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Denham requests GAO investigation on the California High-Speed Rail court ruling

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Dan Richard, current High-Speed Rail (HSR) Authority Chairman and Judge Quentin Kopp, former HSR Authority Chairman, duked it out on KQED radio right before Thanksgiving. Richard stated, “I won’t say this was the ruling we were hoping to get but on the other hand the claims that this was a major setback are wildly overstated.” Kopp countered, “The ruling was a major setback.”

Richard who argued back about what the judge didn’t do, offered, “Judge Kenny didn’t stop the project; he didn’t cancel the contracts." Kopp reminded him, “The judge didn’t stop you from spending money because you’re spending federal money. And who knows how financially responsible the fed bureaucracy is? Maybe they’ll let you go ahead and spend it but there is a limit to that. They can’t spend more than 50% of the total cost from Federal money.”

Denham/Latham letter to General Accounting Office:

But clearly some one is watching from Washington DC since alarm bells sounded one day after the adverse rulings. Congressmen Jeff Denham, (R) Turlock and Tom Latham, (R) Iowa requested an investigation from the U.S. Government Accountability Office (GAO) about the terms and agreements between the Federal Railroad Administration (FRA) and the California High-Speed Rail (HSR) project and the risk now associated with the project. Denham is the Chair of the subcommittee on Railroads, Pipelines and Hazardous materials. Latham is the chair on the subcommittee on Transportation, Housing and Urban Development.

A letter dated November 26, 2013, shows the Congressmen troubled about a specific quote from Deputy AG during the Prop 1A court case where Ms. Inan says, “ [t] he State is spending only Federal money,” and floated the concept that spending those federal grant funds, “does not commit bond funds…and there is no need to match anytime soon.” The state contends it can continue the project with federal funds and the California Superior Court does not have jurisdiction over the spending federal funds.

More in the letter:

The Congressmen show great concern about contract provisions in the FRA and California High-Speed Rail Funding Agreement dated December 2012. They note the “departure from standard Federal/local cost share agreements where funds must be spent concurrently from requiring matching funds. Considering the magnitude of the project, we are concerned about FRA’s stewardship of Federal funds in California and elsewhere.”

The letter states, ” taxpayers’ funds may be at significant risk with questionable likelihood of recovery if the Authority fails to comply with the terms of the agreement. “ They are also concerned about “the extent to which FRA has amended agreements with other state grantees.”

The Congressmen ask the GAO to address the following questions:

· Is the Authority currently violating, or on the verge of violating its grant agreements with the Federal government? If the Authority is in violation of those agreements, what remedies are available to the Federal government?

· In August, the Authority was found to be non-compliant with State law regarding the project’s funds and environmental requirements. What impact does this finding have on the California grant agreements with the Federal government?

· Since the FRA continues to expend grant funds paying the Authority for current activities, do the recent State court rulings put the FRA in violation of any Federal laws, including the Anti-Deficiency Act? If so, what remedies are available to the Federal government?

· What responsibility falls on FRA to re-evaluate the grant agreements in light of these court rulings?

Note: California has had five revisions since the project grant agreements were signed in early 2010; and rumor has it a 6th revision will appear later this Spring. The revisions always seem to help overcome difficulties the project is facing. The current agreement, #5, is full of details about keeping the FRA abreast of lawsuit activity.

It acknowledges compliance with other state laws and requires quarterly reporting. It says this in the agreement:

“ There has been no material adverse change in pending litigation, including the timeline for resolution, or change in any other circumstances that might prevent the Grantee from securing and delivering its required matching funding contribution, including any change in circumstances consistent with the Funding Contribution Plan included with this Agreement as Exhibit 3”

Here’s the link to the funding agreement: http://hsr.ca.gov/docs/about/funding_finance/funding_agreements/FR-HSR-0009-10-01-05.pdf

A public records request has been sent to the HSR Authority to obtain quarterly reports as well as electronic communication between the Authority and the FRA.

Comment and a little history:

In the December 2012, 5th revision of the funding agreement, the federal government agreed to advance grant money without the 50% state match because of project’s problems to obtain bond proceeds. It was a departure from the normal procedure as expressed in a letter the Authority was sent on March 25, 2011 from then Under Secretary for Policy from the Department of Transportation (DOT) Roy Kienitz which stated using federal grant funds first was not possible. “California was awarded funding based in part on the impressive state match they promised in the grant applications. Withholding these matching funds would put the California’s high-speed rail project in serious jeopardy”

Kienitz, the author of the March 25 letter, left the DOT in late fall, 2011; and before the year ended, was working for Parsons Brinckerhoff (PB), the program managers for the California High-speed Rail project. Interestingly, the advance spending revision was developed in the 2012 time frame.

Current Funding Agreement

The current funding agreement dictates the spending of American Recovery and Reinvestment Act of 2009 funds. Since the feds are spending all their money first, the state is required to begin catching up with matching state funds by April 2014 (or sooner if bonds are issued). The court’s ruling now forbids the spending of state bonds for construction purposes until they come up with a satisfactory Funding Plan which specifically meet two requirements: they have the source of all the funds identified Initial Operating Segment (IOS) and all environmental work as been completed.

