State governments are bracing for significant financial hits due to the reduced economic activity—and thus reduced tax revenues—caused by COVID-19 and the response to it.
With less money coming in, and a legal mandate to balance its budget, California’s state government is going to need to find opportunities to reduce costs. One especially easy cost-saving opportunity would be to delay or cancel the high-speed rail project, which is now expected to cost taxpayers $80 billion for the full system promised to voters in 2008.
California relies mainly on capital gains taxes and income taxes for revenue. The recent financial market swoon and looming recession are expected to sharply lower revenue from these sources. And shelter-at-home orders are reducing sales tax receipts. On the expenditure side, California is going to see more unemployment claims.
“In the last four weeks, California has processed about 2.3 million unemployment insurance claims, which is more than the total number of claims filed in 2019,” the governor’s office reported this week. As joblessness skyrockets, the state also expects increased use of other public assistance programs and more Medi-Cal caseloads.
Some of these costs may be absorbed by federal aid. According to a Reason Foundation analysis of the $2.3 trillion federal stimulus bill, California is set to receive $8.5 billion in federal assistance out of the $150 billion pot in the coronavirus stimulus bill dedicated to state and local government. But proportionately, California will benefit much less than low population states such as Montana and Wyoming.
The state could also use some of its general fund reserves to cushion the budgetary blow. Gov. Newsom’s budget projected that the state would start Fiscal Year 2020-21 with a total of $20 billion in reserves, $16 billion of which is in a “rainy day” fund created for emergencies like this one.
Since California cannot print money, however, cuts are going to be necessary. While governments often address such situations by cutting across the board, a more efficient approach is to prioritize spending on the most essential government functions. And building high-speed rail in the Central Valley is far from essential.
The latest California High-Speed Rail Authority (CHSRA) business plan calls for the start of service between Merced and Bakersfield in 2028-29. It expects to spend over $18 billion finishing that line. But previous experience suggests that the deadline will be missed and costs will be higher. And, if rail service does ever start, the Central Valley segment won’t be carrying many passengers. CHSRA estimates just over two million passengers a year, less than 6,000 average daily riders, would ride the line in 2029, which means the system would lose money and require massive subsidies.
One reason the state continues to push forward with high-speed rail is the perceived necessity of meeting the 2022 deadline set in federal grant agreements (The original deadline was 2017, but the state got an extension). The Trump administration, however, has already said it will not provide additional rail money for multiple reasons, including inadequate reporting by CHSRA.
Going forward, if President Trump is reelected this November, California is unlikely to get more high-speed train money regardless of whether it hits the deadline. If former Vice President Joe Biden, the Democratic frontrunner and a strong advocate of rail, is elected it may be possible for the state to renegotiate the grant agreements on favorable terms.
Either way, rushing to try to make the 2022 deadline in this economic environment is a questionable choice of spending priorities, especially since it could lead to additional cost overruns. The state auditor found the rail authority has ”$600 million in costs overruns thus far for the three active Central Valley construction projects” and “cannot demonstrate that the large amounts it has spent on its contracts have been necessary or appropriate.”
The economic fallout from COVID-19 is going to force state governments to make difficult decisions. But shutting down or scaling back the high-speed rail project should not be a difficult decision for California. The wasteful, financial disaster should not siphon money away from more important projects.