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Appellate Decision on bullet train aka deferring the piper

Sacramento’s 3rd district Appellate Court overturned both of Superior Court Judge Kenny’s decisions. One is known as the Tos decision and the other is known as the bond validation decision. In the Tos decision the court said there were valid points made by the opposing side but they were both too late and too early. The Tos litigants will have the opportunity at a second bite at the apple later when the Authority attempts to spend bond funds.

As history, Judge Kenny ruled that the HSRA had exceeded its authority by submitting a substandard funding plan; not having environmental work completed for the entire Initial Operating segment; and not having the funding to pay for the construction for a stretch of 300 miles from Madera to the San Fernando Valley. The Judge also ruled that the general obligation bonds for the project could not issued because the Authority had not brought forth evidence that the bonds allocation was “necessary or desirable.” (Note: this is different than the sale of the bonds, which the Treasurer decides when the sale will occur.)

Tos/Fukuda/Kings County Case Appellate decision:

The Attorney General’s office argued in both hearings that the funding plan was meant as an instruction to the legislature and the legislature had the right to select a less than perfect funding plan. They called the first plan, preliminary and that seemed to stick. The Appellate Court agreed with them.

The Tos legal team disagrees with the interpretation that the first funding plan was a preliminary plan, merely meant as a reporting mechanism for the Legislature. Each funding plan has specific requirements, and is not identified as a preliminary or final plan, just a funding plan. The first funding plan was meant to ensure the voters that a large enough segment was being built that could stand on it’s own without subsidy. It had clear environmental and financial hurdles to clear. The second plan was meant as a refinement of the first plan. Both plans were identified exactly in the same way, a detailed funding plan.

The language in the statute is as clear as it can be and the Tos legal team only concentrated on two of the requirements for the Writ case, environmental work and funding:

The authority shall have approved and submitted to the Director of Finance, the peer review group established pursuant to Section 185035 of the Public Utilities Code, and the policy committees with jurisdiction over transportation matters and the fiscal committees in both houses of the Legislature, a detailed funding plan for that corridor or a usable segment thereof. The plan shall include, identify, or certify to all of the following:

(A) The corridor, or usable segment thereof, in which the authority is proposing to invest bond proceeds.

(B) A description of the expected terms and conditions associated with any lease agreement or franchise agreement proposed to be entered into by the authority and any other party for the construction or operation of passenger train service along the corridor or usable segment thereof.

(C) The estimated full cost of constructing the corridor or usable segment thereof, including an estimate of cost escalation during construction and appropriate reserves for contingencies.

(D) The sources of all funds to be invested in the corridor, or usable segment thereof, and the anticipated time of receipt of those funds based on expected commitments, authorizations, agreements, allocations, or other means.

(E) The projected ridership and operating revenue estimate based on projected high-speed passenger train operations on the corridor or usable segment.

(F) All known or foreseeable risks associated with the construction and operation of high-speed passenger train service along the corridor or usable segment thereof and the process and actions the authority will undertake to manage those risks.

(G) Construction of the corridor or usable segment thereof can be completed as proposed in the plan.

(H) The corridor or usable segment thereof would be suitable and ready for high-speed train operation.

(I) One or more passenger service providers can begin using the tracks or stations for passenger train service.

(J) The planned passenger service by the authority in the corridor or usable segment thereof will not require a local, state, or federal operating subsidy.

(K) The authority has completed all project level environmental clearances necessary to proceed to construction.

The Appellate court reported, “Tos real parties further contend the mandatory language of the statute was designed for the express benefit of the voters; that is, the voters insisted on an elaborate financial mechanism to ensure they would not be obligated to subsidize a boondoggle or pay for a stranded segment of the rail system.”

In addition the Appellate court said, “absence of a clear directive from the people to constrain the discretion of the Legislature, we will not circumscribe legislative action or intrude on the Legislature’s inherent right to appropriate the funding for high-speed rail.” This is where they introduced the separation of power issue which was always of concern to the Superior Court and the Tos legal team.

The Piper still has to be paid

The court points to protections in the Prop 1A bond act. They say under the Bond Act, bond funds cannot be committed and spent until the second and final funding plan is approved by the Authority and submitted to the Director of the Department of Finance and the Chairperson of the Joint Legislative Budget Committee, and an independent financial consultant prepares a report.”

They also said, “This latter report is particularly significant in that the independent consultant must certify that construction can be completed as proposed and is suitable for high-speed rail; the planned passenger train service will not require an operating subsidy; and upon completion, passenger service providers can begin using the tracks or stations.”

It is this very point that gives Mike Brady, co-counsel for the Tos legal team, hope because “they [The Authority] must show that the project will be successful financially and in other respects, actually the financial situation on funding, the increased costs, the lack of private investors, the likelihood of government subsidies, forbidden by 1A, have all deteriorated in the last 2 years, making the prospects for success very remote.”

