With the announcement that California would be committing $4.3 billion to the construction of a 29-mile rail link between the cities of Fresno and Madera in the state’s Central Valley, California’s 20-year-old quest for a high-speed rail line was finally coming true. The California High-Speed Rail Authority (CHSRA), first established in the mid-1990s, had long pursued the goal of linking the San Francisco Bay metropolitan area in the north to the cities of Los Angeles and San Diego in the south. Under the administration of President Obama, the federal government set aside money from a stimulus package to fund high-speed rail initiatives in several states, including Wisconsin, Florida, Ohio, Illinois, and California. The election of Republican governors in Ohio and Wisconsin led to a rethinking of the projects in those states, and they ultimately refused the seed money grants from Washington, harboring suspicions that the rail projects were both unnecessary and likely to be
subject to huge cost overruns, for which state taxpayers eventually would be held responsible. As a result, Transportation Secretary Ray LaHood reclaimed $1.2 billion from these states to be presented to 13 other states. One of the states that stood to benefit most from this redistribution of federal money was California, with its ambitious and, as many argue, the ultimately foolhardy decision to support a massive transportation project to link its cities with high-speed rail. The history of the CHSRA’s drive to create high-speed railways is a fascinating one, with supporters and critics in equal measure. As part of its initial pitch for the project, the CHSRA argued that the system would lead to multiple benefits. For a one-way $55 ticket, passengers in Los Angeles would be able to travel to the Bay Area in less than 3 hours or reach San Diego in 80 minutes. Estimating that 94 million passengers would use the rail system each year and that its development would generate hundreds of thousands of permanent jobs, the CHSRA used these projections to help convince state voters to approve a
nearly $10 billion bond issue and support the project in a 2008 referendum. Other advantages the organization cited included the reduction of pollution and fossil fuel use by diverting millions of people to the rail line who otherwise would use automobile or air travel between cities.
With a revised estimated cost of at least $69 billion, the overall project would first operate trains up
to 220 mph along a 520-mile route between Anaheim and San Francisco. Extensions to San Diego and Sacramento would be built later. The Obama Administration approved a total of $3.18 billion in federal funding for the state’s bullet train proposal, the largest amount for any pending rail project in the nation. With matching state funds, the amount available for construction was about $5.5 billion, according to the CHSRA. Since its approval, a number of events have led insiders to reconsider the wisdom of pursuing the rail project. First, based on other high-speed rail projects, the CHSRA has revised its projections for ridership downward, suggesting that the project will serve 39 million passengers by its tenth year of operation, which is about 40% of its original estimate prior to getting funding approval. Second, another change in the original business model is that projected ticket prices
have been raised to $105 for a one-way trip, although critics suggest that actual prices, based on comparable cost-per-mile data from Europe and Japan, are likely to be closer to $190 (the CHSRA’s current projections are that tickets will sell for $86). A third concern relates to the decision to start the project with a link through largely empty agricultural farmland between two Central Valley communities; that is, the high-speed rail project is specifically designed to join major metropolitan areas such as San Francisco and Los Angeles, the first pilot stage is to be constructed along a route that is one of the lesser-populated segments of the line. This decision sits poorly not only with rail critics but also with rail supporters, who recognize the need to make a more significant statement in order to answer other objections of critics. “It defies logic and common sense to have the train start and stop in remote areas that have no hope of attaining the ridership needed to justify the cost of the project,” U.S. Representative Dennis Cardoza (D-CA) wrote in a letter to Transportation Secretary Ray LaHood. A fourth closely questioned element in the project is the projected final price. Though the CHSRA and state officials hold to the latest $69 billion price tag (a figure that has doubled since the original $33 billion estimate approved by voters in 2008), others, including the transportation consultants at Infrastructure Management Group, have suggested that this figure, based on historical data, grossly underestimates the final cost while inflating the likely number of passengers. Economists
suggest that a more likely range for the final cost of the project would be anywhere from $100 to $250 billion, and a more reasonable estimate of annual passenger traffic is in the range of 5 million. If these numbers are close to accurate (and they are disputed by the CHSRA), they point to a project that cannot ever hope to pay for itself, will require long-term annual subsidies, and will place the already cash-strapped state even deeper into a financial hole. “The train will lose money and require
