of If Project Moves Forward, Changes Needed federal funds and potentially other private funds to Increase Likelihood of Its Success. Given the from outside the state, such as international threats to the project that we described earlier, we partners who might invest in the project, would have concluded that the Legislature should only benefit the overall economy at least in the short proceed with the project if two significant changes run. Some work, such as the construction of rail in direction occur. First, the Legislature needs more cars, could be performed by California firms. time and the flexibility to make critical decisions However, it is unclear how much of the relating to the project, even though this would funding allocated for high-speed rail would be require modifications to the federal restrictions spent in California. Because California has never that have been imposed on the project. Second, before built this mode of transportation, some given the magnitude of the state’s investment in out-of-state or international firms may have the the project, significant improvements are needed in critical expertise needed by the state to successfully the way both day-to-day and longer-term strategic build such a large-scale and complex rail system. decisions to manage the project are made. We have For example, according to the Bureau of Labor concluded that the current governance structure for Statistics, 97 percent of all operators of the track- the project is no longer appropriate and is too weak laying equipment that HSRA indicates it would use to ensure that this mega-project is coordinated and for the project reside in other states. To the extent managed effectively. These changes in governance that the state procures the services of firms from need to be made soon, in our view, because HSRA outside of California to develop and construct has already begun the process to move toward the the rail line, as well as to obtain rolling stock and award of multi-billion dollar construction contracts equipment for the system, the overall economic for the project. We describe in more detail below benefit to the state could be diminished. the specific changes in direction that we have concluded are necessary. 14 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t State needS moRe tIme and flexIBIlIty to develoP PRoJeCt As mentioned earlier, the FRA has imposed critical decision could pay other dividends. For some impractical restrictions on the development example, it might better enable the state to properly of California’s proposed high-speed rail system. If prepare environmental documents necessary for the state were granted flexibility from the federal the project to move forward and decrease the government to spend federal funding on a more likelihood of delay from litigation. Such project reasonable timeline, and where it will have the delays can endanger the state’s ability to meet most benefit, the project’s chances of success could deadlines as well as increase the overall cost of the be significantly improved in a way that might also project. better accomplish some of the federal program’s More Flexibility Could Help the State Meet stated goals in funding the project. Federal Goals. Putting a hold on the Central Valley Flexibility Regarding Federal Restrictions Is segment, and asking the federal government for more Needed. Based on our analysis, we recommend flexibility to examine this and other alternatives more that the state seek substantial additional flexibility carefully, carries the inherent risk that the state could regarding the federal restrictions on the project. lose some or all of the committed federal funding. First, the state needs more time than federal author- However, we believe it is likely that the federal ities are currently allowing to critically evaluate government would ultimately work with the state to which segment or segments should be constructed grant more flexibility, for the following reasons. first. Second, the state should be allowed to choose • California Offers a True High-Speed the segments to be constructed. Among the critical Rail Option. The federal administration factors that we believe the state should consider has prioritized dedicated high-speed rail in choosing a segment for construction are: projects, or projects that result in trains (1) whether a passenger rail system on a selected running at speeds of over 110 mph and segment could generate the ridership and revenues generally do not share tracks with freight to be financially successful and operate without a rail. California’s project is currently the state subsidy; (2) how much of the segment could only federally funded high-speed rail be completed with the funds now available; and system in the country. (Some federally (3) the potential benefits from building a particular funded “high-speed rail” projects in segment, including its potential impacts on traffic other states would incrementally improve congestion and air quality. The nearby text box (see existing passenger rail services, but none next page) describes some alternative segments of these are dedicated high-speed rail within Phase 1 that our analysis indicates should projects.) For this reason, it is in both FRA’s be carefully evaluated because of their potential to and the state’s best interests that the project provide greater overall benefits to the state than the succeed. Central Valley route. Whatever routes were chosen as a result of • Federal Authorities Are Already Showing this additional evaluation, gaining the additional Flexibility. The FRA has already demon- federal flexibility needed to take more time on this strated a willingness to adjust timelines www.lao.ca.gov Legislative Analyst’s Office 15 An LAO RepOR t in order to accommodate the state. For to identify ways to reduce the cost of example, the state was recently granted construction. In addition, in February more time to complete the environmental 2011, the President issued a memorandum clearance on the initial construction section to all federal agencies directing them to to give the contractors an opportunity provide more administrative flexibility to A S C P m B S lternAtive egmentS ould rovide ore enefittothe tAte For several reasons discussed earlier, there is a significant risk to the state that the statewide high-speed rail system envisioned in Proposition 1A will never be fully completed. It is possible that only a segment or two of the system will ultimately be