Solyndra Times Seven: Why California’s high-speed rail project is an even greater waste of federal tax dollars.

March 28, 2012

City Journal:

The national media have devoted plenty of skeptical attention to California’s bullet-train boondoggle—from the ballooning cost of the California High-Speed Rail Authority project to its shoddy management to the baffling decision to build the first segment in the lightly populated Central Valley. But the press has yet to focus on a crucial fact: the bullet train isn’t just some quirky Left Coast fiasco; it’s also a grotesque waste of federal money. The project serves as a powerful reminder of the Obama administration’s mishandling of the $787 billion stimulus that Congress passed in February 2009 with solemn assurances of prudence and accountability. The bullet-train project, in fact, can be thought of as “Solyndra times seven”—that’s how far its costs outstrip those of the much-touted Bay Area solar panel manufacturer that burned through $528 million in federal loans before declaring bankruptcy and folding last September.

In California, the federal government is committed to spending $3.5 billion—with most of those dollars coming from the 2009 stimulus—for a project whose problems are glaring. State officials are trying to remake the bullet train on the fly, promising at a legislative hearing in Silicon Valley to implement changes that would bring down the cost and speed up construction. But none of those changes alters the fact that the bullet-train project appears clearly to violate federal regulations governing stimulus spending on transportation. The rules, published in the Federal Register on June 23, 2009, require that applications for stimulus funds to build high-speed rail projects would be approved only after “rigorous analysis,” factoring in a careful examination of the proposed project’s “financial plan (capital and operating),” “reasonableness of financial estimates,” and “quality of planning process.” Grant recipients would make regular progress reports, corroborated by Federal Railroad Administration audits. Even the most cursory analysis shows that the California bullet train falls far short of compliance with the rules.

State auditors, the University of California’s Institute for Transportation, and an ad hoc peer-review committee appointed by the legislature all lambasted the project’s financial plan as incomplete, overly ambitious, and based on unverifiable numbers. In January, the peer-review group issued its assessment: “We cannot overemphasize the fact that moving ahead on the HSR project without credible sources of adequate funding, without a definitive business model, without a strategy to maximize the independent utility and value to the state, and without the appropriate management resources, represents an immense financial risk on the part of the state of California.” The peer review followed a damning analysis published in November by the state’s nonpartisan Legislative Analyst’s Office, perhaps the most respected agency in Sacramento, which concluded that rail officials had yet to address how to fund the (at least) $98-billion-system linking Los Angeles and San Francisco.

California has about $13 billion on hand to begin the first phase of the project. The rail authority and its boosters claim that the federal government and private investors will supply the remaining $85 billion. Those additional federal dollars are almost certainly not coming. Congressional budget cutters have targeted discretionary domestic spending, and the $260 billion transportation bill currently winding through Congress expressly prohibits California from diverting any highway funds for high-speed rail. Meanwhile, Wall Street isn’t enamored with the project, and private investment funds have shown zero interest in partnering with California unless they receive revenue or ridership guarantees. But guaranteeing a certain return on investment would amount to promising subsidies if the rail authority’s immense ridership forecasts don’t pan out—taxpayers would be making up the difference. And Proposition 1A—the 2008 state ballot measure providing $9.95 billion in bond money for the project—explicitly bans taxpayer-funded operating subsidies.

Rail authority executives and prominent California Democrats, including Governor Jerry Brown, Senate President Pro Tem Darrell Steinberg, and former HSRA chairman Quentin Kopp, continue to talk up the chances for substantial private investment. But the record of the last two governors, both ardent champions of the project, suggests the obstacles to such investment are larger than they first appear. Arnold Schwarzenegger explored outsourcing the construction and operation of the train to the Chinese. He failed. And in January, Brown suggested that the tens of billions of dollars that companies will pay for pollution rights in coming years under the state’s nascent cap-and-trade program could fund the project—assuming, of course, he can find a way to pry those dollars from the clutches of the California Air Resources Board, which already has plans for the uncollected funds…

Read it all.

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