California Is Headed for a Real Fiscal Train Wreck

In Saturday’s Wall Street Journal, Reason Foundation Senior Analyst Shikha Dalmia argues that American taxpayers should not subsidize California’s potential high-speed rail system. Dalmia writes:

With credit markets in New York in crisis last week, California Gov. Arnold Schwarzenegger sent an extraordinary letter to Treasury Secretary Henry Paulson asking for $7 billion. Although the governor has since withdrawn that request, it testifies to the dire state of his budget. Yet days before penning his note, the governor told an audience at the Commonwealth Club of California not to worry about the state’s budget crunch and to approve $9.95 billion in new debt on the November ballot to build a bullet train to connect Los Angeles to San Francisco: “Just because we have a problem with the budget does not mean people should vote ‘no’ on high-speed rail.” (A spokeswoman confirmed Monday that, despite the request for federal money, the governor still supports the initiative.) Actually, the state’s budget woes should give votes pause — especially since high-speed rail is a fantasy that has as much chance of delivering on its promises of creating 450,000 jobs, vanquishing road congestion and lowering greenhouse gases as “Conan the Barbarian” had of winning the Oscar. The Golden State’s finances are a mess. California’s general obligation debt has tripled in the past six years and is now almost equal to the state’s $145 billion annual budget. Even without any new loans, in three years the state will spend a record 6.1% of its budget just to service the debt it already has. What’s more, with the economic slowdown, the state is now expecting a deficit larger than $1.1 billion for the first three months of this fiscal year. The state’s rainy-day fund is running dry, which has hurt its credit rating. Under such circumstances, the prudent course would be to avoid taking on new debt, even for worthwhile projects, much less sure-shot losers such as the high-speed rail. But in California, prudence is in short supply. With the governor’s support, rail backers in the “Transportation and Land Use Coalition” want to make the Golden State the bullet-train beacon for the rest of the country. Proposition 1A, the bond initiative, represents the first phase of their plan that, once fully in place by 2030, will run high-speed rail from northern San Francisco to southern San Diego, connecting a string of cities in between. What’s more, voters are being told after the initial $9.95 billion the project will not need another dime of state funding. The California High Speed Rail Authority, the state agency overseeing the project, maintains that the Los Angeles to San Francisco line will be so lucrative that it will generate enough revenue to pay for its own operating costs, as well as much of the remaining network, with private investors and Uncle Sam making up the difference. But there is little reason to believe such cost or revenue projections. The Rail Authority admitted recently that the new estimate of $45 billon is 50% above the original 1999 estimate of $30 billion and more than double what California needs to update and expand existing rails and roads, according to the Howard Jarvis Taxpayers Association. An analysis by the Reason Foundation has found that even this figure understates the final price tag by about $30 billion because the Authority has not fully taken into account the added expense of building in the world’s most active geological zone and erecting sound walls to abate noise and other nuisances. This is not surprising since political authorities habitually underestimate the cost of megaprojects. Bent Flyvbjerg, a Danish researcher who analyzed 258 infrastructure projects around the world, reports in his book “Megaprojects and Risk: An Anatomy of Ambition” (Cambridge University Press, 2003) that rail projects on average cost 45% more than originally advertised. Another rosy assessment comes in estimates of annual ridership. The Rail Authority says the trains will carry 65 million riders each year. But the Reason Foundation’s study gives a much lower estimate — 23 million riders annually — after looking at Japan and France, which have the world’s strongest markets for rail. Neither country has achieved the kind of ridership California is predicting and both countries have far higher population densities in the cities served by their bullet trains than Los Angeles and San Francisco. To attract riders, California’s rail will have to out-compete cars and airplanes by keeping a lid on commute times and fares. To keep commutes short, the state legislature has put statutory limits on travel times. The Los Angeles-San Francisco commute, for instance, is legally required to come under two hours and 42 minutes. This is probably impossible because it would mean that the train will have to post average (not potential) speeds of 200 miles per hour, something that has not been achieved anywhere in the world, even in places whose flat topography allows for far straighter routes. And as for fares, the Rail Authority is promising a $70 ticket between Los Angeles and San Francisco. This is about half of Japan’s Tokyo-Osaka ($135) and France’s Paris-Marseille ($140) train and far less than the $172 Amtrak charges riders traveling between New York and Washington — all of which are shorter and, with the exception of Japan, heavily subsidized. It seems that California is promising to build a train that is faster, cheaper, more efficient and serves more riders than any high-speed train in the world. And all it has to do to pull off this miracle is defy the laws of economics and physics. This is the kind of creative thinking possible only in the land of Hollywood, but odds are that eventually reality will sink in and California will have to abandon its rail just like Texas, Florida and Southern California were previously forced to do with their far less ambitious proposals. Yet should it proceed, this rail will likely become a gigantic white elephant requiring vast amounts of taxpayer dollars. Regardless of whether California voters green light this project, Uncle Sam should have no part of it — either directly by offering California matching rail grants as it is hoping or indirectly by approving any future requests for emergency cash. American taxpayers should not subsidize California’s fiscal train wreck.

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