constructed. The High-Speed Rail Authority has chosen to begin construction of the system on a 123-mile segment from near Fresno to Bakersfield. If this is the only portion of the system built, the state would realize some service improvements for the San Joaquin intercity rail corridor, such as shorter trip times and better on-time service. This intercity rail service currently runs six trains daily in each direction. However, based on our analysis, other segments could provide greater benefit to the state’s overall transpor- tation system even if the rest of the high-speed rail system were not completed. Below, we describe three segments that warrant consideration as alternatives to the Central Valley line. • Los Angeles-Anaheim. This highly travelled corridor includes commuter, freight, and intercity rail traffic, which could benefit greatly from corridor improvements along the alignment shared with the proposed high-speed rail system. Fifty passenger trains run daily through this corridor, at times sharing tracks with roughly 75 freight trains. In addition, grade separations that could be built as part of a high-speed rail project would improve the flow of auto traffic along the corridor because vehicles would no longer have to stop and wait for passing rail. Finally, to the extent improved passenger rail service in this corridor led to increased ridership, it could reduce pressure on other transportation modes and decrease the need for infrastructure projects that expand the capacity of the roads. • San Francisco-San Jose. Similar to Los Angeles-Anaheim, capital projects in this heavily congested corridor could improve both rail and auto traffic. This segment currently hosts 86 commuter trains daily, and freight trains use it at night. • San Jose-Merced. The state provides intercity rail service from Sacramento to Merced (and on to Bakersfield), and a separate rail service between Sacramento and San Jose. If the state chose the segment between San Jose and Merced for a high-speed rail project, the state would essentially “close the loop” and enable a significant increase in passenger rail mobility between the Central Valley and the Bay Area. This benefit from high-speed rail construction would result even if high-speed trains ultimately were never operated on the system. A recent report prepared by a Bay Area transportation commission projects that the number of commuters traveling daily from the Central Valley to the Bay Area will double by 2030, adding 60,000 commuters a day. 16 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t state and local governments in order to approach, the state could request that FRA adjust improve outcomes in federally supported its regulations to allow the state to first spend the programs at a lower cost. federal funds it has received and, after those funds have been fully spent, to spend the amount of state • Federal Authorities Could Get a Greater funds committed under the federal program. The Payoff From Their Investment. Granting amount of state funding committed to the project the state more flexibility from federal would not change—only the timing of when the deadlines and restrictions could ultimately funds are spent. This approach seems reasonable lead to greater achievement of the federal given that the ARRA funds required no match program’s own policy goals. For example, and therefore are being spent by other recipients in addition to ARRA’s goals of creating in this way. Such a change would enable the state jobs and stimulating economic recovery, to spend the ARRA funds twice as quickly once the federal law was intended to improve construction begins and make the 2017 expen- the nation’s energy independence, improve diture deadline more easily achievable. environmental quality, and make regional In addition, FRA indicates that it has the transportation systems more efficient. administrative discretion to remove the current A better decision on where to start requirement that its grant award to California construction of California’s high-speed be used for construction of the high-speed rail rail system could lead to a greater payoff in line beginning in the Central Valley. Changing each of these areas. this requirement opens the possibility to begin How Greater Federal Flexibility Could Be construction anywhere on the proposed line Achieved. A federal extension of the timeline for between San Francisco, Los Angeles, and Anaheim. expending these funds could be accomplished Such a change would give the Legislature more in a couple of ways. Current FRA regulations latitude to consider the state’s interests when require that the state spend federal funds and its determining the initial construction segment of the state matching funds at the same time. Under one high-speed rail system. moRe effeCtIve goveRnanCe Could ImPRove lIkelIHood of PRoJeCt SuCCeSS If the Legislature chooses to move forward with Our analysis found no one best way to the high-speed rail project, it could also address structure an organization to improve governance, issues we have identified pertaining to the gover- and that there is no particular organizational nance of the project—how both day-to-day and structure that can guarantee effective governance. longer-term strategic decisions about the project are Management experts hold the view that an organi- made and implemented. Our analysis indicates that zation’s structure should ideally be adjusted on a a more effective governance structure could help regular basis to reflect its current goals and the to remedy some of the serious problems faced by particular circumstances it faces, both of which the high-speed rail project and improve its chances can change dramatically, sometimes even within for success. The concept of good governance is a few years’ time. Ultimately, an appropriate discussed in the nearby textbox (see next page). www.lao.ca.gov Legislative Analyst’s Office 17 An LAO RepOR t organizational structure allows for the best consider the state’s relationship to and responsi- decisions to be made that lead to the best outcomes. bilities regarding the project. In other words, is the Our analysis indicates that the current organi- project at this phase of development principally zational structure for California’s high-speed rail a state effort, or should the state minimize its project does not meet these tests. For example, involvement and allow the project to be developed in our view, the current decision making process and administered like