Bill Lockyer Needs to Show Wall Street the CALPIRG Study
There’s a myth in America that investors, especially Wall Street investors, are smarter and better informed than the rest of us poor schlubs. The market and its experts are given more weight than the views of other observers, because Americans in recent decades have gone all-in on the belief that markets know best.
We should know from the events of the last decade this isn’t really true. Wall Street is notably susceptible to the wisdom of crowds, and not very quick to anticipate trends or problems. If they were that smart and all-knowing, we’d never have had the financial crisis that unfolded in 2008, caused by Wall Street convincing itself that a housing bubble built on an unsustainable amount of debt was somehow a good thing.
But the sentiments of Wall Street do matter, even when it’s ill-informed. That’s why California Treasurer Bill Lockyer’s recent comments about Wall Street and high speed rail matter, despite the fact that they rest on a deeply flawed basis. Lockyer made his comments to the San Diego Union-Tribune editorial board, a group that has been deeply hostile to HSR since day one and was obviously pleased to hear this.
When it comes to the debate over the state’s $43 billion high-speed rail project, there are two camps. One features California High-Speed Rail Authority officials, their paid consultants and Gov. Arnold Schwarzenegger, who are enthusiastic advocates for the public-private partnership to build a network of speedy trains linking Northern and Southern California. Then there are those who look at the project’s business plan and ridership projections without rose-colored glasses – the Legislative Analyst’s Office; the University of California’s Institute of Transportation; state lawmakers of both parties; etc. – and question its viability.
On Tuesday, a powerful official added his name to the list of skeptics: state Treasurer Bill Lockyer. In an interview with Union-Tribune editorial writers, Lockyer raised two profound questions about the project.
The first question has to do with the rail authority’s ability to attract the $10 billion to $12 billion in private investment it says it needs. (Outside analysts think that much more private funding will be necessary.)
“There are segments of the line that you could run sensibly, principally L.A. to San Diego ,” the treasurer said. “I hear from the world of Wall Street investment bankers about what they think makes sense. And almost universally, they’re convinced that no one can finance the routes from L.A. to the Bay Area, that it just will never work economically, certainly in the foreseeable future.”
Lockyer is surely just repeating what he’s heard, but these claims need a strong pushback. These investment bankers are clearly clueless about how HSR works around the globe. They seem to believe the canard that “nobody will ride trains” or “nobody will abandon an airplane for a train,” claims the airlines themselves don’t believe.
More importantly, they’re obviously not aware of the global context. They would if they’d read the CALPIRG report on the global success of HSR, including how routes that travel roughly the same distance as SF-LA, such as the AVE between Madrid and Barcelona, have been a stunning financial success.
Wall Street bankers should know this, since the Acela, connecting Boston to New York to Washington DC, generates an operating profit. Even the Taiwan HSR system now generates an operating profit after the government helped straighten out its flawed finances.
Now, the U-T didn’t report the full details of Lockyer’s remarks. We don’t know if Lockyer was saying that Wall Street doesn’t think they can fund the entire project themselves – which we all know they can’t, and shouldn’t. That’s where Taiwan got into trouble. But there remains every reason to believe private investors should want to invest in a system that they’re not paying for entirely, that is known to generate an operating profit around the world.
Lockyer went on:
Rail authority officials “need to do a lot more work to make sure investors can be reassured of the financial viability of the project,” Lockyer said. “There are dozens if not hundreds of infrastructure investment funds on the planet. [The California Public Employees’ Retirement System], as an example, recently bought a significant piece of a London airport. There are a lot of infrastructure funds like that that are public and private, probably trillions of dollars looking for good deals. So there’s financing potentially available if it’s a good deal. I’m just not yet convinced the investors are going to think that’s a smart investment to make.”
So Lockyer isn’t saying HSR is a bad investment, just that more work needs to be done to sell investors. That may well be true, and it hasn’t helped that there have been three flawed and misleading anti-HSR reports – from the Legislative Analyst, the State Auditor, and now Berkeley’s Institute for Transportation Studies – that have generated high-profile scare stories about HSR but that few people actually understand in detail. This blog has looked at each in detail and has consistently found serious problems in each one.
It is good to see that Lockyer agrees with me that CalPERS would make a good investor. But it’s clear that Lockyer also needs to hear the truth about HSR, and not get taken in by these flawed anti-HSR studies.
Unfortunately, the damage appears to have already been done:
The second question has to do with the $9.95 billion in state bonds that voters authorized as seed money for the high-speed rail project in November 2008.
Given the many outstanding questions about the project, “I would be reticent to try to go to market to issue bonds to finance the state’s share,” the treasurer said.
