Review of High-Speed Rail Draft 2016 Business Plan

Review of High-Speed Rail Draft 2016 Business Plan MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • MARCH 17, 2016 Summary On February 18, 2016, the California High-Speed Rail Authority (HSRA) released a draft of its 2016 business plan, as required by state law. The plan provides updated information on the project and proposes changes to the project’s construction plan. Specifically, the plan (1) changes the initial operating segment (IOS) of the project from the south (Central Valley to San Fernando Valley) to the north (Central Valley to Silicon Valley), (2) updates the capital cost and schedule for Phase I of the system (San Francisco to Anaheim), (3) identifies full funding for the proposed IOS North, and (4) assumes additional funding will become available for the remainder of Phase I of the system. Given the significant cost of the planned high-speed rail project and the level of investment that the state has thus far made on the project, it will be important for the Legislature to ensure that the final version of the authority’s business plan is aligned with its priorities. In this report, we identify three major issues that merit legislative consideration. First, there are several uncertainties regarding the funding plan for Phase I, such as uncertainty regarding the future availability of cap-and-trade auction revenues to fund the project as planned. Second, the Legislature will want to ensure that the change in the scope of the IOS meets its priorities. To the extent that the Legislature concurs with the proposed IOS North, it will want to consider whether the IOS has stand-alone value. Third, in order for the Legislature to maintain oversight of the project, it needs detailed information about the cost, scope, and schedule of each segment HSRA is planning to construct in order to easily track changes over time. AN LAO BRIEF INTRODUCTION The California High-Speed Rail Authority high-speed rail system. On February 18, 2016, (HSRA)—an independent authority consisting of HSRA released a draft of its 2016 business plan. The a nine-member board appointed by the Legislature authority must adopt a final business plan by May 1 and Governor—is responsible for planning and following public review and comment on the draft constructing an intercity high-speed train system plan. In this report, we (1) provide background that would link the state’s major population information on the planned high-speed rail centers. Under existing state law, HSRA is required system, (2) describe the major changes proposed to prepare a business plan every even year that in the draft 2016 business plan to the project, and provides certain key information about the planned (3) identify issues for legislative consideration. BACKGROUND Overview of the Planned service for about 500 miles from San Francisco to High-Speed Rail System Anaheim. Phase II of the system would connect the system to Sacramento in the north and San Diego Project Initiated in 1996. Chapter 796 of 1996 in the south. In 2014, HSRA estimated that Phase I (SB 1420, Kopp) established the HSRA to plan and of the system would be completed in 2028 and cost construct an intercity high-speed train system that about $68 billion. The authority has not provided would link the state’s major population centers. In estimates of the cost or schedule for Phase II. November 2008, voters approved Proposition 1A, The HSRA plans to build Phase I of the system which specified certain criteria and conditions in segments as funding becomes available. As that the high-speed rail system must ultimately discussed below, the authority has been planning achieve. (As we discuss below, Proposition 1A also since 2012 for the first segment to connect the authorized the state to sell bonds to partially fund Central Valley to the Los Angeles region. Initial the system.) For example, the measure requires work on Phase I also includes certain early electric trains capable of operating speeds of at least improvements to the “bookends” of the system. 200 miles an hour and specifies maximum travel These are projects on commuter rail lines in the Bay times along specific routes, such as nonstop travel Area and Southern California that will facilitate from San Francisco to Los Angeles being no more high-speed rail and also provide benefits to existing than two hours and forty minutes. Proposition 1A commuter rail systems. also requires that the system operate without First Operable Segment Planned to Go South. requiring a subsidy. The planned project would be Since 2012, HSRA has reported that the first the first high-speed rail system in the U.S. and one operation of high-speed rail in the state will be after of the state’s largest public works projects. the construction of an initial operating segment Construction of Project Divided in Two (IOS) of Phase I, which would connect Merced to Phases. The HSRA plans to construct the the San Fernando Valley (commonly referred to as high-speed rail system in two phases, as shown the “IOS South”). The HSRA selected the IOS South in Figure 1. Phase I of the system would provide partly because the authority estimated it could 2 Legislative Analyst’s Office www.lao.ca.gov AN LAO BRIEF Figure 1 Planned High-Speed Rail System Phase I Phase II Sacramento Stockton San Francisco San Jose Merced Gilroy Fresno Kings/Tulare Bakersfield Palmdale Los Angeles Riverside Anaheim San Diego www.lao.ca.gov Legislative Analyst’s Office 3 AN LAO BRIEF meet the requirement of Proposition 1A to operate