In addition, getting those project level environmental clearances will be tough going since completion dates for environmental work has consistently lagged 2-3 years. At the present time they lack project level clearances past Bakersfield looking south which is the path of the Initial Operating Segment. They also face stiff opposition with six lawsuits filed about the inadequacy of the environmental work for the Fresno to Bakersfield EIR/EIS just certified by the Rail Authority board in May 2014.

The remaining two segments, Bakersfield to Palmdale and Palmdale to the San Fernando Valley are estimated for completion for the summer/fall 2015. Here is what the Authority submitted to the Legislature in March 2014 in regard to the schedule. See page 17-table 5

The problem is there is little time remaining. If the Authority blows the environmental schedule, they have blown the chance to spend federal grant money through the American Recovery and Investment Act of 2009 (ARRA) since those funds have to be spent by an unmovable September 2017 deadline. The statute actually asks that the final bills be submitted six months prior to the deadline to insure proper processing but perhaps the Federal Railroad Administration, who has a soft spot for the project, may grant leniency to the HSR project for the bill submission timing.

Written in May 2012, the Los Angeles Times writer, Ralph Vartebedian characterizes the construction of this project as being the fastest constructed project in US history and that was if it started in 2012. What about 2014, 2015, 2016? When is it too late to start? Here is the original article.

Validation case:

In the validation case, the Superior Court ruled the Proposition 1A general obligation bond could not be issued because the committee that reviews the request for bonds to be issued weren’t shown any evidence that the approval of the bond allocation was “necessary or desirable.”

The justices started on page 20 of the ruling to discuss the validation case and they decided that the High-Speed Train Finance committee had the right to vote for bond issuance without the Authority providing information that it was necessary or desirable to authorize issuance of the bonds.

The court felt that the “ask” by the Authority was evidence enough. The court said this, “Real parties in interest offer neither a statute nor an analogous case to support the novel proposition that a “necessary or desirable” determination must be supported by substantial evidence in the administrative record.”

The court also confirmed that the issuance of the bond is different than the spending of the bond proceeds. The bond funds cannot be spent on construction until the second funding plan is approved. This just means if the bonds are sold, the state of California stands behind them. If the project doesn't go through it doesn't matter, the investors are secure in knowing they will be paid.

Looking back at the hearing, this outcome could have been predicted. In short, it didn’t go well. The judges hinted back then that the Tos litigants were too early because the final decision hadn’t been made yet in what’s called the final funding plan. And that’s what they ruled -- the objections are premature. See the article written immediately after the hearing.

They also said the Tos team was in effect too late because the Legislature had already reviewed the plan and appropriated funds despite deficiencies in the funding plan and they had that right. There seems to be a very small sweet spot between too early and too late and with the courts being so behind in hearing cases it may be a challenge to hit it just right.

In the ruling just released, the justices pointed to the language in the statute:

“We return, as we must, to the plain language of the statute. As the trial court aptly noted, there is nothing in the statute compelling the Legislature to ensure that the preliminary funding plan was compliant; nothing in the statute defining any ministerial duties the Legislature was obliged to perform; and there is nothing in the statute describing any consequences to the Authority for failing to produce a preliminary funding plan certifying that each of the 11 components have been included.

The Legislature appropriated the bond proceeds based on the preliminary funding plan, however deficient, and there is no present duty to redo the plan. The writ therefore should not have been issued.”

Simply put, the Appellate Justices said the Bond Act does not require a fully compliant preliminary funding plan before a final plan may be approved. So it seems the Authority and the Legislature at this point in time are bulletproof.

The appellate court said in their decision, basically: “don’t worry you’ll get your CEQA review”. “The Authority has repeated frequently that it will have all the requisite environmental clearances before construction begins. CEQA certainly demands nothing less. The Tos real parties, in fact, concede that state and federal law require environmental clearance before starting construction. Because the Authority must comply with CEQA before the project proceeds, a writ of mandate is not necessary.”

But the Tos litigants argued that the reason the environmental review completion was required at the time of the first funding plan was to prevent a stop in the project because of an unforeseen issue discovered during the process. The same argument applied to the funding. If there was inadequate funding for a particular useable segment, it could sit isolated and unusable. A total waste of taxpayers money.

And CEQA will remain the law of the land as it pertains to this project. It was validated on June 24th, as part of the appellate ruling in the Atherton case. There were press reports recorded that ruling a win for the Authority since the court didn’t require parts of the program level EIR from the Bay area to the Central valley to be done. But the win for CEQA is a major win for the entire state. See page 9. The courts were baffled how the Attorney General, could argue NEPA supremacy over the state law of the land. It usually is the other way around.