This doesn’t mean Lockyer would or could block their issuance. “The only discretion I have is to say, ‘You can’t sell this. No one will buy this bond, certainly not at any reasonable price.’ ”
This is a serious problem, for several reasons. One, these are NOT revenue bonds. They are General Obligation bonds. Even though we have confidence that HSR will have high ridership, even if we’re wrong, it doesn’t impact the bond repayments. Those come out of the general fund. So I don’t quite know what Lockyer is talking about here. The question is whether investors are worried about the state’s ability to pay back the bond. And before people make facile comments about the state’s budget deficit, California’s debt load is just 4% of its GDP and there has never been any realistic chance that the state would default on its debt. Lockyer himself has sold CA bonds at good rates earlier this year, so he should know that the bond market has a strong appetite for California debt.
The U-T goes on to criticize Arnold Schwarzenegger for backing HSR. Arnold hasn’t always been HSR’s best friend, but he does continue to support it, as well he should. The governor should get on the horn to his Wall Street friends, email them a copy of the CALPIRG report, and set them straight on HSR.
There remains every reason to believe HSR ridership on the SF-LA line will be very high. Wall Street may not see it, but that’s OK. We might not need them anyway. China is investing $10 billion in Argentina’s HSR and has shown interest in investing a similar amount in the California project.
Wall Street has done a pretty good job wrecking the American economy, and their investment judgment hasn’t been shown to be all that sound. So if they persist in being skeptical about the California HSR project – and we don’t know how deep that skepticism goes; all we have is Lockyer’s word – and won’t listen to evidence and reason, then perhaps we’ll have to look elsewhere to get the private contribution.
LA to SD? Seriously??? People are far more likely to drive this route rather than use HSR given the time advantage isn’t all that great. By taking HSR to SF, a driver would save AT LEAST 5 hours. Taking HSR to SD would only save about an hour.
I don’t know, but it seems like LA-SD would be a far more risky Phase 1 than LA-SF, unless it were to use the LOSSAN Corridor; basically like what Jerry Brown tried to build in the early 80s.
YesonHSR Reply:
July 14th, 2010 at 8:46 pm
Agree…SF-LA is where the big ridership/rev is..what I think he means is the LA-SD section is far less in cost than the SF-LA and he must think it would be less risk and easy to fiance .thou LA_SF is by prop1A the first phase and really will get alot of bidders and funding interest..If China ia willing to put up 10Billion for HSR in SouthAmerica then it a good chance they will here. And a good chance HSR funding will be in the next trasportaion bill ..Wall street and there 4 quater mindset may not even matter
HSRforCali Reply:
July 14th, 2010 at 9:22 pm
I wouldn’t count on the next Transportation Bill coming around anytime soon, especially with elections this coming November. I think it’d be safe to assume its not going to happen and look into other ways of raising federal funding.
flowmotion Reply:
July 14th, 2010 at 11:35 pm
I could see the argument that LA-SD would make a better starter line to bootstrap the system. What we have now is a gigantic mega-project designed to serve half the state (partially for political reasons), which leaves it open to a lot of fear, uncertainty, and doubt.
Lockyer is relating his thoughts what Wall Street will actually finance. I doubt the bankers care about what the broke college students at CALPIRG have to say.
Walter Reply:
July 15th, 2010 at 2:42 am
I agree with the sentiment. The key to building the entire system is getting a useful and profitable operating open as soon as is feasible.
A real winner would be a pre-Phase I route open along the Surfliner corridor with five stations: LAUS, ARTIC, Irvine, Solana Beach and San Diego. Express trains will make the trip in 50 minutes and local trains will make it in 65 or so. Escondido, Murrieta, Riverside and Ontario/Industry can be part of Phase II as planned, and if an infill station at Norwalk is still desired, then it will be built with the rest of Phase I (also as planned).
Caelestor Reply:
July 15th, 2010 at 9:57 am
I agree that Anaheim traims should operate on the legacy line to San Diego. Try it out, people may like it!
Walter Reply:
July 15th, 2010 at 12:32 pm
Yup. Call the straight LA-SD trains Surfliner Nonstop and the ones with three (or so) intermediate stops Surfliner Express. If it makes political sense, let Amtrak run them. They would cost the same as Surfliners now (faregates?) and passengers could transfer to regular Surfliners to reach Oceanside, Burbank, etc. Or, in short, passengers pay to get from point A to point B, regardless of the speed of their train.
When this is a smashing success (I honestly don’t see how people wouldn’t flock to a train that covers LA-SD in about an hour), either start the same setup on Caltrain/Capitol Corridor or build out from LA to either Riverside or Bakersfield.