a business enterprise? for the project does not ensure that this statewide Because of the magnitude of this project and effort, funded heavily with state bond funding, is the length of time it is likely to take to develop and developed primarily with the state’s best policy construct the project, the answer to this question and fiscal interests in mind. In the sections that will depend largely on which phase the project follow, we explore several issues related to the way is in. Figure 3 shows the overall timeline and the decisions are made about the project. In particular, different phases of implementation anticipated for we discuss (1) whether the project should be treated the high-speed rail system. (The timeline for the as a state project or a business enterprise and project, which is based on HSRA’s business plan, (2) options for modifying HSRA’s organizational differs from that of a traditional PPP. We describe structure to improve the governance of the project. these differences in more detail in the textbox on page 19.) As we noted earlier in this analysis, the i t P h -S r S hiS hASeof igh Peed Ail original role of HSRA was to explore the feasibility d S P eveloPmentA tAte rojeCt of creating a state high-speed rail system and to do B e ? or uSineSS nterPriSe some initial planning for the system. The state’s role A first step toward improving the governance in the project is already changing dramatically as structure for the high-speed rail system is to it begins the development and construction phase, C g g hArACteriStiCSof ood overnAnCe Governance refers to the process of decision making and how decisions are implemented. Public governance involves the management and control of public resources and the delivery of programs and services. According to numerous studies of national and international organizational management, good governance principles generally include: • Participation—the involvement of key stakeholders. • Accountability—holding decision makers responsible for what they say and do. • Transparency—clarity and openness in the decision-making process. • Responsiveness—addressing the priorities and expectations of the public. • Efficiency—the extent to which resources are used without waste, delay, or negatively impacting future generations. Effective governance structures are more likely to make decisions and take actions that define expectations, grant power, and ensure that performance meets expectations. Such an approach can better ensure the successful completion of large projects within budget and on time. 18 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t and would change again during its subsequent government plays the primary role in the day-to- operation and maintenance. As a result, it is day as well as long-term strategic decision making. reasonable that the state’s governance approach to The figure also summarizes the characteristics the project should similarly evolve over time. We of what we refer to in this analysis as business discuss these concepts in Figure 5 more detail below. Characteristics of State Projects and Business Enterprises High-Speed Rail State Business Is More Similar to Characteristic Project Enterprise Large State Projects Funded by General Fund dollars X During Development Funded by large amount of federal funds X Financially self-supporting X and Construction Similar work done by private entities X Figure 5 summa- Competes with private market to deliver services X Requires coordination with other levels of government X rizes some of the key Contractors perform most work X X characteristics of what we Use of eminent domain X refer to in this report as Oversight of public funds X Completion of environmental studies and mitigation X state projects—meaning, High level of accountability to the public X projects in which state Takes some risks to realize higher returns X h P t P w d f t PPP owthe hASeSof hiS rojeCt ill iffer rom rAditionAl S In all public-private partnerships (PPP), there is a point in the project’s development when the public sector’s involvement diminishes and the private partners take significant control. Generally, for transportation-related PPPs, this happens after the initial design, environmental clearance, and right-of-way acquisition occur, but before construction is fully under way. This is because it is often best for the public entity to bear the early risks to the project—such as right-of-way acquisition— because the public sector can use such tools as eminent domain to accomplish the task that are not available to the private sector. Typically, control of a PPP project is ceded to the private sector for later phases of a project’s development in order to potentially lower the project’s overall cost and to reduce the risks that the sponsoring public agency would otherwise bear for its development. California’s high-speed rail project will differ from this typical model because of the enormous cost and risk involved with the project. While a consortium of large firms can generally bear the risk of a project costing up to a few billion dollars, the High-Speed Rail Authority’s (HSRA’s) latest business plan indicates that this project will conservatively require $10 billion from the private sector to complete. According to HSRA, the high amount of risks and costs mean that the state will need to follow a different project development model. For this project, HSRA expects to spend most or all the public funding first and oversee the dozens of large construction contracts. Then, toward the completion of the project, HSRA expects that a private partner or consortium will provide funding to finish the system and procure rail cars, likely with a long-term operations and mainte- nance contract to recover its costs over time. www.lao.ca.gov Legislative Analyst’s Office 19 An LAO RepOR t enterprises—activities for which the state cedes that it does not require public funds from either significant administrative responsibility and the state or federal government to operate. It does control to a more autonomous state agency or even work similar to private entities, and in some ways a private partner. competes with the private sector to provide home- Our analysis found that, during the upcoming mortgage loans. At this time in its development, development and construction phases, the high- the high-speed rail project shares none of these speed rail project more closely resembles a state qualities with CalHFA. project. For example, state bond