The Tos litigants argued that courts have the power to invalidate an unconstitutional legislative appropriation. The court agreed with that assessment however in the Shaw case that was cited, the voters made clear what the Legislature could and could not do. The justices did not feel the same clarity was present in the bond act.

Bond measure problems for the future:

If you look at this ruling, bond measures would then be subject to interpretation by the Legislature sitting in power at the time unless the bond measure has very specific language as to what the legislature can and cannot do. Attorneys in the past had stated the language had to be clear as to what the requirements were and only if that language was hazy did the Legislature have the right to step in and help clarify what the statute meant. That’s not what the court said here.

Also the court stated that if there is no clear direction on how the legislature handled the language in the bond measure once the Legislature rules, it would be nearly impossible to undo their action due to the separation of power doctrine. The court said in this case, “We cannot dictate to the Legislature how it should utilize a deficient preliminary funding plan.”

Co-counsel Mike Brady stated, “ Prop 1A had various safeguards and protections which do apply in this case, and we question whether the court has properly interpreted those protections. The court itself on several occasions conceded that the initial funding plan was “deficient.”

Brady also stated, “We are also evaluating the possibility of going to the [State] Supreme Court on issues such as respect for the protection of the voters in the initiative process when measures were specifically enacted for their protection and are then brushed aside, contrary to the intent of the initiative.”

Stuart Flashman, co-counsel added, "The court has essentially allowed the Authority to ignore promises it, and the legislature, made to California’s voters. It bodes ill for voters’ willingness to trust such promises in the future.”

The future of this project or where the rubber meets the road:

But in actuality this news isn’t all bad for the Tos litigants. The justices told them you have some good arguments here but you’re a bit premature. Compliance with the bond act comes later when the second funding plan is filed. The Authority can’t spend bond funds on this project until the second funding plan is presented. This does not go before the full legislature. The Authority, Director of the Department of Finance and the Chairperson of the Joint Legislative Budget Committee, approves it and an independent financial consultant prepares a report. Of course, the question remains who selects the independent financial consultant.

The Tos legal team believes that “when the Authority applies for Prop1A bond funds they will have to demonstrate that they have obtained all the environmental clearances for the entire 300 mile usable segment that THEY picked.” Co-counsel for the Tos team, Mike Brady also foreshadowed that the team will be waiting.

Brady said the court indicated “they would have the opportunity to challenge the legality of the Authority’s actions when the Authority moves to the NEXT STEP and actually tries to access the monies in the bond fund. They have to apply for that money through a different section of the law, a section which is actually much tougher on the Authority with respect to what it has to prove.”

The court conceded, “Although we agree that the voters clearly intended to place the Authority in a financial straight-jacket by establishing a mandatory multi-step process to ensure the financial viability of the project, we agree with the petitioners (meaning the Authority represented by the Attorney General) that the essence of the writ violates very basic principles circumscribing when and against whom a writ of mandate may be issued.”

Translation: The court said the Authority cannot be presented with a writ ordering a correction if there is nothing to correct. The court's thinking is with the appropriation already having been made, it is not subject to invalidation. Therefore, having the funding plan rewritten would not address any present duty of the Authority. The Tos legal team disagrees with that assessment.

Challenges for the Rail Authority:

Round two indeed may prove much harder for the project and that’s when the second funding plan moves forward. No bond funds can be spent for construction without it. But perhaps they won’t try to ask for approval on the second funding plan for a while. They could be waiting for environmental work to be completed and perhaps more money to materialize that would demonstrate that the project is sound. In the meantime they may just spend limited cap-and-trade dollars and federal funds.

Granted some of the conditions have changed, and this time around the Authority has the promise from the Legislature of a continuous revenue stream of cap-and-trade funds -- but it’s far from certain. While the Rail Authority is sure it has 25% of something, no one knows how much. There still remains a gap of more than $15 billion to complete Initial Operating Segment from Madera to the San Fernando Valley and probably more if scrutiny was placed on what the actual construction costs would be.

They also have more legal challenges ahead of them including facing Judge Kenny again sometime this fall. The second half of the Tos/Fukuda/Kings County case will be about specific promises made to the voters and if the Authority will be able to comply.

There are three primary issues that will be heard:

Will the train make the time requirements promised in that is 2 hours and forty minutes? Will the project require an operational subsidy? And did the blended plan, the use of existing transit tracks, meet the requirements of Prop 1A?

Bottom line, the court opinion did not validate that the Authority was following Prop 1A, in fact it said just the opposite. They have a short reprieve but it’s a tough road that lies before for them for this case and many others. Meanwhile the clock is ticking on the ARRA federal funds.

The entire court decision can be found on the TRANSDEF Site.

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