High-speed rail plan proceeds despite warnings

Analysts say project is tens of billions short.

June 27, 2011 

The agency spearheading California's efforts to build a high-speed train through the center of the state is plunging forward despite repeated warnings that it may be tens of billions of dollars short of the money needed to build and operate the system, records and interviews show.

"There is an air of unreality" about the project's $45 billion construction budget, a panel of experts warned the state Legislature last year.

It's a "big gamble" to start construction, the nonpartisan Legislative Analyst's Office warned in May, saying financing was "highly uncertain."

The project lacks "a disciplined business plan that makes any sense," says state Treasurer Bill Lockyer. He fears Wall Street won't invest anywhere near the $12 billion in private capital needed to build the system.

Undergirding the warnings, an inquiry by California Watch and the Orange County Register has found, is a tangle of related concerns:

The appointed officials who make up California's High-Speed Rail Authority say they will rely on $19 billion in federal aid to pay for the 800-mile system. But the legislative analyst says federal funding may amount to less than $4 billion – a $15 billion shortfall.

The rail authority's $45 billion construction estimate may be $22 billion too low, the legislative analyst says. Cost overruns of the sort that have afflicted other big U.S. projects could even drive the actual price above $200 billion, according to a critical study by a Stanford University professor.

The high-speed train's prospects for turning big profits are founded on ridership forecasts that are deeply flawed, two studies claim. Rather than making billions in profits, high-speed rail might actually "incur significant revenue shortfalls," a University of California at Berkeley study found.

The high-speed train's boosters say these concerns are unfounded or overblown. They say they are confident that sufficient funds will be found to build the system, which would connect Orange County and San Francisco via 220-mph trains.

Rail is the cheapest way to meet the transportation needs of California's burgeoning population, which could reach 50 million by 2030, advocates say.

Construction of the first leg, linking Fresno and Bakersfield, is set to begin next year. Eventually, trains would run all the way from Sacramento to San Diego.

The authority has based its cost estimates on mountains of studies, Deputy Executive Director Jeff Barker said. When the legislative analyst criticizes the authority's cost estimate, he said, it's "simply dumbing down the process."

He criticized the analyst's office for suggesting an overhaul of the project, saying that would mean delays guaranteed to increase the price.

"The sooner we build it," said rail authority Chairman Tom Umberg, "the less expensive it will be."

Plans start rolling

Japan, France and Spain are among the nations that have turned to high-speed rail to solve 21st-century transportation problems.

For a generation, transportation planners in California have looked to trains as well. In a state where the car is king, some saw rail as a way to break the cycle of building freeways to ease traffic gridlock, only to see the new roads fill up with cars. There were other foreseen benefits: Reining in urban sprawl. Reducing dependence on foreign oil. Cutting smog. And, of course, the economic boost that would come with a massive public works project.

In 2008, state voters approved $9.95 billion in bonds to begin building the system. Trains would be fast, frequent and cheap to ride, voters were told. Once the system was built, it would make money. No taxpayer subsidy would be allowed.

In the depths of a recession, the economic boost the project would provide was another selling point: Advocates said the high-speed train would create 160,000 construction jobs and 450,000 permanent jobs – "American jobs that cannot be outsourced," the ballot argument said.

With the election of President Barack Obama, the project got another boost: $3.48 billion in federal stimulus funds. Almost half of that came when Ohio, Florida and Wisconsin dumped planned rail projects, saying they didn't pencil out.

Funding questioned

With the federal funds came deadlines: California was told it had to begin construction in 2012. As high-speed rail rolled onto the fast track, there came official scrutiny – and then alarm.

In the past two years, the state auditor, UC Berkeley's Institute of Transportation Studies, the legislative analyst and a peer-review group expert panel formed by the Legislature have studied the project's finances.

So have a Stanford-trained expert in statistical economics and a Stanford management professor affiliated with a Palo Alto citizens group called Californians Advocating Responsible Rail Design.

The studies have repeatedly red-flagged the project – starting with its source of funds. In a 2009 business plan, the rail authority said it would draw on as much as $45 billion in funding to build the system – including up to $19 billion in federal money. But three inquiries concluded that the rail authority had been wildly optimistic about receiving billions in federal funds in an era of soaring deficits and deep budget cuts.

