As a financial advisor to governments, your job is to tell sometimes hard truths about the financial implications of public plans. Governments ignore these financial consequences at the peril of taxpayers and long-term financial health.
Unfortunately, the California High-Speed Rail Authority's financial plan, as it is currently conceived, ignores some hard truths. It would be a slow-moving train wreck that would do economic damage to California for generations.
I should know. Fifteen years ago, I was the financial advisor to California High-Speed Rail.
In 1999, the system was estimated to cost $24 billion to $34 billion and take 10 years to construct from downtown San Francisco to downtown Los Angeles. In looking at the various means available to the state to finance the project, it quickly became apparent to us that system revenues were too speculative and too far off in the future to be the basis of a financial strategy.
At that time, train fares were estimated to be 60% of airfares between L.A. and the Bay Area. It was a time when air costs were higher (pre-Southwest expansion), and the key assumption was a less-than-three-hour travel time from city center to city center. Now, flight costs are actually lower in real terms, the travel time significantly longer, and the proposed system does not come anywhere close to connecting the city centers.
In order to actually generate the construction funding required, we identified the fact that the system must seek its own dedicated funding source. Trying to use existing funding sources would simply take funds away from schools and other important state priorities. We specifically determined that trying to use state general obligation bonds would not be feasible and would exhaust the state's borrowing capacity and unfairly crowd out funding for water, highways and schools.
If the state wanted to build this project, we said, it needed to be honest with Californians and ask them to consider enacting a dedicated funding source. We advised the rail authority to give voters the ability to decide for themselves, with all the financial pros and cons on the table, whether this project was worthy.
So-called "manna from heaven" strategies, where assumptions were made about magic "private investment," would have been a dishonest approach to real project funding. At that time, a statewide quarter-cent sales tax, among other options, would have been sufficient, given the engineering estimates. Our job as financial advisors was to identify a strategy that would actually work, not one that would deceive the voters.
Of course the state ignored our advice. Then-state Sen. Jim Costa passed a general obligation (GO) bond authorization for $9.9 billion that was narrowly approved by the voters. The Obama administration briefly offered a small amount of high-speed rail grant funding. California alone bit on this offer of federal support.
State GO bonds are not a funding source; they are debt proceeds that must be paid back. The annual debt service on $9.9 billion would add approximately $650 million to the state budget each year for 30 years. While the state could receive a little over $3 billion in federal grant funds, federal requirements require repayment if the project is not completed as promised. Today's project business plan does indeed rely on "manna from heaven" in the form of imagined "private investment" once the project is underway.
In the meantime, project costs have soared as the route has been adjusted to respond to political pressure. Passenger revenue estimates drop when travel time and end-to-end accessibility are sacrificed. Even if the state was to finance the full $9.9 billion and get all the federal grants, the project would still be $55 billion short of completion, and that is an optimistic number.
Ridership constrained to just the Central Valley would produce an operating deficit, which would further exacerbate the state-funding drain. If the project was not completed as projected (a likely scenario), the federal government would seek reimbursement of its $3 billion.
The project could not be built without a tax increase in 1999, and it cannot be built today without raising taxes, which I strongly oppose. Gov.