Newsom’s shorter California bullet train plan likely to run out of money before completion

The California bullet train project will probably run out of money before it can fulfill Gov. Gavin Newsom’s modest plan to build a high-speed operating segment between Bakersfield and Merced, according to a Times analysis of the state rail authority’s financial records.

The governor declared his support for the scaled-back rail plan last month, saying that for the foreseeable future the original goal of a Los Angeles-to-San Francisco system would cost too much and had no path forward. Instead, Newsom said, the state did have the “capacity” to build a 171-mile route through the almond orchards, orange groves, vineyards and oil fields of the Central Valley.

But the project faces many challenges, including an investigation by the inspector general for the U.S. Department of Transportation that has been looking at allegations of poorly controlled or improper spending by the California High-Speed Rail Authority in the Central Valley, according to individuals familiar with the probe.

The biggest problem, however, remains a limited pool of money for the complex project.

Newsom did not provide a cost estimate when he announced his plan to focus on a Bakersfield-to-Merced rail line. If no new problems emerge, the cost will run about $16 billion to $18 billion for structures, electrical lines, train stations, signals, a heavy maintenance facility and bullet trains, according to the rail authority’s business plan and technical cost documents. Meanwhile, it can count on roughly $15.1 billion through 2023 to build the Central Valley system, though it could collect more money in later years or the Legislature could increase funding.

A rail authority spokeswoman said the agency believes it has enough money to complete the operating system and will publish a project update in early May that will provide details on its plan.

Over the last decade, the rail authority has blown through original cost estimates, taking the project from $33 billion to at least $77 billion. Within those totals are massive increases for environmental reviews and land acquisition. The rail authority has acknowledged causing delays and paid out tens of millions of dollars in delay claims to construction firms.

Among the most important issues for the project’s future is whether the underlying management problems that caused those increases have been solved. In November, State Auditor Elaine Howle released a scathing audit that found mismanagement had caused billions of dollars in cost increases. The auditor found similar problems in 2010 and 2012, citing lax management and weak oversight.

Interviews with current and former engineers, financial managers, consultants, contractors and executives show that fundamental weaknesses in the organization remain.

“Things are getting worse,” said a manager at the authority’s headquarters. “Every day more and more people are losing hope.”

The manager said regulations that cover state business are routinely bypassed, records are poorly organized, job responsibilities are not delineated and rapid turnover brings in a constant stream of people who need to be trained. Internal surveys in the past have shown pervasive morale problems, a reflection of the desperate condition of the project and the resulting pressure-cooker environment.

A supervisor in the Central Valley said environmental clearances remain open on land that has been turned over to construction firms, a breach of procedure. And more than 200 additional eminent domain actions will be required because some parcels are too small to accommodate the relocation of underground utilities. Getting that much new land threatens additional delays.

A former executive of the engineering firm that handled those designs said in an interview that the problems were identified years ago but that the rail authority and its consultants did not address the issue.

A spokeswoman for the rail authority said that the need for additional parcels is part of the routine give-and-take with its construction contractors and that not every request it makes for more land will be satisfied. The goal, she said, is to minimize land acquisitions. She added that the current land acquisition program is in good condition.

The problems raise the risks that the giant construction job will require more money than the rail authority has in hand over the next several years.

The possibility of insolvency grew sharply when the Federal Railroad Administration said last month it would terminate a $929-million grant to the project and was looking at ways it could recover $2.5 billion in another grant that has already been spent. The federal agency said the rail authority is not making adequate progress to meet a 2022 deadline to complete 119 miles of construction in the Central Valley. Indeed, the rail authority’s own documents show that the Fresno section has a completion date set for this summer even though it is far from finished.

Federal grant administrators are giving the state “an opportunity to respond” before any final action, an FRA spokesman said in a statement Friday.

“However, there is no requirement to provide a hearing or any additional appeal process,” he said. “The FRA Administrator will make the final decision whether to terminate this cooperative agreement based on the totality of the information summarized in the letter to [the rail authority], along with any additional information submitted … by March 5, 2019.”

A powerful rebuttal is expected by California officials any day. Grant experts say the termination is unprecedented, though they give federal officials a good chance of blocking the $929-million grant. They say it is less likely that the Trump administration can claw back the much larger $2.5-billion grant that has already been spent.

The cost and funding for the Bakersfield-to-Merced system are laid out in the rail authority’s lengthy financial and planning documents. The $16-billion to $18-billion cost of the portion includes $10.7 billion of work already underway between Madera and Wasco. The additional cost of building south from Wasco to Bakersfield is $1.9 billion, and north from Madera to Merced is $2.2 billion. Electric trains could cost $1 billion or more, depending on how many are ordered.

Some of the cost assumptions made by the rail authority appear optimistic, including those for the high-voltage electrical system. The Caltrain commuter line in the Bay Area is electrifying 50 miles of track for $2 billion, about six times higher than the per-mile cost assumed by the California High-Speed Rail Authority for the Central Valley bullet train. The Caltrain electrification is more complex than installing lines on new track, but the risks of cost increases run into the billions of dollars, a rail engineer said.

One additional complication is that spending on the project is not steady each year, but reaches a high peak in the middle. Coordinating that spending curve with uncertain revenues could also push up costs.

Meanwhile, the rail authority’s revenues are constrained.

Its funding sources of $15.1 billion through 2023 include $6.8 billion in funds from the $9-billion bond act approved in 2008. It also includes $2.1 billion of the $2.5-billion federal grant (about $400 million went to help cover cost overruns on environmental planning), assuming the Trump administration fails to recoup it. And it will receive about $6.2 billion in proceeds from the sale of carbon emission allowances under the state’s cap-and-trade program.

To be sure, the rail authority could wait until more money arrives through its share of greenhouse gas fees through 2030 — though inflation will eat away at its buying power. Under the prior plan that Newsom junked, the rail authority was going to build a line from the Central Valley to San Jose by 2028. Newsom said that was taking too long. So waiting for billions more in cap-and-trade money to roll in could put the project in the same fix.

It also has long hoped to borrow against future cap-and-trade proceeds, which would require legislation and possible guarantees to investors. Another hope of supporters is that if Democrats take over the White House and Senate in 2021, they would provide additional money and reverse the Trump administration’s grant termination. And costs could be reduced by eliminating electrification and running slower diesel trains on the line or some other restructuring of the program.

Whether a bullet train confined to the Central Valley could operate profitably, which is required under state law, is unproven. An operating plan and ridership projections did not exist when Newsom made his decision and only now are being developed.

“We are eager to meet this challenge and expand the project’s economic impact in the Central Valley,” rail authority Chief Executive Brian Kelly said about Newsom’s new direction.

If the bullet train does reach Merced, it may be able to connect to the Altamont Corridor Express, which runs diesel-powered commuter trains to San Jose. The joint powers board that operates the system has a project to extend the service to Merced.

“There are all kinds of questions that will have to be answered,” one official close to the project said about the Newsom plan, “to convert what nobody thought was a serious proposition into a serious proposition.”

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