Legislative Analyst’s First Look At 2009 Business Plan
Supposedly the big news at yesterday’s Assembly Transportation Committee hearing was the Legislative Analyst’s Office releasing their first take on the 2009 Business Plan. To hear some people tell it, pearls were clutched, gasps were heard, and pandemonium broke loose. Watch the video for yourself here.
Or maybe that was The Godfather, Part II, I can’t remember.
Looking at the LAO document, I’m surprised by how unsurprising it actually is. This is their first take on the 2009 Business Plan, which they said was much improved upon the 2008 Business Plan. But the LAO document focuses on the negatives, which was probably to be expected. There are three specific areas the LAO was concerned about in the 2009 Business Plan: risk, timelines, and funding.
For a project that is still very much in development, especially in terms of the full funding, none of that should be a surprise. The 2009 Business Plan is a snapshot of a project in evolution. Any expectation that all the financial details would have been ironed out in a year is absurd and unrealistic, but then, HSR often gets burdened with absurd and unrealistic expectations, particularly from skeptics and critics. Certainly the things the LAO points to deserve resolution, and we fully expect they will be resolved. But to use this report, as some want to, as evidence of a flawed project is itself a flawed analysis.
Let’s have a closer look.
Inadequate and Incomplete Discussion of Risk. The plan’s discussion of risk management is significantly inadequate, lacking any description of mitigation processes or detailed consideration of many key types of risk.
No Risk Management Strategy. The plan contains no discussion of the authority’s plans or processes to (1) identify potential threats or (2) manage, respond, and mitigate those threats. The plan only states that the authority “believes it is aware of all existing threats and is taking the appropriate steps to prevent or mitigate those threats.”
Unknown Confidence in Projections. The plan does not provide any numerical ranges nor confidence intervals for projections contained in the plan (such as cost, revenues, or ridership). Without this information, the risk of not realizing the forecasted ridership, revenues, or costs is unknown.
Inadequate Discussion of Key Types of Risks. The plan contains no detailed discussions or consideration of even the most significant risks to the project, such as ridership and funding.
The LAO goes on to mention specific risks of low ridership and low funding. Are we to believe that the CHSRA erred in not discussing these in great depth?
I don’t think so. Sure, a detailed discussion such as the LAO wants might be worthwhile and I suspect we’ll see that in the 2010 Business Plan. But we don’t need that data to understand these risks, which are inherently political risks.
The main risk is that the CHSRA will not get sufficient federal funding. That’s a very real possibility. President Obama is throwing away political capital by the day and Congress is becoming an institution incapable of action. Every sign we’ve seen from the federal government in 2009 was encouraging, but it’s true that there is a risk that the climate may change and HSR might not get the funding it needs.
In that case, the HSR project has much bigger problems than a lack of “confidence intervals” in the Business Plan. Without full federal funding, the SF-LA project isn’t going to happen. Pieces will be built, and it’s unclear what that would look like. Should the CHSRA address that issue in its Business Plan? Probably. Is it fatal that they didn’t? Not really. Again, we know that federal funding is make-or-break, and we don’t need a Business Plan to tell us that. If it’ll make the LAO happy, go for it, but I’m not going to worry about it, since we’re already well aware of the importance of ongoing federal support.
The LAO also criticizes the timeline:
Uninformative Timeline. The program management and project delivery timelines contained in the plan are very general and provide little opportunity for increased accountability. There are few deliverables or milestones included against which progress can be measured.
Inconsistent Order of Events. Because the timelines in the plan are so general, it is unclear in what order various events will occur. For example, regulatory approvals are expected by 2018 but procurement is scheduled to be complete by 2014. This could mean the train technology and rolling stock will be procured before regulatory agencies approve their use.
Is the timeline vague? To some degree, yes. That’s partly because the final decisions on project implementation haven’t yet been made. Once they have been, then it is absolutely the right time to begin holding CHSRA accountable on that front.