only through September 30, 2017. As without requiring a subsidy due to potentially of November 2015, HSRA had spent high levels of ridership to and from the densely $670 million of these funds. The remaining populated Los Angeles region. The authority’s plan $928 million in federal funds are subject to a funding agreement with the Federal was to build the IOS South in smaller construction Railroad Administration. According to segments, but not operate high-speed trains on the HSRA staff, the terms of the agreement system until the entire IOS South was completed. can potentially be changed in the future In 2014, HSRA reported that the IOS South would to align with the project’s needs. At this cost about $31 billion and be completed by 2022. time, HSRA has not spent any of the Initial Construction Began in the Central $928 million in federal funds. Valley. Construction of the IOS South began on a segment—commonly referred to as the initial • Cap-and-Trade Auction Revenue. In construction segment (ICS)—extending 130 miles 2014, the state began providing cap-and- trade auction proceeds to HSRA for the from Madera (about 30 miles south of the proposed high-speed rail project. Cap-and-trade northern terminus of IOS South in Merced) to auction proceeds are revenue generated an area north of Bakersfield. The HSRA initially by the state from the sale of emission estimated that the ICS would be completed by 2017 allowances as part of the state’s efforts to and cost $5.9 billion. reduce greenhouse gas (GHG) emissions. Funding Provided for the Project. The HSRA The Legislature authorized the state’s has received partial funding to plan and construct cap-and-trade program as one of several the high-speed rail system. Specifically, through programs to reduce GHG emissions to 1990 2015-16, HSRA will have received an estimated levels by 2020. In 2014-15, HSRA received $8.1 billion to build the system. The specific $250 million in cap-and-trade auction funding sources provided for the project are: revenues. As part of the 2014-15 budget, • Proposition 1A Bonds. This measure the Legislature also adopted budget trailer authorized the state to sell $9.95 billion legislation to continuously appropriate, in bonds, with $9 billion of this amount beginning in 2015-16, 25 percent of annual for the high-speed rail project. These cap-and-trade auction revenue for the bond funds cannot be used for more than planning and capital costs for Phase I of 50 percent of the construction cost of a the high-speed rail project. In 2015-16, this segment of the system. The Legislature has amount is estimated to be $600 million. appropriated $3.7 billion of the bond funds The Governor’s budget estimates that authorized for high-speed rail, most of HSRA will receive $500 million in auction which remains unspent. About $1.1 billion revenues in 2016-17. In addition, state of the funding appropriated is for the law currently provides that an additional bookend projects on commuter rail lines, $400 million in cap-and-trade revenues as discussed above. that were previously loaned to the General Fund will be provided to HSRA. • Federal Funds. The HSRA has received The Governor’s budget assumes that $3.5 billion in federal funds. This amount $100 million of this will be provided in includes $2.6 billion in federal stimulus 2016-17 and $300 million in 2017-18. funds, which are available for expenditure 4 Legislative Analyst’s Office www.lao.ca.gov AN LAO BRIEF HSRA Statutorily Required to • Funding Information. The plan is also Prepare Business Plan required to include information on the funding HSRA anticipates receiving to State law requires HSRA to prepare a business construct the system from various sources, plan every even year that provides certain key such as state bond funds and federal funds. information about the planned high-speed rail system. Specifically, the authority must adopt a • Risks to Completing the System. The plan final business plan by May 1 every even year, and a also must include information on the risks draft of the plan is required at least 60 days prior for faced by the project, such as risks related to public review and comment. Under current law, the financing, ridership, and construction. biennial business plan must include the following: On April 30, 2014, HSRA adopted a final 2014 • Construction Plan. The business plan must business plan. Our above description regarding the include a description of the type of train planned high-speed rail project reflects the final service HSRA is developing, the timing and 2014 business plan. As we discuss in the following order for building various segments of the section, the authority recently released a draft 2016 system, estimated schedules for completing business plan. environmental clearance, and estimated capital costs of constructing the system. MAJOR FEATURES OF DRAFT 2016 BUSINESS PLAN As required by state law, HSRA released a plan are summarized in Figure 2 and discussed draft business plan for public review and comment below. on February 18, 2016. Specifically, the draft 2016 Changes IOS From South to North business plan provides updated information on the project and proposes changes to the project’s Silicon Valley to Central Valley IOS. The construction plan. The major features of the draft draft 2016 business plan changes the direction Figure 2 Major Features of Draft 2016 High-Speed Rail Business Plan 9 Changes Initial Operating Segment (IOS) From South to North. The plan changes direction of the IOS from south to north. Specifically, the IOS would extend from the Central Valley to the Silicon Valley, rather than from the Central Valley to the San Fernando Valley in Southern California. 