Florida Taxpayers Ultimately Responsible for Extra High-Speed Rail Costs

Taxpayers cannot be completely protected from potential cost overruns

There is considerable confusion about the financial risks for taxpayers if the proposed Tampa to Orlando high-speed rail system is built.

Some public officials, like Rep. John Mica, have taken the position that Florida taxpayers should have no liability beyond the present $280 million and that the private builder/operator must accept the risk for any cost overruns or operating subsidies.

Others, such as State Senate President Mike Haridopolos would like to see the private builder/operator pay the $280 million, rather than Florida taxpayers. Former Florida High-Speed Rail Authority Doc Dockery has stated the case even more strongly:

“The Florida Department of Transportation has said repeatedly in public meetings and in private conversations with potential bidders on the Tampa/Orlando high speed rail link that any bidder on the project must give a fixed price cost for designing, building, operating and maintaining the system. This means no cost overruns, which would become a liability of Florida taxpayers”

Former Chairman Dockery continues: “How can this be more plainly stated?”

However, even if “no cost overruns” is “plainly stated,” this promise falls far short of actually protecting taxpayers. The state cannot delegate its obligations to anyone. There will be no “sugar-daddy” waiting on the side to pay what taxpayers will owe if there are cost overruns.

No public official, present or former, has either the responsibility or the personal resources to make taxpayers whole. The Florida Department of Transportation does not have non-taxpayer resources that could be used to make taxpayers whole. All of these assurances are worth no more than “play money” if costs escalate on the Tampa to Orlando high-speed rail line, as they have on projects around the world.

Cost Overruns Cannot Be Transferred to the Private Builder/Operator

The most important risk is of cost overruns during construction.

In exchange for approximately $2.4 billion in federal funding the state must agree to complete the Tampa to Orlando high-speed rail line. Currently the cost is projected at $2.7 billion, $280 million of which would be the responsibility of Florida taxpayers. However should costs rise above the $2.7 billion, every penny of the additional cost will be the obligation of Florida taxpayers. This additional cost could rise to as much as $3 billion, based upon the international experience.

No private builder/operator will provide a blank check to the state. Moreover, no builder/operator will have the financial resources to cover substantial cost overruns. If the financial burden becomes too great, it can be expected that the private builder/operator will simply not pay, and the state of Florida could be left seeking compensation in bankruptcy court. This would not be the first such receivership.

Moreover, in the event of substantial cost overruns, the state wouldn’t be able to simply decide not to complete the project – they’d have to give all of the money back to the federal government.

This is what New Jersey was facing, but it got lucky on this score. When Governor Chris Christie cancelled the Hudson Tunnel, it had spent only $300 million of the planned $3 billion in federal funds. Facing more than $3 billion in cost overruns for which it would be responsible, returning $300 million to the federal government was a bargain.

Operating Subsidies: The Responsibility of the Taxpayers

In accepting the federal money, the state of Florida will have to commit to operating the high-speed rail line for a minimum of 20 years, regardless of whether or not there are sufficient riders to pay for the system’s operation.

This is a particular concern because the high-speed rail line could struggle to attract riders because it will provide little or no time advantage for travel between Tampa and Orlando and will be more costly than driving. This unattractiveness could lead to lower than forecast ridership (again, consistent with the international experience) and the need to provide operating subsidies. Again, there would be limits to both the inclination and financial resources of the builder/operator to pay these subsidies.

This is not theoretical. Already, the state of Florida is paying at least $13 million every year to ensure that service levels are high enough on Tri-Rail, the commuter rail line that serves Palm Beach, Broward and Dade counties. When Tri-Rail reduced service, the federal government made it clear that $250 million of federal funding that had been used to improve the line would have to be paid back. This payment was avoided only because the Florida Legislature provided additional money to Tri-Rail to provide artificially higher service levels.

The Critical Issues

The bottom line thus comes down to three propositions.

1. It is naïve to believe that the Florida taxpayer obligation can be held to $280 million.

2. No rational private builder/operator will be prepared to guarantee the level of cost escalation that could occur on the project. Extraordinary cost escalation would be the responsibility of Florida taxpayers and Florida taxpayers alone.

3. Operating subsidies could be necessary. Again no rational private builder/operator will be prepared to continue operations for 20 years if ongoing operating losses are encountered. This would again mean that the bill must be passed to the funders of last resort, the taxpayers of Florida.

The open-ended risk that Florida taxpayers could face beyond the $280 million, is the fundamental issue Governor Rick Scott should consider as he decides the fate of this expensive project.

Wendell Cox is principal of Demographia, a consulting firm based in St. Louis, Mo., and author of a recent Reason Foundation study of the financial risks to taxpayers in Florida’s proposed high-speed rail system.