If you build it (with cash cow segments first), they will ride.
Peter Reply:
July 15th, 2010 at 12:38 pm
Didn’t we discuss this already with respect to the ICE-TDs that Schwarzenegger wants to run before he leaves office? Wasn’t the conclusion basically that they would eat up the capacity and that there are major constraints along the route?
Walter Reply:
July 16th, 2010 at 1:39 am
What does “eat up capacity” mean with respect to what would amount to the most popular, useful and profitable train in the state?
I just can’t imagine a future in which California builds out all of the planned HSR but leaves the 75 mile gap between Irvine and University City unserved, meaning that all OC-SD traffic is routed through Riverside. I’m not advocating an abandonment of the Inland Empire alignment, but not running HSR on the LOSSAN corridor is nonsense. Currently, Surfliner can close the Irvine-North County gap in 62 minutes, which would be faster than taking a HSR train north to LA, east to Riverside and south to University City. We can do better.
adirondacker12800 Reply:
July 16th, 2010 at 8:19 am
What does “eat up capacity”…
It means you can’t have two trains on the same piece of track at the same time. Probably the primary concern of signal system designers. Once the express train is behind the local train the express train can only go as fast as the local train. Or you have to clear the tracks of local trainds. or build lots and lots of sidings.
Alon Levy Reply:
July 16th, 2010 at 9:14 am
At the distance range of Orange County to San Diego, HSR has little competitive advantage over driving.
Peter Reply:
July 16th, 2010 at 9:21 am
“At the distance range of Orange County to San Diego, HSR has little competitive advantage over driving.”
Much less over the existing Amtrak service.
BruceMcF Reply:
July 16th, 2010 at 9:28 am
There’s always the competitive advantage of not having to drive the damned car … but to expand on Peter’s point, a 110mph upgrade to the existing Amtrak service would capture an even larger portion of that part of the market.
Its the network economies when Stage 1 is in place that makes a compelling case for extending to San Diego.
adirondacker12800 Reply:
July 16th, 2010 at 12:24 pm
The communities on the coast fight any changes tooth and nail. There’s never going to catenary on the line for one. Would ruin the view. So the best they can hope for is diesel service and a change in Anaheim or Irvine.
Robert Cruickshank Reply:
July 16th, 2010 at 12:29 pm
That’s only true if you ignore the constant traffic.
I know several people to make the SD-OC trip (and vice versa) often. Many already use the Surfliner and would appreciate an HSR option.
Alon Levy Reply:
July 16th, 2010 at 5:14 pm
Robert, the distance between OC and SD is much less than the distance between Tokyo and Nagoya. On Tokyo-Nagoya, the Shinkansen only has a 30% mode share; more people drive than take the train. For shorter trips, the flexibility advantage of cars is even starker. The ideal distance for HSR is slightly shorter than LA-SF; at OC-SD distances, it has almost no benefit over cars or low-speed rail.
adirondacker12800 Reply:
July 16th, 2010 at 6:11 pm
How many people go through Nagoya on their way to more distant destinations? The point of bring the train to Anaheim or Irvine is that the passengers can continue on to places like LA or SF or I know synonymouse would find this hard to believe Bakersfield or even Palmdale.
Alon Levy Reply:
July 17th, 2010 at 8:43 am
For through-service, there’s the Inland Empire connection. In principle it’d be better to keep the Inland Empire on a stub, pending Phoenix service, and have the LA-SD connection go through a coastal alignment; however, that’s out due to NIMBYism, and once trains can go from LA to the Inland Empire to SD, there’s no point in offering a second connection.
adirondacker12800 Reply:
July 17th, 2010 at 10:40 am
Qu’ils mangent de la brioche eh? or in this case gasoline fumes and bad traffic? If it’s unfortunate that the primary route isn’t going through there, a feeder route, with service that makes it faster than driving probably makes sense. Conventional diesels can make it faster than driving.
Alon Levy Reply:
July 17th, 2010 at 11:20 am
Don’t be so sure, Adirondacker. Even with direct service, the runtime is too long; the ridership model expects little diversion of air traffic between SD and SF. The basic issue is that the type of service that would attract any nontrivial ridership between SD and OC is regional in character and needs to be designed as such. Feeding HSR is pointless; there’s going to be direct service anyway.
adirondacker12800 Reply:
July 17th, 2010 at 12:05 pm
If driving to Murrieta is considered direct service. The whole thing about transportation networks is that they are networks not straight lines. If it’s faster to take the upgraded train from San Clemente to San Diego people will use it. Not all of them but many. Or take the train to Anaheim and change for HSR. Or use Metrolink to get to LA. The palm trees don’t make clocks run slower, fast frequent service will attract riders.