Currently the project only has 29 miles of environmental clearance for the 300-mile stretch that goes from Madera to the San Fernando Valley. Also, against an estimated IOS construction cost of $31 billion, HSR has only identified $6 billion in committed funding (of which roughly half involves federal funds).

The problem of switching the IOS: What would they pick?

The state clearly doesn’t have the additional $25 billion to fund the current IOS. The environmental work is incomplete as well. They would have to complete the Fresno to Bakersfield segment and come up with another, legislature-appropriated source of state funds or private investment funds to cover cost of construction.

Another possibility is the state might change the location of the IOS with accompanying proof that there will be enough riders to make the segment subsidy proof. Regardless there will be a very likely delay in the promised 50% state match of fed funds. It’s simply not possible to go through all the steps required and legally comply to begin spending bond funds by April 2014.

Whatever Initial Operating Segment they choose must have the original segment as part of it because that particular segment has obligated funds, which were committed to in 2012, which may not be transferred at this late date to a brand new segment.

Another possibility is that the Rail Authority could simply attempt to keep the same 130-mile stretch in the Central Valley that the court ruled insufficient and change the label from the Initial Construction Segment to the Initial Operating Segment. One, the judge might not like a simple switcheroo of the title on the same segment however the reality is there is not sufficient ridership to support this approach. Insufficient ridership equals operating subsidy, forbidden by Prop 1A.

Many knowledgeable Authority employees, board members and the current Authority’s chairman are on record admitting this won’t work. Specifically in March 2012 (Mountain View, Ca.), in answer to a question by then Senator Alan Lowenthal who implied insufficient ridership in the Central Valley equals operational subsidy forbidden by Prop 1A, Dan Richard responded: “Our business plan never intended, our business plan does not contemplate that we would operate the HSR in the central valley. That has never been part of our plan, for exactly the reason you said there’s not sufficient ridership to do that.”

Will the FRA continue to fund the project?

According to Washington sources, the Federal Railroad Administration (FRA) is apparently very aware of the request for a GAO investigation. It is rumored, though not confirmed, that due to California's court rulings, the FRA may have ceased reimbursing California for project expenses in order to have time to figure out next steps.

In addition, sources reveal another reason for possibly paused funding may be that the FRA could be in violation of federal law if it continued to advance funds, knowing that California is unable to match due to the court rulings.

See the briefing paper researched by William Grindley and William Warren for a meeting with the US Assistant Inspector General (IG) Mitchell Behm. The paper was delivered in person to the IG just days before the court remedy ruling stating the Authority abused its discretion and submitted an insufficient funding plan to the state legislature. It outlines why the FRA should stop funding the California project.

The Authority says:

Board Chairman Dan Richard revealed some initial thoughts in the KQED interview on November 27, 2013. He believes that the old funding plan is attached to an old business plan that was done in late 2011. He also said that, “ When we revised our business plan in the spring of 2012, there were a lot of things we did with the HSR Program which I think addressed a number of key concerns. “ He believes their new approach is superior since “high-speed rail is now seen as integral part of the state’s rail transportation network. “

Quentin Kopp commented,” This wasn’t tied to any old plan; the any old plan was high-speed rail. This isn’t high-speed rail, it’s something else.” Kopp adds, “Tell the voters that’s what you’re going to do with their money, their tax money which they have to repay to the bond buyers; they have to repay with interest. Be honest.”

Comment: Neither the draft Business Plan November 2011 plan or the April 2012 Business Plan addressed the court’s ruling. The IOS South was selected in the newest business plan and the blended system was introduced as a cost saver, bringing down the cost from $98 billion to $68 billion. There was never a revision of the November funding plan despite changes in the business plan. While the notion of putting the HSR bond measure back on the ballot sounds like a good idea, there is clearly not time to create, schedule and complete such a proposition before federal funds must be matched.

Richard said in the radio interview, “My colleagues and I are getting together next week for the HSR Authority meeting. I suspect after that, we’ll be able to lay out to the public, what the course is going to be. We think a number of these issues can be addressed and addressed in a straightforward way.”

The question is how.

References:

Denham/Latham Letter: http://denham.house.gov/sites/denham.house.gov/files/11-25-13%20Denham%20GAO%20Letter.pdf

William Warren declaration explains the finances and specifically the spending per the FRA agreement. http://transdef.org/HSR/Taxpayer_assets/Warren%20Declaration.pdf

Here are the rulings: Tos/Fukuda/Kings County: http://www.saccourt.ca.gov/general/media/docs/tos-v-ca-high-speed-rail-authority-ruling2-112513.pdf

The Validation Case: http://www.saccourt.ca.gov/general/media/docs/tos-v-ca-high-speed-rail-authority-ruling-112513.pdf

Links to all legal briefs can be found at http://transdef.org/HSR/Taxpayer.html

Kathy Hamilton has written several recent articles on the current lawsuits and many other subjects concerning the High-Speed Rail Authority. See a brief synopsis by title on her site: http://www.examiner.com/transportation-policy-in-san-francisco/kathy-hamilton

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