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High-Speed rail gets another break: State match delayed

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Friday night is one of the slowest news days of the week. At times, undesirable news is released this way in an attempt to avoid wide-spread press reports. Four out of the last 5 Fridays, there has been important news released about or by the High-Speed Rail Authority. Here’s what happened:

1. HSR Authority files a request with California Supreme Court – Friday. January 24, 2014

2. Draft 2014 Business Plan released – Friday, February 7, 2014

3. State Court of Appeal decides to take the case – Friday, February 14, 2014

4. FRA grants the state an extension to delay matching federal funds with $180 million in state funds originally due April 2014, now delayed until July 1st - Friday, February 21st.

With the latest released news this past Friday, the Authority publicized a letter dated February 20th which showed the latest proposed changes to the FRA Funding Agreement that governs the project. It appears that the Authority will be able to delay producing matching state funds in the amount of $180 million dollars, moving it from April 1st to July 1st.

Morales also notes in his letter that the Authority does not anticipate investment with Prop 1A funds until July 1st, 2015. Either he doesn’t think he’ll need the money or he thinks they’ll need that long to get through the entanglement of the court cases. One wonders what will be built since the American Recovery and Reinvestment Act of 2009 (ARRA) requires all expenditures by September 2017.

House Transportation Hearing January 15, 2014

January 15, 2014, Congressman Denham quizzed the FRA administrator Karen Hedlund about the prudence of continuing to fund the Authority considering the court ruling. She didn’t think there was a problem. See the video tape one, the one on the top for a five-minute exchange. (http://transportation.house.gov/calendar/eventsingle.aspx?EventID=366174 Go to 2 hours and 40 minutes to 2 hours and 45 minutes.

The 2nd video segment at the bottom of the above link shows Denham interacting with Authority Chairman Dan Richard about the court case and Richard’s idea of what court compliance means.

Funding- burden moves to the Federal Government:

In the letter Morales sent to the FRA, one of the most serious consequences of these changes is in the new funding contribution plan it shifts a large amount of investment in the coming years to the Federal government and a significant decrease in California contribution compared with the original plan, according to financial expert William Warren and co-author of data analysis articles about the rail project. This basically leaves the US taxpayer with more exposure while pushing forward a California State project that a state court ruled is non-compliant with the voter approved bond measure.

The state has been receiving federal funds upfront for planning and environmental work for the past year delaying the state match of 50% until later. The original agreement provided for a simultaneous match as per the communication of Roy Kienitz then Undersecretary of Policy, Department of Transportation (DOT). He sent a letter to the rail authority on May 25, 2011 with a rather unequivocal opinion on the subject of matching funds, which said in short “thou shalt not spend federal funds first.”

Kienitz wrote in that letter, “ On the matter of using federal funds up front to postpone use of the State’s matching funds, we hope you will understand why this is not feasible. Both the fiscal year 2010 appropriations law and the FRA grant commitments require matching funds as a prerequisite for this project to go forward. California was awarded funding based in part on the impressive state match promised in the grant applications. Withholding these matching funds would put the California’s high-speed rail project in serious jeopardy.” See the Fresno Bee Report written on March 25, 2011.

Kienitz left the agency and within a year, he joined Parson Brinckerhoff, the primary consultant on the HSR project. Shortly thereafter a revised 2012 Funding Agreement Amendment #5 was published which said the federal funds can be spent first and matching state bond funds can be spent starting in April 2014.

It had been expected that the Rail Authority would have access to state bond funds by April 2014 but recent court action, the opposition winning, dashed those hopes.

The "shift" of federal funds- construction to environmental and planning

Morales also asked for a shift of $145 million in federal funds from construction to the planning and environmental category. While the feds always had construction dollars in their #5 agreement, the Rail Authority had to get specific permission to use those funds. Judge Kenny’s rulings, which effectively halted the spending state bond funds for construction, does not forbid the spending of Federal funds, even for construction.

This request for the “shift” of funds could be because the FRA fund releases usually follows the progression of the project, releasing funds a little at time. The Authority is not ready for the construction part yet. They are still in the planning phase and they do need more funds to move the project forward. Besides changing the labels for the funds, it shifts a higher degree of risk to the federal government.

It should be noted that the spending of Federal grant construction dollars also comes with strings. There must be master agreements with any railroads in the path of the train. See page 8 of FRA Grant Agreement #5. The Rail Authority acknowledged on page 70 in the 2014 Draft Business Plan the lack of those master agreements is a risk.

They also have a lot of old bills to clear up, $63 million dollars to be exact. It was noted that while the aged payables report shows $47 million it was revealed at the February 11, 2014 Board meeting, the amount was updated to $63 million. http://www.hsr.ca.gov/docs/brdmeetings/2014/brdmtg_Item4_ATTACHMENT_3_Accounts_Payable_Aging_Report.pdf

Katherine Perez-Estolano, HSR board member added that many small businesses are suffering because of the delayed payments.

