The Legislative Analyst’s Office is out with another report that attacks the California high speed rail project. Rather than work to find the best way to ensure it gets built, the LAO appears to be throwing in their lot with the emerging anti-HSR strategy coming from Senators Alan Lowenthal and Joe Simitian. The report suggests that California delay the HSR project even at the risk of losing $4 billion in federal funds already awarded to the project. It suggests that the Central Valley not be the first segment constructed, and suggests that the project be placed under the authority of Caltrans – even though as the LAO admits, Caltrans has no experience with this kind of work.

The LAO makes some other recommendations too, of varying degrees of value, but the headline suggestion – that HSR be essentially put on ice – is a slap in the face to California voters, who support this project and expect it to be built as quickly as possible.

The LAO has attacked the HSR project before – and with similarly disappointing results. In January 2010 they leveled a flawed criticism of the HSR project. The May 2011 report, curiously timed to be released just as the State Senate is taking up a bill to blow up the California High Speed Rail Authority board and replace it with a bunch of people skeptical of the project’s value.

The basic flaws of this LAO report are as follows:

1. It does not adequately acknowledge the risk of losing federal funding if the report’s recommendations are implemented. Loss of these funds will essentially kill the HSR project, necessitating massive freeway and airport expansions in the future, and suppressing needed job creation.

Fund Only Needed Administrative Tasks for Now. We recommend that the Legislature reject the administration’s 2011–12 budget request for $185 million in funding for consultants to perform project management, public outreach, and other work to develop the project, and only appropriate at this time the $7 million in funding requested for state administration of the project by HSRA.

Seek Flexibility on Use of Federal Funds. We propose that the Legislature direct HSRA to renegotiate the terms of the federal funding awarded to the state by the Federal Rail Administration (FRA). We believe the state must obtain relief from the current federal restrictions on the project if it is to be developed successfully, and therefore that the Legislature should proceed with the project only if this flexibility is obtained from the federal government.

The LAO’s headline recommendations – to essentially defund the CHSRA and reject federal funding – are the equivalent of what Republican Governors Scott Walker, John Kasich, and Rick Scott did to HSR funding in their states. Did anyone tell the LAO that voters approved high speed rail funding in November 2008? Or that they dealt a crushing defeat to anti-HSR Republican gubernatorial candidate Meg Whitman in November 2010? The LAO is calling for the state legislature to reverse the will of the voters. That’s highly inappropriate. The LAO’s job is to help the Legislature implement the project – not call for it to be undermined.

The federal government is highly unlikely to agree to such a request if California were insane enough to make it. The feds are already having a tough enough time fighting the Republicans in Congress over HSR funding. If California were to demand “flexibility” it would immediately be spun by the Republicans as further “proof” that HSR is a bad idea. The White House would either do as they did to Florida – demand that the project move ahead as originally planned or take back the money and give it to someone else. The LAO’s grasp of the politics of the issue are simply incompetent.

As to the question of the CHSRA funding, cutting it back to $7 million would totally cripple the project no matter what happens with the federal funding. The CHSRA, under new CEO Roelof van Ark, has been doing an increasingly effective job of conducting better planning and public outreach on the project. All that work would grind to a halt if the project were defunded, as the LAO proposes. It would be very difficult to start that work back up – and it would certainly be more costly. Federal stimulus deadlines would be jeopardized, and if the LAO things the feds can be flexible on that, they’re nuts.

The LAO’s fiscal recommendations are simply irresponsible.

2. The LAO report irresponsibly claims that the entire project could cost $67 billion. This is a figure extrapolated from outdated numbers and is not based on any sound analysis of project features, materials and construction costs, or land values for the entire HSR system. Further, their claim does not take into consideration the Authority’s recent approach of “value engineering,” including last week’s decision to reject a costly viaduct through Fresno.

NIMBYs have been running around claiming – without ANY evidence – that the project will actually cost $67 billion. They have no solid facts for this claim. They have not done an analysis of materials costs, construction costs, land values, the price of steel, the price of concrete, the possibility of inflation (or deflation), fuel costs, so on and so forth. The LAO has now embraced this claim, and like the NIMBYs, bases it in a deeply flawed assumption:

If the cost of building the entire Phase 1 system were to grow as much as the revised HSRA estimate for the 100–mile [Central Valley] segment discussed above, construction would cost about $67 billion. This extrapolation of costs, however, is based on the cost increase for a relatively straight–forward and uncomplicated segment of the proposed rail line. It is possible that some of the more urban segments could be even more significantly underestimated.

But the problem is that the estimate for the Central Valley segment is old. Just last week the CHSRA board voted to reject a costly viaduct through Fresno, saving hundreds of millions of dollars. The LAO’s report suggests the office is simply not aware of what the Authority is doing or planning. Instead it simply collected all the existing anti-HSR arguments, slapped their name on it, and is trying to use their reputation to give credibility to an attack on the project.

The LAO should know better than to engage in such uninformed speculation.

3. The LAO is engaging in deficit errorism, claiming that deficit spending does not create any lasting economic value and merely is a threat to the project.

State Would Incur Major Additional Debt Service Costs. The 2009 business plan assumes that $9 billion in state funding for the project will come from the sale of general obligation bonds approved by voters in Proposition 1A. The debt service payments on general obligation bonds are typically paid for from the state’s General Fund. We estimate that, should the state sell all of the $9 billion in voter–approved high–speed rail bonds, the state’s total principal and interest costs for repaying the debt would be $18 billion to $20 billion. This would require annual debt service payments of roughly $1 billion for the next two decades. Due to the dire condition of the state’s General Fund, adding such costs for debt service in the near future means that the Legislature would have to consider reducing costs for other state programs or increasing revenues to offset these costs.

