High-Speed Rail

Legal wrangling means no rush to sell high-speed rail bonds

While a state appellate court has declared that California has the authority to issue billions of dollars in bonds for high-speed rail development in the San Joaquin Valley, state finance officials aren't rushing to sell the bonds to investors just yet.

"Even if the state wanted to go out and sell bonds tomorrow -- which it does not -- it couldn't," said H.D. Palmer, a spokesman with the California Department of Finance.

A three-judge panel of the 3rd District Court of Appeal in Sacramento overturned a lower-court decision that denied the request by the California High-Speed Rail Authority and Gov. Jerry Brown's administration for a blanket validation of the bond sale. But, Palmer said, that ruling won't become final until Aug. 30, a month after the court issued its opinion on July 31.

On top of that, at least five organizations or individuals who sought to block the sale of Proposition 1A high-speed rail bonds are asking the 3rd District Court of Appeal to reconsider its opinion. Prop. 1A is the $9.9 billion bond measure approved by California voters in November 2008.

On Wednesday, the Howard Jarvis Taxpayers Association and the First Free Will Baptist Church in Bakersfield filed a joint motion for the 3rd District court to rehear the case. On Thursday, attorneys for Kings County farmer John Tos, Hanford homeowner Aaron Fukuda and the Kings County Board of Supervisors filed their own petition for a hearing from the appellate court. Friday is the deadline for requesting a rehearing.

Whatever the 3rd District justices do, a petition to the California Supreme Court to review the case is likely to follow. Kings County supervisors unanimously voted last week to appeal the case to the Supreme Court, and Flashman said Tos and Fukuda have also agreed to petition the Supreme Court for a review if the rehearing request to the appellate court proves unsuccessful.

California court rules give the losing side 10 days after an appellate decision becomes final to petition the Supreme Court for a review. In this case, if the 3rd District denies the rehearing, that deadline would be Sept. 9. "The Supreme Court may order review within 60 days after the last petition for review is filed" and may extend that to 90 days, according to information provided by the 3rd District court. "If the Supreme Court does not rule within that time, the petition for review is deemed denied."

A court handbook indicates that the Supreme Court has exercised its discretion to review contested appellate opinions "in only about 3% of the civil cases" petitioned.

"Until all of these legal issues are resolved, the state would not be able to move forward with a bond sale," Palmer said.

The petition by the Howard Jarvis Taxpayers Association and the Bakersfield church asserts that the appellate justices made two errors by:

<SC120,116>Ruling that the validity of the bond sale and determinations of how the money would be spent are two separate issues because no final funding plan has been set and that the rail project's design is in flux. "The plan for spending bond proceeds has congealed to the extent that key elements are capable of being measured" against provisions of Prop. 1A, the Jarvis and church attorneys wrote.

<SC120,116>Failing to recognize that the High-Speed Passenger Train Finance Committee -- a five-member panel of the state treasurer, finance director, controller, transportation secretary and chairman of the California High-Speed Rail Authority -- only made one of two findings required by law before voting last year to issue bonds. While justices ruled that the committee acted within its authority in finding that it was "necessary and desirable" to issue the bonds last year, attorneys argued that the committee never determined "the amount of bonds to be issued and sold."

Thursday's petition by attorneys for Tos, Fukuda and Kings County joined in their support for the Jarvis and First Free Will church petition, but they also have a different bone to pick with the appellate court.

The appellate justices overturned a lower-court ruling that the state's preliminary funding plan for the rail system violated Prop. 1A because it failed to realistically identify all of the money needed to build an "initial operating segment" from Merced to Los Angeles and because the authority could not certify that it will have all of the environmental clearances for the operating segment before starting construction anywhere on the route.

The Tos/Fukuda/Kings County attorneys argue that the justices made their decisions based on issues of fact and law "that were neither proposed nor briefed" by either side in the case, including that the preliminary funding plan was merely one piece of a multistep process.

They also assert that the justices misinterpreted provisions of Prop. 1A and other legislation, deciding among other things that the law did not constrain the state Legislature's discretion to approve allocating money to the train project in 2012 despite concerns with the preliminary funding plan.

Attorneys also argue that the justices misunderstood the basis for concern, and that of Sacramento County Superior Court Judge Michael Kenny, about the incomplete environmental certifications for the Merced-Los Angeles segment.

Of more than $9.9 billion authorized by voters in Prop. 1A, the state has so far sold about $623.7 million in bonds, leaving more than $9.2 billion yet to be issued.

As of July 1, California had a total of more than $80 billion outstanding in general obligation bonds and commercial paper, with about $25.9 billion in bonds authorized but not yet issued.

California typically offers general obligation bonds for sale in the spring and fall, and the next sales are scheduled for September. Because the appeals schedule could push a final decision by the state Supreme Court until November or December, the state would likely have to wait until next spring to begin selling bonds for the high-speed rail project if the court rules in its favor.

"Assuming we prevail on all of the potential pending legal issues, the state would then only sell a portion of the bonds on an as-cash-is-needed basis for the project to continue to move forward," Palmer said. "For this or any other bond, the state wouldn't want to sell more bonds than needed for a given period of time. Otherwise, cash would be sitting idle and the state would incur unnecessary debt service costs."

In the meantime, Palmer said, the state and the high-speed rail authority have enough money -- between a $250 million allocation of cap-and-trade money from the state's greenhouse gas reduction program, a $400 million loan from last year and future cap-and-trade revenue -- to meet its matching obligations for more than $3 billion in federal high-speed rail grants and move forward with construction in the Valley.