9 Updates Capital Cost and Schedule for Phase I. The plan estimates the capital cost of Phase I at $64 billion, about $4 billion less than identified in the prior business plan. 9 Identifies Full Funding for Proposed IOS North. The plan identifies sources to fully fund the proposed IOS North (Silicon Valley to Central Valley). 9 Assumes Additional Funding Will Become Available for Remainder of Phase I. The plan discusses potential sources that might be available to partially fund the remainder of Phase I, but does not include a full funding plan. www.lao.ca.gov Legislative Analyst’s Office 5 AN LAO BRIEF of the IOS from south to north, as shown in the IOS North would carry between 2.2 million and Figure 3. Under the draft plan, the IOS would 4.1 million passengers. extend 239 miles from the Central Valley to the Estimated Capital Cost of Proposed IOS. A Silicon Valley (referred to in this report as the “IOS primary reason for the change in the IOS is because North”), rather than from the Central Valley to of insufficient funding to complete the planned IOS the San Fernando Valley. Under the plan, HSRA South. As we discuss below, the draft business plan would connect the ICS that is currently under identifies funding sources to complete the proposed construction in the Central Valley to San Jose. IOS North, which is estimated to cost less than the Specifically, the IOS North would connect Diridon IOS South. Specifically, HSRA estimates that the Station in downtown San Jose to an agricultural IOS North would have capital costs of $20.7 billion, area north of the city of Shafter in the Central including $7.3 billion for the ICS and $13.4 billion Valley. Because the southern terminus of the line to extend from Madera (the northern terminus would be roughly 50 miles south of the last station, of the ICS) to San Jose. This is about $10 billion HSRA plans to build an interim station at the less than the estimated cost of the IOS South. In southern terminus north of Shafter. The draft plan addition, HSRA would incur financing costs for estimates that in 2025, the first year of operation, the IOS North. The HSRA also indicates that the Figure 3 Proposed Initial Operating Segment (IOS) Sacramento Stockton San Francisco Merced San Jose Gilroy Fresno Kings/Tulare Pacific Ocean Bakersfield Palmdale Proposed IOS North Previously Planned IOS South Los Angeles Riverside Initial Construction Segment Anaheim San Diego 6 Legislative Analyst’s Office www.lao.ca.gov AN LAO BRIEF Silicon Valley to Central Valley segment has fewer expenditures on the project and engineering challenges and could therefore be built (2) $12.5 billion from 2025 through 2050 more quickly than the more technically complex to support financing. Specifically, the connection into the Los Angeles region. $12.5 billion would be securitized to generate $5.2 billion in financing proceeds. Updates Capital Cost and Schedule for Phase I While not specified in the plan, the remaining $7.3 billion would presumably The 2016 draft business plan includes an support financing costs. updated capital cost of Phase I of the system (San Francisco to Anaheim) of an estimated $64 billion, • $338 million from various sources, such as which is about $4 billion less than the cost provided Proposition 1A and federal funds, that are in the 2014 business plan. As shown in Figure 4, allocated to project planning. this includes the cost of the proposed IOS North Of the above $28 billion, (1) $20.7 billion would and costs to complete the other segments of support the estimated capital costs of the IOS North Phase I. These costs reflect estimated capital costs and (2) $176 million would support a reserve for the for the project and do not include certain other project. According to the business plan, the remaining costs associated with building the system, such $7.3 billion appears related to financing costs. as financing and administrative costs. The plan assumes Phase I would be complete by 2029. Assumes Additional Funding Will Become Available for Remainder of Phase I Identifies Full Funding for Proposed IOS North While the draft plan identifies funding sources The draft business plan identifies sources to to complete the proposed IOS North of Phase I, as fully fund the proposed IOS North (Silicon Valley well as meet certain costs for the bookends of the to Central Valley). These sources include: system, the plan does not identify specific funding • $6.8 billion from Proposition 1A, to support the construction of the remainder of including $4.2 billion that has not yet been Phase I. This would mean that the state would need appropriated by the Legislature. to identify additional funding sources in the future • $3.2 billion in federal Figure 4 funds already Phase I Capital Cost—2016 Draft Business Plana appropriated to (In Billions) HSRA. Segment • $17.8 billion in IOS North —Silicon Valley to Central Valley North of Shafter to Madera (ICS) $7.3 cap-and-trade Madera to San Jose 13.4 auction revenues Subtotal ($20.7) through 2050. Remainder of Phase I This amount IOS North extension to San Francisco and Bakersfield $2.9 includes Other Phase I segments 40.6 (1) $5.3 billion Subtotal ($43.5) Total $64.2 through 2024 that a Estimated dollar amounts are in year of expenditure. would support IOS = initial operating segment and ICS = initial construction segment. pay-as-you-go www.lao.ca.gov Legislative Analyst’s Office 