funds (with debt o i g PtionSfor mProving overnAnCe service costs paid for by the General Fund) will h -S r P ofthe igh Peed Ail rojeCt finance a significant portion of the project’s costs. These monies are typically managed by the state As discussed above, our analysis suggests that rather than private or quasi-private entities. In an autonomous state operation does not seem to addition, the success of the completed system will be a very good fit with the critical set of tasks now largely depend on its integration with local transit, required to move forward with a high-speed rail the state’s intercity rail, and the state highway project. This is of concern for several reasons. First, systems. The high-speed rail project is also more the current governance structure for HSRA grants like a state project in that, in order to complete its its commission more independence and auton- work, the implementing organization must engage omous decision-making ability than we believe is in a number of activities traditionally accomplished appropriate for this phase of the project’s devel- by government rather than private enterprise. These opment. Second, because of the significant impacts activities include, for example, the use of eminent on the state’s transportation network, we believe domain to acquire large swaths of property. the project should be integrated into the state’s All of these factors suggest the need for a more current transportation planning structure. Finally, “hands-on” involvement by the state at this phase preserving the current organization of HSRA could in both day-to-day administrative and strategic lead to redundancies within state government and decisions. At this stage of implementation, the inefficient allocation of resources. Below, we present high-speed rail project in many ways resembles three options for changing the governance of what the construction of the state highway system. The we view as fundamentally a state project rather development of the state’s highways was assigned than a business enterprise. to Caltrans, a department which, like most state High-Speed Rail Project Could departments and agencies, is subject to strong Be Shifted to Caltrans oversight and controls by both the executive branch and the Legislature, such as through the annual One option to address the problems identified state budget process. above would be to shift some or all of the respon- In contrast, California Housing Finance sibility for overseeing the construction of the Agency (CalHFA), which takes the lead on a high-speed rail line to a more conventionally number of the state’s affordable housing finance governed state agency or department. Caltrans programs, has operated with considerably more may be the best choice, in our view, because this autonomy under the model of a business enterprise. project is consistent with Caltrans’ mission of CalHFA is financially self-supporting, meaning delivering transportation construction projects and improving mobility throughout the state. 20 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t Caltrans has decades of experience in delivering Caltrans Staff Could Perform Many Project large transportation infrastructure projects and Tasks. While much of the more specialized has a large complement of engineering staff in project work would remain the responsibility of place. Because Caltrans is already subject to close contractors, some of the proposed contracted work oversight by both the executive branch and the could be moved to Caltrans. Under this alter- Legislature, moving the project from HSRA to native, HSRA’s executive director and staff would the department could improve accountability for be shifted to Caltrans to oversee the remaining critical project decisions. Such a change could also contract activities, as well as to develop plans for somewhat reduce the need for external contractors future partnerships to help finance and operate the and provide the state with greater staff resources rail system. Examples of work that could be turned to ensure appropriate oversight of the sizeable over to Caltrans staff include: number of contracts that would be required for the • Negotiating and Overseeing Large construction of such a project. Contracts. Caltrans contracts with While we believe there are merits to shifting engineering and construction firms for the project to Caltrans, there are reasons to the completion of major transportation be concerned about such a shift. For instance, projects. For example, the department transportation experts within and outside state has entered into multiple, large contracts government have expressed concerns about ranging from hundreds of millions of Caltrans’ ability to effectively implement this dollars to $1.75 billion for the construction project, citing the department’s longstanding focus of the San Francisco-Oakland Bay Bridge. on highways and lack of expertise in working with private partners on PPPs. In addition, our office has • Acquiring Property for Transportation in recent years found some significant management Rights of Way. Caltrans has roughly 500 problems in Caltrans. Finally, some experts staff in Sacramento and in district offices suggest that the project should be viewed not as that acquire property for the state’s trans- a state project but as a PPP under which the state portation projects. This staff is already well- would cede a significant level of control to private trained in the specific actions necessary partners. (As we indicate in a previous text box, to acquire rights of way for transportation however, this project is not expected to follow the projects, including assessment of property traditional PPP schedule and would be the state’s values, relocation of utilities, and the responsibility for many years before the private successful negotiation of land purchases. partners become involved.) For instance, the HSRA is planning to Notwithstanding these issues, the benefits of adopt Caltrans’ manual for right-of-way moving the responsibility of this transportation acquisition as its own because of the project to Caltrans may outweigh these potential department’s experience and in-depth concerns. The Legislature would have to consider knowledge of the process. carefully exactly what operational changes might • Developing Public Support for be needed for Caltrans to successfully manage Transportation Projects. The department development and construction of a new high-speed maintains a public information