…and who says 4 train trips won’t be done? I know lots of Long Islanders who won’t consider anything but the LIRR and Amtrak to get to Philadelphia Baltimore or DC. With that lovely change of trains in Manhattan…
Alon Levy Reply:
July 17th, 2010 at 12:46 pm
There isn’t that much population between Irvine and the San Diego commuter shed… if you insist on having an HSR extension, go up to Redding.
adirondacker12800 Reply:
July 17th, 2010 at 1:18 pm
If there’s no population there then why would “In principle it’d be better to keep the Inland Empire on a stub, pending Phoenix service, and have the LA-SD connection go through a coastal alignment”
….pesky scrolling up and re-reading things bites doesn’t it? And what part of “conventional diesel service” equates to to “HSR extension”?
Alon Levy Reply:
July 17th, 2010 at 2:13 pm
Faster service from SD to LA and points north.
adirondacker12800 Reply:
July 17th, 2010 at 2:41 pm
But people originating in San Clemente don’t care how long it takes to get from SD to LA.
HSRforCali Reply:
July 17th, 2010 at 3:17 pm
San Diego’s planning to widen I-5 between La Jolla and Oceanside. Cost: approx. $4 billion
http://www.nctimes.com/news/local/article_6d6673e4-8932-11df-86ea-001cc4c002e0.html
Alon Levy Reply:
July 17th, 2010 at 3:20 pm
San Clemente isn’t the biggest population center in the world.
Richard Mlynarik Reply:
July 17th, 2010 at 5:11 pm
True. That title is held jointly by Monterey and Los Banos.
adirondacker12800 Reply:
July 17th, 2010 at 7:11 pm
They aren’t building HSR stations in Monterey or Los Banos are they? Or San Clemente for that matter.
Outta one side of his mouth the line should go along the coast. Out of the other side there aren’t enough people there.
Alon Levy Reply:
July 17th, 2010 at 7:32 pm
Kindly reread the part about “faster service from SD to LA and points north.” Going along the coast has one drawback, besides NIMBYism, and that’s lack of SD-Inland Empire service. That market’s tiny because it’s too close for HSR to beat driving. Just explaining, in case they don’t teach reading comprehension in Jersey, or something.
Joey Reply:
July 17th, 2010 at 7:59 pm
How much faster? CHSRA claims they can do LA-SD in 1:18 via Riverside. How much better could you do on the coast? Especially with the speed restrictions that route would impose…
(for reference, the surfliners take 2:40)
Alon Levy Reply:
July 18th, 2010 at 7:05 am
Joey, I’m not sure. A coastal alignment shaves about a third of the distance.
Bear in mind, the Inland Empire route isn’t very fast, either. 167 miles in 1:18 is an average speed of 80 mph, on a par with the NY-DC leg of the Acela and a little more than the 100 mph express diesel trains between Tel Aviv and Haifa.
synonymouse Reply:
July 17th, 2010 at 6:00 pm
Anyone know what the cost of Tejon tunnels would be in contrast to the I-5 $4 billion? To pull the chain of the highway crowd or in fact private investors you need to ramp up to shock and awe. They intend to spend a fortune on highway improvements for years to come and in order to compete with that level of investment the CHSRA needs the best and biggest bang not half–assed detours.
Time to play the trump card while there still is a game. You are going to have to convince Whitman that this is a 21st century game and a 19th century route won’t suffice.
BruceMcF Reply:
July 18th, 2010 at 10:10 am
Building a route for its shock and awe value instead of pursuing the best route seems like a strategy to never get Stage 2 built.
Peter Reply:
July 18th, 2010 at 10:26 am
“Building a route for its shock and awe value”
Isn’t that what China has been doing to build its HSR network? That works out great for the communities involved, doesn’t it?
synonymouse Reply:
July 18th, 2010 at 11:48 am
Tejon is the best route – that’s why both I-5 and 99 use that alignment. Palmdale is off route – let LA build its own version of BART to Palmdale, unless Steve Wynn, Sheldon Adelman, et al want to pay for it as part of a loss leader line to Sin City.
Peter Reply:
July 18th, 2010 at 12:08 pm
Heheh:
From the DSM IV:
Does this sound like synonymouse’s persistent claims that Tejon is preferable, no matter what anyone says?
synonymouse Reply:
July 19th, 2010 at 12:27 am
If put to a vote, most Californians would opt for the Tejon route.
But I guess no idea is too dumb for Lalaland, where a city manager can pull in a cool $800,00/yr.
adirondacker12800 Reply:
July 19th, 2010 at 1:34 am
Um they did put it to a vote and they voted yes.
synonymouse Reply:
July 19th, 2010 at 9:03 am
With enough advertising you can sell anything in California. That’s why Whitman is the likely next governor.