7 AN LAO BRIEF to pay for the $43.5 billion in construction costs Use Operating Revenues to Partially Fund for other segments of Phase I, in addition to any Other Segments of Phase I. Assuming the IOS financing costs that might be required. The draft North is constructed as well as the extension of business plan assumes that this additional funding the IOS described above, HSRA estimates that would be available in order to begin construction the other segments of the Phase I system will cost on the remainder of Phase I in 2018, so that the $40.6 billion to construct. In addition, HSRA will entire Phase I system would be completed and have administrative costs, and could potentially operational by 2029. While the plan discusses have financing costs related to the completion of potential sources that might be able to partially Phase I that are not required to be included in the fund additional portions of Phase I, as we discuss business plan. The draft business plan estimates below, it does not include a full funding plan. that the IOS North will generate an operating Seek Federal Funds to Connect IOS to surplus after it is completed. The plan assumes that San Francisco and Bakersfield. As part of the plan this net operating revenue could be securitized, to complete Phase I, HSRA plans to extend the meaning the state could essentially sell the right proposed IOS from San Jose to San Francisco and to these ongoing revenues in order to generate a from the southern terminus into Bakersfield. The one-time up front payment to the state. Specifically, HSRA estimates these extensions would require the business plan estimates that the state could an additional $2.9 billion in funding—$2 billion to generate $3.2 billion from such securitization. The extend the line into Bakersfield and $900 million HSRA also estimates that if the IOS were extended for improvements to facilitate service into San to Bakersfield and San Francisco, that would allow Francisco. The $900 million for the San Jose to for an additional $4.2 billion in financing, for a San Francisco section represents only a portion of total of $7.4 billion. These leveraged funds would the total cost of that segment. The business plan then be available to fund construction of a portion indicates that HSRA will request funding from the of the remainder of Phase I. The HSRA has not federal government for the extension of the IOS identified where the remaining funding would into San Francisco and Bakersfield. come from in order to complete Phase I of the system. ISSUES FOR LEGISLATIVE CONSIDERATION Given the significant cost of the planned Uncertainties Regarding high-speed rail project and the level of investment Funding Plan for Phase I that the state has thus far made on the project, it In order to ensure that Phase I of the will be important for the Legislature to ensure that high-speed rail system is completed as planned, it the final version of the authority’s business plan is is essential that HSRA develops a comprehensive aligned with its priorities. Below, we identify three and credible funding plan for the project. While major issues that merit legislative consideration: the 2016 draft business plan identifies sources to (1) uncertainties regarding the funding plan for fully fund the proposed IOS North, there is some Phase I, (2) the scope of the IOS, and (3) adequate uncertainty regarding the future availability of oversight of the project. cap-and-trade auction revenues to fund the project. 8 Legislative Analyst’s Office www.lao.ca.gov AN LAO BRIEF In addition, the business plan lacks a complete No Complete Funding Plan for Remainder funding plan for the remainder of Phase I. We of Phase I. As mentioned above, HSRA estimates discuss each of these issues in more detail below. that the capital costs to complete the remainder Availability of Future Cap-and-Trade of Phase I after the IOS North are $43.5 billion. Revenue to Complete IOS Could Potentially There would also be an unidentified amount Require Certain Legislative Actions. As discussed of administrative costs as well as potentially above, about half of the funding identified in the significant financing costs. While the draft business draft business plan for the proposed IOS is from plan discusses the possibility of securitizing the net cap-and-trade auction revenues after 2020. While operating revenues once the proposed IOS North the administration indicates it plans to continue is complete to support part of the costs to complete the cap-and-trade program beyond 2020, current Phase I, it is unclear whether the system will law does not appear to authorize the program’s actually generate an operating surplus. Moreover, continuation beyond 2020. This means that without the plan estimates that the amount of funding that legislative action, the cap-and-trade funds HSRA could be generated would fall significantly short of plans to use to build the IOS would likely not be the level needed to complete Phase I and does not available. At a minimum, these funds are subject identify how this shortfall would be met. to considerable legal uncertainty. The Legislature Scope of IOS will want to consider whether to approve the state’s cap-and-trade program beyond 2020 on the merits Weigh Trade-Offs of Proposed IOS Scope of that program as a policy tool to achieve its GHG Change. The Legislature will want to ensure emission reduction goals. To the extent that the that the change in the scope of the IOS meets its program is authorized beyond 2020, these revenues priorities. While the