office with rail system. Below we further discuss the advan- over 60 staff, as well as hundreds of staff tages of moving the project to Caltrans. www.lao.ca.gov Legislative Analyst’s Office 21 An LAO RepOR t in its planning division. Many of these Caltrans’ Capital Outlay Process May Be staff regularly attend local public meetings Better-Suited to High-Speed Rail. Currently, the concerning state projects and by doing high-speed rail project is subject to a review and so work to gain public support for the approval process administered by the state Public department’s proposals. In addition, the Works Board (PWB). The main purpose of this department has established relationships process is to ensure that capital outlay projects are with local agencies, regions, and other developed in compliance with the Legislature’s intent stakeholders which could greatly benefit when it appropriated funding for them. This process the high-speed rail project. The HSRA is is generally used for non-transportation projects currently contracting with Caltrans to such as the construction of office buildings and conduct inter-governmental relations with courthouses or the acquisition of open space land. many of the entities potentially affected by However, certain departments, such as the project. Caltrans, are not subject to the PWB process. Traditional transportation projects use a different • Providing Legal Support for Project capital outlay process which we find is better-suited Development and Delivery. Caltrans to the high-speed rail project. Caltrans’ process has about 280 attorneys, many of whom takes into account various challenges unique to are experienced in handling legal issues transportation projects, such as the timing of regarding the environmental review design, environmental clearance, and right-of-way process for transportation projects. In acquisition. Because Caltrans is so familiar with addition, Caltrans’ staff handle legal issues delivering transportation projects, shifting this relating to the acquisition of property for project development and construction work to the rights of way and transportation-related department could increase the odds that the high- contracting issues. speed rail project will be successful. Developing Project Within Caltrans May • Interacting With State and Federal Foster Integration Into Transportation System. If Administrative Processes and the the high-speed rail project were moved to Caltrans, Legislature. Caltrans has significant the project that is ultimately built is likely to be experience dealing with the typical state better integrated into the state’s transportation administrative processes such as working system. Currently, decision making about the with the state’s Department of Personnel state’s transportation system is not integrated and Administration to hire staff and DGS it is unclear to what extent Caltrans and HSRA to award contracts. Caltrans also has are working together to address the state’s overall extensive experience working with the transportation needs. federal Department of Transportation, For instance, we have been advised by Caltrans including meeting reporting requirements that HSRA contractors have only recently begun and effectively communicating the state’s engaging the department in discussions about the needs. Finally, Caltrans has a good under- added traffic volumes around some proposed train standing of the state and federal budget stations. In some cases, Caltrans staff have formally and legislative processes. commented in writing through the environmental process that the additional traffic at the proposed 22 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t stations could be considerable. For example, the to Caltrans could be accomplished in a way that most recent business plan projects nearly 13,000 was not unduly disruptive to the project. Finally, boardings daily at the Palmdale station alone. In any such shift of the project to Caltrans should be theory, close coordination of the train project with accompanied by the enactment of statutory changes improvements to mass transit systems operated by that would allow Caltrans to apply certain project other state or local transportation agencies could delivery tools specifically for the high-speed rail head off potential traffic problems. Without a project that are authorized in state law. These would robust transit system, however, many riders would include the unlimited ability HSRA now has to likely rely on their cars to reach this station. Thus, enter into contracts with private entities for the this potentially significant increase in traffic to design, construction, and operation of the system. and from this station should be included in state Caltrans, in contrast, is currently limited in its and local transportation planning long before the ability to hire contractors and can only complete station opens. This kind of coordination is critical 10 percent of its construction management and to the success of the project. oversight work using consultants. This proposed Some Operational Changes Within Caltrans change would not affect Caltrans’ current limita- Would Be Needed. While Caltrans has developed tions for development of other projects, but would and overseen the construction of the state highway apply only to the work to complete the high-speed system, it has no experience with high-speed rail rail project. projects. In addition, our office has raised concerns Given the complexity of the high-speed rail in the past about aspects of the operations of project, Caltrans should also be given the flexibility Caltrans and, in particular, its staffing levels for its now afforded to HSRA to use design-build division responsible for overseeing the development contracts for its development and construction. and construction of capital projects. Therefore, the Also, if the project were to be shifted to Caltrans, Legislature should carefully consider what opera- we believe certain positions within this new tional changes would be needed within Caltrans Caltrans division should be exempted from state if it were assigned this task. The ultimate strategy civil service requirements to help the state attract should be to take advantage of the department’s individuals from the private sector with the experience and expertise while maintaining the experience to develop this project, negotiate multi- current organization’s access to particular project billion dollar contracts, and oversee the system’s