LAO: California’s High-Speed Rail Business Plan Fails to Address Financial, Risk, Timeline Shortcomings

The California Legislative Analyst’s Office (LAO) issued a devastating report on Monday criticizing the California High-Speed Rail Authority’s revised “business plan” (such as it is). As those of us who have been skeptical of the high-speed rail proposal from the beginning have been saying for the past couple of years (see here and here, for example), the LAO’s analysis confirms that the business plan:

  • Is based on unrealistic and unsubstantiated assumptions about the project’s costs, ridership estimates, projected revenues, and benefits,
  • Does not contain any risk management strategy,
  • Lacks a coherent timeline and measurable milestones, and
  • Fails to explain where the vast majority of the money will come from.

Here are some highlights from the LAO’s analysis:

Unknown Confidence in Projections. The plan does not provide any numerical ranges nor confidence intervals for projections contained in the plan (such as cost, revenues, or ridership).

Inadequate Discussion of Key Types of Risks. The plan contains no detailed discussions or consideration of even the most significant risks to the project, such as ridership and funding.

Uninformative Timeline. The program management and project delivery timelines contained in the plan are very general and provide little opportunity for increased accountability. There are few deliverables or milestones included against which progress can be measured.

Inconsistent Order of Events. Because the timelines in the plan are so general, it is unclear in what order various events will occur. For example, regulatory approvals are expected by 2018 but procurement is scheduled to be completed by 2014. This could mean the train technology and rolling stock will be procured before regulatory agencies approve their use.

Federal Funding Expectations Highly Uncertain. The plan assumes between $17 billion and $19 billion from federal funds by 2016, or nearly $3 billion per year for the next six years. In comparison, over the past five years California has received roughly $3 billion per year of formula funding for the state’s entire highway system, which is primarily funded through federal gas tax collected in the state.

As noted above, critics (including yours truly) have pointed out these shortcomings in the past (although, unfortunately, they were successfully hidden from the public until after the vote on the bond measure). What is new—and the most damning criticism from the LAO report—is that the high-speed rail proposal’s private funding plan would actually violate the law:

Operating Subsidy Necessary for Private Funding. The Proposition 1A bond measure explicitly prohibits any public operating subsidy. However, the plan expects the following items to be funded by the private sector.

  • Revenue Guarantee. The plan assumes some form of revenue guarantee from the public sector to attract private investment. This generally means some public entity promises to pay the contractor the difference between projected and realized revenues if necessary. The plan does not explain how the guarantee could be structured so as not to violate the law.
  • Operations Insurance. The plan anticipates the cost of insurance for operating the system would not be borne by the private operator. If the public sector pays for insurance, that would constitute an operating subsidy in violation of Proposition 1A.

So we have a high-speed rail plan with unrealistic and ever-changing cost and benefit assumptions (the ridership assumption alone has gone from the 23 million passengers a year assumed a decade ago, to 117 million in the lead up to the November 2008 election, to about 90 million days after the election, to 41 million now—and yet these drastic changes never seem to affect the revenue assumptions!), no risk management strategy, a lack of measurable milestones and accountability, and a funding plan that depends on nonexistent funding sources and illegal operating subsidies. Add to this the fact that it calls for expanding the state’s ballooning debt and paying hundreds of millions of dollars a year from the General Fund for a fancy train system that only a very small percentage of people will use—all during a historic budget crisis! Recipe for a colossal boondoggle, anyone?

Related Materials:

The California High-Speed Rail Proposal: A Due Diligence Report

California’s High-Speed Rail Plan Is Flawed (op-ed published in the Los Angeles Business Journal)

State Voters Were Railroaded (op-ed published in the San Diego Union-Tribune)