The legislative analyst's May report was especially pessimistic, saying the rail plan was larded with "unrealistic assumptions" and suggesting that federal aid would fall $15 billion short.

Prospects for raising $12 billion in private capital for high-speed rail aren't bright either, the reviews have suggested. Echoing concerns that have been expressed by the state treasurer, the peer-review group wrote that Wall Street is aware that continued federal aid is iffy. That concern "limits the project's credibility with private investors," the group wrote.

Critics even have concerns about what seems the most solid financial commitment of all – the state bonds.

As the legislative analyst wrote, if lawmakers authorize selling all $9.95 billion of the bonds, the interest that must be paid to investors will run about $1 billion a year – money that would come out of the state's general fund.

Cost estimates vary

The studies also have criticized the rail authority's construction cost estimates.

Those estimates have marched steadily upward – from $15 billion in 1996 to between $43 billion and $45 billion in 2009 dollars, according to the authority.

That amount dovetails with the approximately $45 billion in funding that the authority says it has identified to build the system.

So what's the actual cost?

In its study, the Legislative Analyst's Office noted that the cost of building the first segment – the 100-mile stretch between Bakersfield and Fresno – was estimated at $2.8 billion in 2009. Today, it's increased by 57% to nearly $4.5 billion.

At that rate of increase, building the entire system would cost $67 billion.

For its analysis, the Palo Alto citizens group scrutinized estimates submitted by the authority in applications for federal stimulus funds. The group said the actual cost to build the system was probably $65 billion.

But if it's like the new Bay Bridge, or Boston's Big Dig highway project, the cost will be far higher, according to Stanford management professor Alain Enthoven. With the cost overruns that typically plague public works projects, the final price tag may be closer to $213 billion, he wrote.

"All megaprojects have cost overruns," Enthoven said. "For a state project, if they figure on $43 billion and then it turns out to be $66 or $80 billion, then it's the taxpayer of the state of California [who pays]. There's no fairy godmother."

Studies slam projections

Critics also take aim at the rail authority's upbeat computer forecasts, which show strong future demand for the service. By the year 2035, the rail authority estimates trains will carry 39 million passengers per year, the forecasts say.

Those big numbers undergird the rail authority's claims that the train will generate "over $1 billion in annual profits" when up and running.

The forecasts are the work of a consulting firm, Cambridge Systematics. It polled California travelers, collected other data and created a complex computer model to predict demand. To ensure accuracy, the computer model was subjected to peer review from outside experts. The firm was paid $2 million for its work, records show.

Two different studies have contended the forecasts are deeply flawed.

The first critique was by Elizabeth Alexis, a Palo Alto money manager and co-founder of Californians Advocating Responsible Rail Design.

Alexis said she also found that the consultants had privately made "drastic" changes to key assumptions in the computer model, apparently after initial results were deemed unsatisfactory. The tinkering allegedly occurred after the model was reviewed by outside experts who were supposed to provide guidance on whether its results were valid.

The forecasts were no better than "tossing darts at a board," Alexis said. "I would like to have real numbers so we can have an intelligent discussion about where California should put its transportation dollars."

Concerns were underscored when UC Berkeley's Institute of Transportation Studies weighed in. That study declared that the rail authority's model was "flawed at key decision-making junctures," as Institute Director Samer Madanat put it. The study was too unreliable to predict whether high-speed rail would pay for itself or lose "significant" money," the institute said.

Chief executive Roelof van Ark defended the model, saying there was "no foundation" for the institute's conclusion that it was useless for predicting the bullet train's bottom line.

Lance Williams is an investigative reporter for California Watch. Ronald Campbell is an investigative reporter for The Orange County Register. This story sprung from a partnership among six California news organizations that have been following California’s High-Speed Rail Initiative: The Fresno Bee, The Sacramento Bee, California Watch, The Bakersfield Californian and the Orange County Register. California Watch is part of the independent, nonprofit Center for Investigative Reporting. For more about California Watch, go to www.californiawatch.org.

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