delivery tools necessary for successful completion implementation. of a high-speed rail project. HSRa Could Become a new State department One way to accomplish this would be to create a separate division within Caltrans, led Another option to better integrate the by a high-level deputy director who would have high-speed rail project into the traditional state overall responsibility to manage the construction governance structure is to create a new state project. The current HSRA executive director could department for this purpose within the Business, transition to this role to minimize any disruption Transportation and Housing (BTH) Agency. This to the project. In addition, all of the current new department could focus exclusively on the HSRA staff and position authority could likewise development of the high-speed train system or, in shift to be the initial staff of this new Caltrans the alternative, be combined with other state rail division. In this way, the transfer of the project programs, such as the intercity rail system that www.lao.ca.gov Legislative Analyst’s Office 23 An LAO RepOR t is now overseen by Caltrans. A recent study by HSRa Board Could Be eliminated or modified the California Research Bureau found that a new As described earlier, HSRA consists of a department combining state rail duties would likely nine-member board with considerable power to be beneficial, but could also increase state costs. direct the development and implementation of A new department, whether focused on high- the high-speed rail system. Along with the other speed rail or encompassing all state rail respon- changes described above, the Legislature may wish sibilities, theoretically could have a number of to consider the elimination or modification of this advantages over the current organization. The BTH largely autonomous board that now controls the Agency could better coordinate the activities of this administration of the high-speed rail project. new department with other state transportation Legislature Could Eliminate the Board. As efforts, including those of Caltrans. In addition, discussed earlier, the current governance structure the creation of such a department could give rail for development of the high-speed rail system does system development issues more visibility with the not require that the board keep the overall interests public and give rail projects more prominence in of the state in mind, including state fiscal concerns, policy and budget decisions. Pending legislation, as it makes critical decisions about the project. AB 145 (Galgiani), as amended on March 16, 2011, The current lack of accountability of the board would establish a new Department of High-Speed to either the Legislature or the executive branch, Trains under the BTH Agency to focus exclusively in our view, creates a serious risk that it will on the high-speed rail project. The new department continue to make decisions about the train route proposed in the legislation would be modeled and finances without paying sufficient regard to after Caltrans, but would continue to take policy the future consequences for the state. In addition, direction from the HSRA board and the director we are concerned that such a board—particularly would still work at the board’s pleasure. one lacking requirements for members who have There are some disadvantages to this approach. the specific technical expertise to manage such a Creating a new department would likely increase massive construction mega-project—is not appro- state administrative costs and result in the dupli- priate for the next phase of this work. cation of activities already being performed by For these reasons, the Legislature may wish other state departments. For example, the new to consider eliminating the board and ceding department would likely require the establishment both day-to-day and strategic long-term project of a new division for the acquisition of rights of management decisions either to Caltrans or to a way, duplicating the work of a Caltrans division new state department. Either choice, in our view, already doing the same type of work. Similarly, would likely be more accountable for its decisions the new department would need to duplicate the to the executive branch and the Legislature. expertise that Caltrans already has in negotiating In either case, the California Transportation and entering into various types of innovative Commission (CTC), which works closely with contracts with the private sector. In addition, a new Caltrans, could play an important role. The department may be less able to integrate the project commission already is assigned the responsibility into the state’s transportation system because it of advising and assisting the Secretary of the BTH would lack Caltrans’ familiarity with transpor- Agency and the Legislature in formulating and tation planning processes. evaluating state policies and plans for California’s transportation programs. The important role that 24 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t the current board serves in obtaining public input be changed to require that at least certain members about the project could also be accomplished by have specified technical expertise, such as in changing the statutory mission of the CTC so that construction management, infrastructure finance, it would hear high-speed rail issues in the same way or the operation of rail systems. Appointments to that it currently hears public concerns about state a number of state boards, such as the California highway projects. Energy Commission and the Air Resources Board, Legislature Could Modify the Board’s Existing similarly require that its members have specific Role and Structure. If the Legislature chose to areas of experience or knowledge. Pending legis- retain the board, state law could be changed so lation, SB 517 (Lowenthal), as amended on April 25, that it would operate in an advisory rather than 2011, would vacate the membership of the current a decision making role. For example, Florida’s board and require new appointments of members Statewide Passenger Rail Commission was created with various changes, including requiring specific within the Florida Department of Transportation expertise of some members. (FDOT) to monitor the efficiency, productivity, and Another potential change to the membership of management of all publicly funded passenger rail the board would be to include some representation systems and to advise FDOT and the legislature