The state's strategy of tapping $3.2 billion in federal money to begin construction of an ambitious bullet train project may be legally flawed and could put the state in financial jeopardy, key lawmakers say.
After recent legal rulings that bar the use of state money for the project, legislators from both political parties say that even the use of federal funds is questionable and the entire project needs to be reassessed.
"It has been a colossal failure," Denham said. "They are trying to make up the rules as they go along."
California lawmakers worry that the state is trying to push the project through with a financing plan that risks leaving it with billions of dollars in losses.
If the state cannot eventually match the federal funds, it may have to repay the money and be left with a partially built rail system.
"I am concerned about the state's risks," said state Sen.
Dan Richard, chairman of the California High-Speed Rail Authority, countered that the recent setbacks to the bullet train — connecting Los Angeles and San Francisco with 220 mph trains — represent normal challenges encountered by giant, visionary public works projects.
In a recent debate on public radio, he characterized the legal problems as largely procedural and suggested that "crossing the Ts and dotting the I's" would resolve the issues.
Claims of a "major setback are wildly overstated," he said.
Two major legal blows in recent weeks have put the bullet train project at a crossroads.
Sacramento Superior Court Judge Michael Kenny indefinitely blocked the sale and use of $9 billion in state high-speed rail bonds.
Kenny ruled the rail agency failed to meet legal requirements that it identify the source of the money needed to complete an initial $31-billion segment between Merced and the San Fernando Valley.
The state has identified only the $3.2 billion in federal grants and that $9 billion in bonds.
The legal setback was foreshadowed three years ago by the rail authority's own lawyer. George Spanos told the rail board its plans to begin construction in the Central Valley did not comply with the requirements of the bond measure.
A second administrative decision, by the federal Surface Transportation Board, has stalled the state's ability to execute its plan for the first 29 miles of construction.
The board rejected a request by the rail agency to delay an environmental review of the project. The review could significantly push back any construction.
Despite the setbacks, the rail authority chief said he could start construction with the federal grants.
He pointed to a December 2012 modification of the grant agreement that allowed the state to spend federal grants first and match them with state money later.
"The political key for us is getting dirt moved," said one authority source who asked not to be on the record discussing strategy.
But some say that tactic is unrealistic and legally risky.
Under the 2012 grant modification, the federal government can demand repayment of the money if the state fails to complete the work or fails to come up with matching funds.
Denham asked the GAO to determine whether the state is violating the grant agreement by not having already lined up funds to match the federal contribution.
The rail agency's refusal to acknowledge the growing risks to taxpayers and the project has become part of a political strategy to keep the project moving, said Elizabeth Alexis, a co-founder of a Bay Area watchdog group that has been critical of the rail authority.
Richard "is whistling past the graveyard," said DeSaulnier, who doubts the rail authority can come up with the money it needs to comply with state law.
But Rod Diridon, executive director of the Mineta Transportation Institute at San Jose State University and a former chairman of the high-speed rail board, said he believes there are viable options.
He said the state can build a shorter initial section from Merced to Palmdale, reducing early outlays to $27 billion.
Gov. Jerry Brown could help close the remaining $15-billion shortfall by asking the Legislature to commit to the project billions in anticipated revenue from new greenhouse-gas taxes.
State legislative analysts have warned that option also could run afoul of legal restrictions and could encounter opposition from environmental groups.
The increased uncertainty over state funding is causing jitters among some transportation planners working on major bullet-train-related projects.
The rail authority has signed agreements with the Bay Area and Southern California agencies promising more than $1 billion for local rail improvements, to be drawn from the bond money now frozen by Kenny's ruling.
"We have to come up with a Plan B," said Don Sepulveda,