previously planned IOS South could be available for the high-speed rail project, as would have connected a more populous region well as other uses. of the state and had higher projected ridership, If the legal uncertainty around the continuation it is not possible to be completed as scheduled of cap-and-trade is resolved, in the short-run due to insufficient funding. To the extent that HSRA’s estimate of $500 million annually from the Legislature wants to ensure the continued cap-and-trade auction revenues (based on the development of a high-speed rail system, the 25 percent continuous appropriation) appears proposed IOS North has some merit. Since the reasonable. However, in order to help facilitate the proposed IOS North has construction costs of long-run securitization of future cap-and-trade about $10 billion less than the initially planned IOS revenues as assumed in the plan, the Legislature South, it is much more likely that a full funding would need to take steps to ensure the availability package to complete the segment could be achieved. of an adequate amount of revenues to support In addition, the proposed IOS North would such financing. For example, the Legislature could have less risk than trying to complete the more specify that the first call on annual cap-and-trade technically complex line into Southern California. revenues would be for the repayment of high-speed Ensure IOS Has Stand-Alone Value. If the rail financing. Such changes in the allocation of Legislature concurs with the business plan’s cap-and-trade auction revenues could impact changed scope of the IOS, it will want to consider the level of funding available for other programs whether the IOS has stand-alone value—meaning intended to reduce GHG emissions. that the entire IOS is usable and that it connects www.lao.ca.gov Legislative Analyst’s Office 9 AN LAO BRIEF major metropolitan regions of the state. If the Legislature to maintain oversight of the project to remaining parts of Phase I were not built due to a help ensure it is completed as planned and within lack of available funds, the state would still have a budget. In order to facilitate such oversight, the usable asset. Legislature needs certain information to hold the In evaluating the stand-alone value of the HSRA accountable. Specifically, the Legislature IOS North, the Legislature will want to consider needs detailed information about the cost, scope, whether the southern terminus of the proposed IOS and schedule of each segment HSRA is planning to makes sense. As mentioned above, under the plan, construct. However, the information provided by the IOS North would have its southern terminus HSRA in the business plan and other documents at an agricultural area north of the small city of can be difficult to compare over time. For example, Shafter, which is about 50 miles south of the last since beginning work on the ICS, the scope, cost, planned station on the IOS. In order to make the and schedule of the project has changed, making it southernmost portion of the IOS usable, HSRA difficult to determine how well HSRA is adhering plans to build a temporary station or platform at to the budget for that segment. Specifically, the this location. However, doing so would require length of the ICS was reduced to 118 miles from additional environmental clearance as a station at 130 miles. The projected cost of the ICS assumed this location was not previously evaluated by HSRA. in the draft 2016 business plan is $7.3 billion, Even with a temporary station or platform, ending compared to the initially planned $5.9 billion cost. the IOS in an unpopulated agricultural area does not However, based on the information provided by appear to be an effective approach. This is because HSRA, it is difficult to determine the extent to this location would not have the types of facilities which the change in costs is related to the changes and nearby businesses, such as transit connections, in scope or other factors. rental car facilities, and shops necessary to meet the The Legislature may want to consider defining needs of train passengers. To address these concerns, specific segments of the system and requiring the Legislature could direct HSRA to limit work future business plans and other legislative reports beyond the last permanent station (Kings/Tulare) to provide information on the cost and schedule near Hanford. This could free up some funding of these fixed scopes of work. This would make it to support other aspects of the system, such as easier to track changes over time and understand the IOS North or the bookend projects that make the reasons for cost changes. In addition, state law improvements to existing commuter rail lines. requires HSRA to identify the capital costs related Alternatively, the Legislature could make it a priority to the planned system, but not other costs. The to identify the additional $2 billion necessary to Legislature will want to consider requiring future extend the IOS to Bakersfield. business plans to include all costs associated with the planned system and construction of the various Adequate Legislative Oversight segments, such as financing and administrative Given the state’s significant investment in the costs. high-speed rail project, it will be important for the 10 Legislative Analyst’s Office www.lao.ca.gov AN LAO BRIEF www.lao.ca.gov Legislative Analyst’s Office 11 AN LAO B R I E F LAO Publications This brief was prepared by Jessica Peters and reviewed by Anthony Simbol. 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