As to the issue of procurement and regulatory approvals, sure, the CHSRA ought to be clearer on that point too. But that’s a bit of nitpick in the bigger picture.
Finally, the LAO closes by saying “Funding plan uncertain; appears to violate law.” Oooo! Strike the jarring chord, CHSRA is in trouble now!
Or is it?
Operating Subsidy Necessary for Private Funding. The Proposition 1A bond measure explicitly prohibits any public operating subsidy. However, the plan expects the following items to be funded by the private sector.
Revenue Guarantee. The plan assumes some form of revenue guarantee from the public sector to attract private investment. This generally means some public entity promises to pay the contractor the difference between projected and realized revenues if necessary. The plan does not explain how the guarantee could be structured so as not to violate the law.
Operations Insurance. The plan anticipates the cost of insurance for operating the system would not be borne by the private operator. If the public sector pays for insurance, that would constitute an operating subsidy in violation of Proposition 1A.
Putting a ban on operation subsidies in Prop 1A was immensely stupid, but I guess we have no choice but to live with it. Still, this doesn’t scare me.
Why? Because it all comes back to the issue of private funding. And as we’ve been discussing since the 2009 Business Plan was released, there was a genuine issue with the level of private funding anticipated. You can indeed get more private funding by giving them a public backstop, a guarantee that the public will bear the risk. If that violates Prop 1A, then I think that’s cause for celebration – the role of private funding should be minimized here, and the public should be paying most if not all of the construction cost.
Here again I’d welcome more clarity from the CHSRA, but I don’t see this being any big surprise, we’ve known that we want to minimize private funding, so we ought to go out and do that.
They go on to question the assumptions of federal funding:
Federal Funding Expectations Highly Uncertain. The plan assumes between $17 billion and $19 billion from federal funds by 2016, or nearly $3 billion per year for the next six years. In comparison, over the past five years California has received roughly $3 billion per year of formula funding for the state’s entire highway system, which is primarily funded through federal gas tax collected in the state
This is really misleading. HSR is a special project and is not at all going to be comparable to the $3 billion per year we get in highway dollars. That latter money comes decades after the federal government spent billions to build interstate freeways here, on a 90-10 match. If all goes according to plan, long-term HSR funding in a new Transportation Bill could be as much as $10 billion per year over the next six years. It is entirely plausible that California, with the most advanced plan and with a sizable state match, will get 1/3 of that money. To assume HSR funding would be treated in Congress like highway money is simply ignorant. You’d think the LAO would know better than to make such a basic mistake.
So has the LAO found some faults with the 2009 Business Plan? Absolutely. Should those flaws be addressed? Of course. Are those flaws surprising? Not really, not for a project still in evolution. Should we be scared? I don’t see why we should be. The LAO’s report on the 2008 Business Plan was damning, but that didn’t hurt the HSR project or CHSRA in any obvious way. The legislature is going to continue to support HSR, and while the usual HSR deniers are going to find ways to use ANY problem to argue that the whole thing is a bad idea, we know better than that.
That all being said, the LAO document is itself incomplete, and not just because it’s their own first draft. They discuss ridership risk, but don’t acknowledge that other HSR systems around the world have had no problem generating ridership or operating surpluses. The LAO – and certainly uninformed legislators like Assemblymember Joan Buchanan – seem to want to compare HSR to AC Transit, even though the comparison is rather deeply flawed. The California HSR plan should be compared to other HSR systems around the world, not to a local bus service.
More fundamentally, their analysis falls into the usual trap of assuming that the cost of doing nothing is zero. It’s not. What are the risks to California if we do NOT build HSR? What are the risks to the budget from declining gas tax revenues? What are the risks to the budget of the impact of global warming and dependence on fossil fuels? Has the LAO considered the tax income to the state that would be generated by spending on HSR construction?
If the LAO plans to analyze HSR in isolation, instead of in context, then their analysis isn’t worth very much. Just as the LAO wants a better Business Plan from the CHSRA, we too want a better analysis of that plan from the LAO.