Privately Financed 13-Mile Rail System Envisioned in Study

Nearly a year after the defeat of a local sales tax increase effectively scrapped plans for an ambitious, 38-mile rail transit system through central Orange County, a new study shows that a smaller rail system could be in place as early as 1990 if it were built and operated by private investors.

The study envisions a 13-mile rail line running from Anaheim Stadium to South Coast Plaza--at about half the cost of the full 38-mile route--with “substantial” additional savings because of the tax advantages available to a private transit corporation or investment group.

Shortfall of Funds

While the Orange County Transit District could expect an annual shortfall of $29 million in money available to pay off construction debts if it were to build and operate the system itself, the deficit could be reduced to between $10 million and $16 million annually if private investors took on the job, according to the analysis by Arthur Young and Co. An additional $3.25 million a year would be needed to subsidize operations, according to the study.

“Our analysis shows that, using conservative assumptions in many critical areas, the rail system can be owned and operated by a private firm at a substantially lower cost to the community than under district ownership,” the study said. “These findings represent a major step toward making the fixed guideway system a feasible project.”

County transit officials have had the scaled-down rail system in mind since last June, when voters defeated a 1-cent sales tax increase that would have financed a more elaborate system running throughout north and central Orange County at an estimated cost of $750 million to $1 billion.

The current plan, which envisions a system of electric cars running on an elevated guideway, would serve an area of the county that has one of the highest natural demands for transit: Anaheim Stadium, the City mall in Orange, the Santa Ana Civic Center and the South Coast metro area. OCTD officials estimate that 6 million riders a year would utilize the service.

But even at a reduced cost --$451.4 million--the $216 million that OCTD has banked for a rail system would fall short of paying for the system.

Finding ways to plug the remaining $16-million annual shortfall projected even if private investors are found, the study suggests, is the next major hurdle. The study recommends going to cities along the route--Anaheim, Orange, Santa Ana and Costa Mesa--for either direct contributions or assessments on businesses near the rail line.

Support From Cities

The support of those cities could be the key determining factor in deciding whether the rail system will ever be built, county officials say.

“The possibilities are encouraging, but there’s still a lot of work to be done,” said Tom Daly, a spokesman for OCTD board Chairman Ralph Clark. “This is generally good news. It gives us some direction; it gives us some encouragement, and now the district has to go out and explore some of these possibilities.”

Under the “privatization” concept, a corporation or group of investors would finance construction of the $451.4-million rail system through tax-exempt industrial development bonds and a private injection of cash totaling about $170 million. The company would then own the system and equipment, receiving annual payments from OCTD out of its $216-million transit fund to operate the system and help pay off the construction debt.

Annual Shortfall

In predicting a $16-million annual shortfall, the analysis assumed that businesses within a half-mile of the rail line would be required to pay a one-time assessment of $1 per square foot in recognition of the benefits they would derive from a major transit line nearby. That basic assessment would raise $30 million, but even higher assessments might be necessary to help meet the $16-million annual shortfall, the study suggested.

The district would also have to come up with an additional $3.25 million per year in operating subsidies to keep the system running, a contribution similar to the subsidies that now pay the bulk of the costs for operating the OCTD bus fleet.

Those estimates, however, hinge on ridership, a key point of debate over rail service in Orange County, which critics say does not have the kind of high-density development needed to support a rail transit system.

OCTD estimates that ridership on the rail line would be about 6 million a year, climbing to 7.2 million by the end of the century. An increase in ridership would mean bigger profits to private investors, who would, on the other hand, stand to lose money if ridership declined.

Tax Incentives

The study assumed an 18% return on private investments but showed that the public stands to benefit if the investors pass on part of their tax savings in the form of reduced user fees. As a government agency, OCTD is not eligible for the income tax incentives--such as the investment tax credit and special depreciation allowances--that a private firm could apply for.

But the Arthur Young study encourages county officials to move quickly in order to take advantage of existing tax laws; proposed revisions could eliminate many of the potential tax savings.

“The district should move as quickly as possible in identifying community interest and developing a refined financing approach so that, if there is sufficient interest in the project, steps can be taken to implement the privatization approach under existing tax laws,” Arthur Young recommended.

Accordingly, the study envisioned a start-up date of late 1987 or early 1988, with construction to be completed within three years.