a subsidy,” said Joseph Vranich, former president of the national High-Speed Rail Association. “I have not seen a single number that has come out of the California high-speed rail organization that is credible. As a high-speed rail advocate, I am steamed.” Developing the current section of the project, 118 miles through the relatively easy terrain of the Central Valley, has been a worrisome lesson. The expected cost of this stretch was $6.4 billion, a number that by 2017 had inflated to over $10 billion. Furthermore, a federal risk analysis study noted several obvious problems: 1) In 2012 the rail authority said it would start construction in Fresno, but had not yet purchased a single parcel of
land, 2) Farmers resisted from the beginning, unwilling to sell their land—some of the most fertile in the state— to support the project, 3) Actual construction started two years late, in 2014, 4) By 2016, the rail authority expected to have acquired 100% of the land needed to support the rail line. In fact, 25% of the land has still not been acquired for just the first 29-mile stretch between Madera and Fresno, and less than half of the total land in the Central Valley has been purchased. Current estimates suggest that land purchases will not be completed until 2019 at the earliest. A recent study by three economists found the CHSRA business model to be deeply flawed, concluding that it relies too heavily on federal grants and does not adequately address risks posed by fluctuating ticket prices. “When an investor looks at an assertion by the CHSRA that says you’re going to earn an operating surplus of $370 million in the first year of operations and $1.5 billion profit by the third year, they shake their heads and smile,” said William Grindley, a former World Bank analyst. “It doesn’t pass the smell
test.” This new study calls the CHSRA’s revenue estimates “unreasonably optimistic” and is confirmed by a 2013 Reason Foundation study suggesting that the CHSRA could require over $350 million in annual subsidies to stay in business. One key to attaining sustainability, for example, is the CHRSA’s ability to secure billions of dollars in additional funding from the federal government. The CHSRA acknowledges that the project hinges on additional funding coming from the federal government, but believes that making a good faith effort to produce a workable rail network is critical for securing additional money. However, after the recent national elections, officials in both the Trump
administration and Congress have made it clear that there will be no more federal dollars available to support the project. Recent court decisions have put the brakes on the project as well. The California 3rd District Court ruled that the state could not continue to sell bonds supporting the project since the CHSRA had failed to comply with its own guidelines regarding funding. Voters were originally told that state financial exposure would be limited and that the federal government and private
investors would put up most of the money—promises that so far have failed to materialize. Washington has committed only a few billion dollars, and there is absolutely nothing else the state can expect from the federal government to support the project. The court ruled that the state’s attempt to sell $6.8 billion in bonds to fund the project violated the original provisions of the 2008 referendum. Jerry Brown, California’s governor, has vowed to continue the court battle as long as it takes to
get the bonds approved. However, in the meantime, the project is stalled for lack of funding to continue building the first 29-mile stretch of track. The project also faces a ticking clock, because if the federal grant money is not used by a specific date, it will be reclaimed by Washington.
As of now, one could argue that the project’s future is simply a debate between “dueling economists.” However, there is no question that the future of California’s high-speed rail is uncertain. By 2016, eight years after the project was approved, not one penny in private money had been secured to support the project and California’s idea of using money from their “cap and-trade” auctions to support the project has been a disaster, with far lower revenues raised than the state had hoped to receive. Will the outcome be a case of the best intentions meeting economic realities? Only time
will tell.
Questions
1. Assess the benefits and drawbacks of the high-speed rail project. In your opinion, do the benefits outweigh the drawbacks, or vice versa? Why? Justify your answer.
2. What are the implications of starting a project based on tenuous projections that may or may not
come true 10 years from now?
3. Could you justify the California high-speed rail project from the perspective of a massive public
works initiative? In other words, what other factors enter into the decision of whether to pursue a
high-speed rail project? Why are they important?
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