Receiving more federal funds for the planning and environmental category will allow things to continue more smoothly for the project. The staff also said at the board meeting they expected to get funds from the feds shortly to clear up these past due bills. Not sure if it was under the old plan or the newly implemented plan.

Cap-and-Trade funds:

The Governor has promised $250 million from Cap-and-Trade Auction funds but without the passage of the Budget expected in June, it would be difficult to find the funds for the match by the April 1, 2014 deadline. That’s why July 1st, 2014 works better but it’s still very tight due to the passage of the state budget due June 15, 2014.

Since only the legislature can approve an appropriation, there is not absolute assurance that the Legislators will pass what the Rail Authority has promised. There are many questions about the validity of using cap-and-trade fees for the HSR project and environmental groups have objected. Dan Richard, Chairman of the High-Speed Rail Board said at the January 15th 2014, House Transportation Hearing about the High-Speed Rail project that he would not go so far as to predict that the legislature would approve the Governor’s proposal to use $250 million from Cap-and-Trade dollars but reported promising talks with environmental groups.

Just out is an opinion of the Legislative Analyst’s office and they recommend caution to the overall cap-and-trade program. Here are selected passages and the complete Cap-and-Trade Legislative Analyst's Office report. On page 11, the LAO points out that the high-speed rail project will not finish the first segment to the San Fernando Valley until 2022, 2 years beyond the deadline in AB 32. In that bill it requires a reduction in emissions to 1990 levels. They also point out that the Authority did not include construction emissions in their analysis and it was possible that construction of the Initial Operating Segment may result in a net increase in GHG emissions.

“In reviewing the Governor's proposed expenditure plan, we find that there is significant uncertainty regarding the degree to which each investment proposed for funding will achieve GHG reductions. This uncertainty is the result of several factors, including there being only limited data and analysis provided by the administration, as well as the fact that the level of emission reductions achieved would depend on the specific projects funded by departments.”

Specifically in relation to High-Speed Rail the LAO says this:

The Governor’s budget requests $250 million in 2014-15 to support construction of the high-speed rail system. Specifically, this includes (1) $58.6 million for environmental planning and permitting for the first phase of the project (which would extend from San Francisco to Anaheim) and (2) $191.4 million to purchase land and partially support construction for the Initial Construction Segment (which would extend 130 miles from Madera to Bakersfield). According to the administration, the availability of a high-speed rail system in California will reduce vehicle miles traveled in cars, as well as planes, thereby reducing total GHG emissions. As described above, the administration also proposes budget trailer legislation to continuously appropriate 33 percent of GGRF revenues to HSRA beginning in 2015-16.”

Metrics recommended in regard to prioritizing Cap-and-Trade expenditures:

“We recommend the Legislature direct the board to use this staff to develop metrics for departments to use in order to prospectively evaluate the potential GHG emission benefits of proposed projects as well as direct ARB to establish a set of guidelines that includes direction for departments regarding how they should incorporate these metrics into their decision- making processes.

“While this requirement might delay getting funding “out the door” by a short while, we find that such a short delay would be worthwhile if this were to increase the likelihood that the state could better ensure that the most beneficial projects are being funded.”

Note: The Governor’s office has in mind an immediate “out the door” expenditure since it is relying on those funds for the first $180 million to be spent as of July 1, 2014. The budget might pass by June 15th, 2014 but many times it is delayed.

Congressman Denham’s response:

In a quick response, Congressman Jeff Denhan, who received confirmation that the FRA had approved the Authority's requests for more lenient terms, believes the FRA has let California off the hook again on the schedule of matching funds. He considers the move, risky. He has put forward legislation in Congress to stop the funding for the California Project. Denham said this,

“The Federal Railroad Administration is protecting the Authority yet again and putting California taxpayers at greater risk,” said Rep. Denham. “It has long been clear that the Authority would be unable to provide the funds required in their grant agreement. In December 2012, the FRA changed their agreement to allow for a tapered match rather than the standard concurrent match. Now they’ve changed the agreement again. With billions in federal taxpayer dollars on the line, what changes are next from the FRA? The American people – and Californian taxpayers – deserve to see their money used responsibly.”

It seems the Authority has joined with the FRA as a partner in a political partnership to evade the enforcement of the Prop 1A laws, which were designed to protect Californians, and now protect all US citizens against an irresponsible project. So far the lower courts appear to be in line with the public and the plain language in the bond measure. But courts are not immune from the pressure of politics and one can only hope that the higher courts will allow the lower court decision to prevail despite the wishes of the Governor and even the President. If the FRA and the Authority are allowed to push forward with this project, it will be a win for politics over the rule of law.

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