California bullet train may need subsidies, despite promises

Workers tie rebar on a support structure located on the south end of the Cedar Viaduct section of the California High-Speed Rail project.

Published May 27, 2020 Updated May 28, 2020 6:39 PM PT

When California voters approved bonds in 2008 to build a bullet train across much of the state, a ballot measure promised them that future passenger service would not require operating subsidies.

State officials asserted over the next decade that their system would attract so many millions of riders that it would actually turn a profit.

Now it is debatable whether those promises will be met.

The state rail authority is moving ahead with a plan to issue a massive contract for tracks and an electrical system that would enable bullet train service in the Central Valley. But when the service starts in 2028, it would lose money that the state would absorb, according to consultants for the California High-Speed Rail Authority.

Opponents say the state plan is clearly violating promises made to the electorate.

“It defies the ballot measure approved by voters,” said Quentin Kopp, a former judge and state senator who was a key architect of the bullet train program and former chairman of the High-Speed Rail Board of Directors. “Once you establish the concept, the sky is the limit. There will be a lawsuit, and I want to be the lead plaintiff.”

The $80 billion mega-project has confronted an array of challenges in the last decade, but it now faces new political and legal tests about its ability to operate without further taxpayer support.

The Proposition 1A bond act in 2008 contained what looked like an explicit ban on subsidies, saying, “the planned passenger train service to be provided by the authority, or pursuant to its authority, will not require operating subsidy.”

In another passage, it said that if a partial segment or corridor were built, then “the planned passenger service by the authority in the corridor or usable segment thereof will not require a local, state or federal operating subsidy.”

State officials say they are not violating those promises.

Under a plan introduced by Gov. Gavin Newsom, the state wants to construct an electrified 171-mile starter system between Bakersfield and Merced by 2028 for $20.4 billion. Once the construction is completed, the state would turn over operations to a separate entity, most likely the San Joaquin Joint Powers Authority, which now controls Amtrak service in the Central Valley that goes to Oakland and Sacramento.

Business analyses of the plan by accounting firm KPMG and German rail firm Deutsche Bahn project that the service would lose about $40 million, though the losses could go as high as $90 million a year if expected investments in a new Merced station are not made. The plan includes connections with the ACE commuter system, which goes from the Central Valley to San Jose.

Proponents of the plan argue that any losses would be incurred by the San Joaquin authority, not the California High-Speed Rail Authority.

Brian Annis, the rail authority’s chief financial officer, said the idea is similar to investments the authority made in 2012 in the Caltrain and Metrolink commuter rail lines, which are also subsidized, though they do not operate bullet trains. Annis noted that the plan actually saves the state money, because combining high-speed rail service with existing conventional passenger rail operations reduces state subsidies by half.

Stacey Mortensen, executive director of the San Joaquin authority and chief of the ACE commuter line, said the issue of a subsidy should be “run up the flagpole” to get a legal opinion before moving forward. “Let’s ask the state attorney general to see how it relates to Prop 1A,” she said.

To be sure, the rail authority has consistently won the day in the state Legislature and in state courts, turning back past allegations that it was violating taxpayer protections embedded in the Prop 1A bond act. But the battles have been costly, causing construction delays and higher legal costs for the rail authority.

Authority spokeswoman Annie Parker also defended the plan, saying in a statement, “This model is allowable and consistent with the tenets of Proposition 1A.”

But others take exception to the idea.

The Legislative Analyst’s Office, a nonpartisan adviser to lawmakers, warned in a March report, “Operating subsidy expected” and asserted that a “subsidy of interim service appears inconsistent with the spirit of Proposition 1A.”

Helen Kerstein, the LAO’s expert on the bullet train, said in an interview, “We are not lawyers and in a position to opine on how a court would rule. The idea of having that language was that on an ongoing basis passenger fares would pay for the service, not taxpayers.”

A number of critics also say privately that the $40 million projected subsidy is based on inflated ridership expectations and could easily balloon out of control.

The plan is already facing more than verbal opposition.

A bill by Assemblyman Jim Patterson (R-Fresno) declares that the High-Speed Rail Authority’s plan does not comply with the prohibition of subsidies. A committee staff analysis said, “This bill clarifies the Legislature’s intent when it wrote the 2008 bond language prohibiting any operating subsidy for high-speed rail service in the state, because the most recent HSRA business plan proposes a system with an operating subsidy.”

It was approved by the Transportation Committee by a vote of 12 to 1. Committee chairman Jim Frazier (D-Discovery Bay), who has grown increasingly critical of the project’s execution, voted in favor of the bill, along with other Democrats.

“This is a signal of why high-speed rail is in such difficulty,” Patterson said. “This is clearly bait-and-switch; this is clearly a shell game.”

A second bill, by Assemblywoman Luz Rivas (D-Arleta), would create other obstacles to the Central Valley plan. It would set new priorities for the program’s investments: select ones that provide the most overall benefit, increase rail ridership and replace car trips with rail trips.

It would likely help a fight led by Speaker Anthony Rendon to redirect about $5 billion of the Central Valley funding to rail improvements in Los Angeles and San Francisco. The bill was approved by the committee on a 15-0 vote.

Organized labor has strongly objected to the Rivas legislation, sending dozens of letters in opposition and arguing for continued investments in the Central Valley. The State Building & Construction Trades Council of California has been one of the strongest and most consistent supporters of the high-speed rail authority.

Patterson’s and Rivas’s bills were sent to the Appropriations Committee, which is under pressure to block them, according to Assembly sources.

The state-appointed peer review committee, led by Amtrak veteran Louis Thompson, also warned in a recent report that the cost of operating a high-speed service in the Central Valley could be higher than expected or more than the San Joaquin authority can handle.

“It may be difficult to implement an interim arrangement that does not violate the terms of Proposition 1A,” the report said.

Thompson told The Times that nobody ever defined what constitutes an operating subsidy, so the language in Prop 1A “is imprecise in many ways.”

The subject of subsidies is likely to come up prominently in an Assembly Transportation Committee hearing Wednesday, though no decisions or actions are expected.

If it didn’t have enough trouble with growing political opposition, the high-speed rail is facing another threat, from COVID-19. The state’s $54 billion financial deficit will bring every state expenditure under closer scrutiny. In addition, the rail authority depends on its share of fees raised by the state’s cap-and-trade auction system to reduce greenhouse gas emissions.

The declines in car, rail, bus and air travel, along with less industrial and commercial activity, are reducing energy consumption and will probably decrease at least in the short term the need for emission permits. The results of a quarterly auction for permits last week were disclosed Thursday, indicating a sharp drop in emission permits and revenue.

The Air Resources Board reported that the auction raised about $25 million total. The bullet train project gets a 25% share of that revenue, or about $6 million for this auction. That is well below the minimum of $125 million for each quarterly auction that the agency anticipates. If the trend continues, it could cause future problems.

“That absolutely does create some new risks and new uncertainties for our funding stream,” Annis, the rail authority’s chief financial officer, said.