But maybe the fixers can bring her around by renaming Palmdale “ebay”.
Peter Reply:
July 19th, 2010 at 9:14 am
“With enough advertising you can sell anything in California.”
Isn’t that what PG&E and Mercury Insurance thought about the propositions they were propagating for the June election? As in, the propositions that went down in flames? People don’t check their intelligence at the door as much as advertisers think they do.
synonymouse Reply:
July 19th, 2010 at 11:55 am
PG&E was off by 2 per cent, almost passed. They needed to dedicate a little more to the advert kitty. And they suffered from some real bad pr surrounding the smart meters.
wu ming Reply:
July 15th, 2010 at 8:50 am
half the state? only in terms of dirt, not in terms of people. add up the bay area, the salinas valley/monterey, the san joaquin valley, the inland empire, los angeles and orange country, and what’s left out?
the north coast, the sacramento valley and capitol area (to be connected in phase 2), the foothills, the central coast from big sur to oxnard, east of the sierras, san diego (to be connected in phase 2) and the imperial valley.
if you think those two populations are anywhere close to equal, you might want to ask your teachers for a refund.
and before you go on about the east bay and parts of LA not exactly on the line not really counting, think about how far people drive now to get to an airport.
HSRforCali Reply:
July 15th, 2010 at 1:29 pm
I agree with all of you, a LOSSAN high-speed line would be great. However, NIMBYs residing in lower Orange County would never allow it. That’s one of the reasons the Authority routed the San Diego line through the IE.
thatbruce Reply:
July 16th, 2010 at 2:20 pm
When was the last time the railside communities between Irvine and UCSD were canvassed regarding significant improvements to that part of the LOSSAN corridor? If the feeling of ‘they will try to stop any upgrades’ is solely based on the private HSR attempt in the 80s, it’s probably time to perform another survey.
Pshaw- have you ever driven that god awful corridor? On a Sunday?? I for one, would be delighted to have a hands-free, frustration free experience. Additionally, there are a lot of commuters up and down that route that I’m positive would be thrilled to LA-SD installed first. Go where the people are!
Robert,
You took the words right out of my mouth; we may not need Wall Street or even our own federal government to help finance HSR. Getting a foreign investor (China) and CalPers on board (coupled with Prop. 1A bond monies) would go a long way towards financing all of phase 1.
Lastly, in Lockyer’s world, it appears no population centers exist between SF and LA. Wow!
I’m sorry, but hasn’t CA used General Obligation Bonds to fund its operations? With no possible “revenue” to fund their repayment? How is THAT use of GO bond funds worse than the HSR bonds?
Robert Cruickshank Reply:
July 15th, 2010 at 10:10 am
Yep. That was done in 2004 as Arnold Schwarzenegger’s method of closing the state budget deficit.
Peter Reply:
July 15th, 2010 at 10:12 am
Do we know how much in bonds was sold for this?
Robert Cruickshank Reply:
July 15th, 2010 at 4:56 pm
$15 billion.
“I hear from the world of Wall Street investment bankers about what they think makes sense. And almost universally, they’re convinced that no one can finance the routes from L.A. to the Bay Area, that it just will never work economically, certainly in the foreseeable future.”
I sure would be curious to know who he’s talking about. I’ve not heard any such thing. As a matter of fact, a recent report from a UBS analyst wrote an excellent report on the benefits of HSR.
It would seem that both political parties are expressing caution on HSR but I think its more a reflection of the taxpayer mood and frustration with unbalanced budgets.
Robert, I have a pdf of the research I mentioned. If you give me an e-mail address I’d be happy to send it.
Robert Cruickshank Reply:
July 15th, 2010 at 4:55 pm
My email address is my last name at gmail.
OT: News on the Deutsche Bahn problems with their AC units. Their AC units are only rated to a maximum ambient air temperature of 32 degrees Celsius. Obviously, with global warming just beginning to flex its muscles, this is insufficient.
Article (sorry, German only):
http://www.tagesschau.de/inland/bahn1208.html
The authorities are investigating whether to prosecute one of the conductors for negligent injury to the passengers and failure to assist them.
Have Lockyer show Wall Street the Calpirg Study?
I’d rather show Him the door…
Brandon from San Diego Reply:
July 15th, 2010 at 7:55 pm
Exactly… he’s a politician afterall. It sounds like he spoke to the things San Diegans would want to hear.
Robert, you may want to look at the recent issue of Time magazine as it has an article on high-speed rail. It would be nice to see whether you agree with the article or not.