for local elected officials or transit agencies in areas on policies and strategies relating to state-owned along the route of the high-speed system. This passenger rail systems. This new advisory board could help to ensure that the potential impacts of could be combined with the already statutorily the design and alignment of the high-speed rail established peer review group, tasked with system in those communities are fully considered reviewing the project’s planning, engineering, and and that the high-speed rail line is better integrated financing plans and reporting to the Legislature, with local mass transit and other transportation or it could remain a separate board to monitor the systems. This could be accomplished in a number management of the project and provide general of ways, such as giving each affected county a board advice about the system to the Legislature and the seat, or creating a joint-powers authority (JPA) administration. similar to the Capitol Corridor JPA, which oversees Regardless of whether the panel retains its the Northern California intercity rail system authority as a decision-making body or becomes an between the Sacramento region and the Bay Area. advisory panel, the composition of the board could lao ReCommendatIonS: InCReaSIng tHe oddS tHat HIgH-SPeed RaIl WIll SuCCeed The proposed high-speed rail system offers federal conditions on the funding for the project, some significant potential benefits to California’s lack of good information for decision making, transportation system—including a possible and problems with the way project decisions reduction in overall transportation spending for are governed—pose threats to its successful highway and airport expansions, and improve- completion. ments in air quality and the environment. As we Thus, major budgetary and other challenges have also noted in this report, however, a number related to this project loom in the near term. The of concerns—ranging from the availability of and Legislature will likely be asked to appropriate www.lao.ca.gov Legislative Analyst’s Office 25 An LAO RepOR t billions of dollars for the high-speed rail project in bond funds have been spent and significant future 2012-13. The deadlines and conditions attached to debt-service costs have been incurred, the state will federal funding will make it increasingly difficult be left with a rail segment unconnected to major over time for the Legislature to make any changes it urban areas that has little if any chance of gener- may wish to consider to the proposed configuration ating the ridership to operate without a significant or prioritization of segments of the rail system, or state subsidy. In our view, this is inconsistent with to the organization (HSRA) now charged under the parameters for the project set forth by the state law with the responsibility of building it. voters in Proposition 1A, who explicitly directed Some of these factors have already led to debatable that any future rail system be capable of operating decisions about the future of the project, such as without a state subsidy. HSRA’s commitment to start building a segment in In addition, we have concluded that the the Central Valley. Legislature needs more reasonable deadlines and Accordingly, if upon weighing these factors the flexibility from the federal government so that it Legislature chooses to go forward with the project, can conduct a full evaluation of the Central Valley we believe there are some key steps that it should segment and alternative starting points for the take now to improve the likelihood of its successful system. The granting of this flexibility from the development. In general, our recommended federal government would also give the Legislature strategy involves (1) seeking greater flexibility from time to consider how the governance of the project federal authorities on the project deadlines and the could be improved, given that the current organi- choice of a rail segment involving use of federal zational structure is unlikely to be up to the task grant funds and (2) improving the governance and of development and construction of the new rail oversight of the project. The recommendations system. In our view, the state has a potent argument below represent the first steps that the state could that the granting of such flexibility by federal take so that, in the long run, the efforts undertaken authorities would not only protect the interests to develop and implement the high-speed rail of the state, but would ultimately lead to greater project can provide the best outcomes for the state achievement of the federal program’s own policy as a whole. goals to improve the nation’s energy independence, improve environmental quality, and make regional Seek flexibility from federal Restrictions and transportation systems more efficient. evaluate Construction of alternative Segments Therefore, we recommend the Legislature take In our view, the Governor’s budget proposal a series of steps to ensure that the state prioritizes to continue to fund activities that would move the spending of state funding for segments that have high-speed rail project forward as now proposed the best chance of actually being constructed and is asking the Legislature to take a huge leap of operated. faith given the threats to the success of the project. First, we recommend that the Legislature reject For example, the proposed start to the project in HSRA’s 2011-12 budget request for $185 million the Central Valley represents a significant gamble in funding for consultants to perform project that additional unidentified funding to complete management, public outreach, and other work adjacent segments of the project onward to urban to develop the project. We recommend that the areas will be forthcoming. The proposed approach Legislature appropriate only the $7 million in creates a serious risk that, after billions of state funding for HSRA state administration provided 26 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t for in the pending budget bill, SB 69. This would such a study without creating delays that would provide the resources needed by HSRA to complete make it impossible to meet the renegotiated the tasks we describe below that we believe are federal deadlines. Because the HSRA may need warranted to move the project forward in a way additional resources to conduct this study, we which is more likely to be successful. further recommend the adoption of budget bill Second, we recommend that the Legislature language authorizing the administration to seek adopt budget bill language directing HSRA to an augmentation of its funding during 2011-12 renegotiate the terms of the federal funding for this purpose. The HSRA should be directed to awarded to the state by the FRA. The language identify the top two options, including its recom- would specifically request that FRA permit the mended option, for beginning construction based state to first spend the federal funds it has received on criteria identified by the Legislature. The criteria and, after those funds have been fully spent, to for evaluating the best segment to build first should spend the state bond funds that it has committed. be included in the budget bill language and could As noted earlier, such a change would enable the include: state to spend the ARRA funds twice as quickly • The potential statewide benefits from once construction begins and make the 2017 building a particular segment, such as expenditure deadline more easily achievable. It its impact on improving mobility and would not change the state’s financial commitment reducing congestion or improving environ- to the segment supported with federal funds. mental outcomes. The language would also request that FRA use its administrative discretion to remove the current • How far along in the environmental review requirement that its grant award to California be and design process the segment is and used only for construction of the high-speed rail when construction could begin. line beginning in the Central Valley. This would • Whether a passenger rail system on the open up the possibility for the state to begin selected segment could generate on its own construction of whatever segments on the proposed ridership and revenues to be financially route between San Francisco, Los Angeles, and successful and operate without a subsidy. Anaheim that further evaluation shows makes the most sense. Further, we recommend the Legislature • How much of a segment could be only proceed with the project if this flexibility from completed with available funds, and under the federal government is forthcoming. the assumption that little or no additional Third, we recommend that the Legislature funding might be forthcoming for the adopt budget bill language requiring HSRA to high-speed rail project. reevaluate which segment or segments of the Fourth, we recommend that the HSRA high-speed rail line should be constructed first. provide specific updated information about the The language would specify that this reevaluation project, such as updated cost estimates for the would proceed only if federal authorities granted entire proposed rail line, to help the Legislature the state the additional flexibility described above. make more informed budgetary decisions about The language would further direct that this its investment in the high-speed rail system. We study be completed by October 2011. In our view, recommend that the Legislature require that this this would provide sufficient time to complete www.lao.ca.gov Legislative Analyst’s Office 27 An LAO RepOR t report be completed by HSRA by October 2011 in moving the project to Caltrans is a better option order to facilitate timely decision making about than creating a new department. Establishing how the project could best move forward. a new department would likely increase state Lastly, we recommend that the Legislature administrative costs and result in the duplication adopt budget bill language authorizing the admin- of activities already being performed elsewhere. istration to seek an augmentation of HSRA’s budget However, due to the project’s unique nature, the that would allow it to proceed with the development move would need to ensure that Caltrans has some of the segment approved by the Legislature based of the project delivery tools available for devel- on the results of the evaluation described above. opment of high-speed rail currently granted HSRA This entire multistep process we have outlined to enable the state to effectively deliver the complex above should take no more than a few months rail system. and therefore should not significantly affect the Accordingly, we recommend that the state’s ability to meet the federal deadlines for Legislature pass a bill this session that shifts the project—assuming, of course, that federal the responsibility for the development of the authorities provide the state with the additional project from HSRA to Caltrans. In addition, we flexibility we believe is necessary for the project to recommend that the Legislature remove decision- move ahead with the best chance of success. making authority over the high-speed rail project from the HSRA board to ensure that the state’s Structure High-Speed Rail overall interests, including state fiscal concerns, are development as a State Project fully taken into account as the project is developed. Because the characteristics of the high-speed If the board is retained in an advisory role, we rail project at this time more closely resemble recommend that state law be changed to specify a state project, we recommend its governance that some members have specifically designated and oversight structures be crafted accordingly. expertise in such fields as engineering, infra- We believe the best way to do this is to move the structure finance, and rail systems. Representatives responsibility for development and construction of local agencies and/or mass transit systems along of the system to Caltrans, the state’s existing the route of the proposed high-speed rail system department responsible for delivery of state trans- could also be provided some representation on such portation projects. As noted earlier, the project an advisory board. Such changes would address would benefit greatly from Caltrans’ expertise in concerns we about the board’s accountability to such areas as the acquisition of rights of way, devel- the executive and legislative branches, and would oping local support, and negotiating and overseeing provide the organizational structure the project large construction contracts. We believe that needs at this time if the project is to succeed. LAO Publications This report was prepared by Eric Thronson, and reviewed by Farra Bracht. The Legislative Analyst’s Office (LAO) is a nonpartisan office which provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an email subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 28 Legislative Analyst’s Office www.lao.ca.gov