This is a deeply flawed claim, because the LAO is not including here the stimulative effects of infrastructure spending. Nowhere do they address the tax revenues from the 160,000 jobs the project would create, jobs and revenues that the LAO believes should be put at risk by advocating for a delay of project implementation.

Nowhere do they examine the cost of delay to the residents and businesses of California by continued dependence on ever-more expensive gas and worsening highway and air congestion.

Nowhere do they address the costs of pollution and carbon emissions that would result from long delays to the project that the recommendations would cause.

The LAO ought to know, better than anyone in Sacramento, that if you’re going to assess the costs, you have to actually assess both sides of the equation – the spending side AND the revenues that the spending generates. I’m guessing nobody in the LAO office is familiar with the green dividend, which a US Conference of Mayors report from June 2010 indicated could be as much as $10 billion a year – $7.6 billion in new business sales and $3 billion a year in new wages. Both those things can be taxed, and that alone will get you close to, if not above, the debt service costs.

You won’t find that anywhere in the LAO report.

4. The LAO report suggests doing what Senator Alan Lowenthal has always wanted – gutting the HSR project into nothing more than disconnected commuter rail segments that do not serve the project’s primary purpose of moving travelers rapidly from SF to LA.

The first section of the project to be built will be the Central Valley, connecting Fresno and Bakersfield and extending out toward LA and SF. The federal government dictated this (and the LAO naively thinks that can be ignored) because the Central Valley has some of the highest unemployment in the state, and since the federal funds are stimulus funds, they should go where jobs are needed the most.

As with the Interstates, you have to start building somewhere – but the ultimate goal is a system that connects SF to LA. The Central Valley is where construction is the cheapest, so it makes sense to get started there. After all, the goal is to connect SF to LA, and the Central Valley is the spine of that project.

The LAO doesn’t seem to care about that. In what may be a sign of collaboration between the LAO and Senator Lowenthal’s office, a look at the segments they propose to fund instead shows that they have totally forsaken the goal of fast, European or Asian-style intercity bullet trains for merely upgrading commuter rail. The LAO ought to know that’s forbidden under Prop 1A. But they do it anyway:

Alternative Segments Could Provide More Benefit to the State

For several reasons discussed earlier, there is a significant risk to the state that the statewide high–speed rail system envisioned in Proposition 1A will never be fully completed. It is possible that only a segment or two of the system will ultimately be constructed. The High–Speed Rail Authority has chosen to begin construction of the system on a 123–mile segment from near Fresno to Bakersfield. If this is the only portion of the system built, the state would realize some service improvements for the San Joaquin intercity rail corridor, such as shorter trip times and better on–time service. This intercity rail service currently runs six trains daily in each direction. However, based on our analysis, other segments could provide greater benefit to the state’s overall transportation system even if the rest of the high–speed rail system were not completed. Below, we describe three segments that warrant consideration as alternatives to the Central Valley line.

* Los Angeles–Anaheim. This highly travelled corridor includes commuter, freight, and intercity rail traffic, which could benefit greatly from corridor improvements along the alignment shared with the proposed high–speed rail system. Fifty passenger trains run daily through this corridor, at times sharing tracks with roughly 75 freight trains. In addition, grade separations that could be built as part of a high–speed rail project would improve the flow of auto traffic along the corridor because vehicles would no longer have to stop and wait for passing rail. Finally, to the extent improved passenger rail service in this corridor led to increased ridership, it could reduce pressure on other transportation modes and decrease the need for infrastructure projects that expand the capacity of the roads.

* San Francisco–San Jose. Similar to Los Angeles–Anaheim, capital projects in this heavily congested corridor could improve both rail and auto traffic. This segment currently hosts 86 commuter trains daily, and freight trains use it at night.

* San Jose–Merced. The state provides intercity rail service from Sacramento to Merced (and on to Bakersfield), and a separate rail service between Sacramento and San Jose. If the state chose the segment between San Jose and Merced for a high–speed rail project, the state would essentially “close the loop” and enable a significant increase in passenger rail mobility between the Central Valley and the Bay Area. This benefit from high–speed rail construction would result even if high–speed trains ultimately were never operated on the system. A recent report prepared by a Bay Area transportation commission projects that the number of commuters traveling daily from the Central Valley to the Bay Area will double by 2030, adding 60,000 commuters a day.

The LAO report gives the appearance of dictating state policy rather than providing objective advice and reliable numbers to the legislature. Under the new Legislative Analyst, Mac Taylor, the LAO has been doing a lot more of that lately, and it’s starting to become a very serious problem. The LAO cannot provide objectivity and useful analysis if it is seen as having a position or a side in policy debates.

5. The LAO calls for placing the CHSRA under Caltrans – even though it admits Caltrans has no project experience.

This one pretty much speaks for itself:

While we believe there are merits to shifting the project to Caltrans, there are reasons to be concerned about such a shift. For instance, transportation experts within and outside state government have expressed concerns about Caltrans’ ability to effectively implement this project, citing the department’s longstanding focus on highways and lack of expertise in working with private partners on PPPs. In addition, our office has in recent years found some significant management problems in Caltrans. Finally, some experts suggest that the project should be viewed not as a state project but as a PPP under which the state would cede a significant level of control to private partners.

This sections seems quite clearly intended to make the case for something like Lowenthal’s SB 517, which calls for the CHSRA board to be replaced by a group of people skeptical to the project. Caltrans wouldn’t necessarily be skeptical, but it won’t provide effective governance or leadership. Lowenthal’s bill appears designed to ensure the project does not have effective governance, so that it becomes easier for him to get his hands on the Prop 1A money and simply redirect it elsewhere.

The LAO report mentions some specific ways in which Caltrans expertise could be useful to the project. Those can and should be explored, but as a partnership.

6. The LAO report does not really take HSR seriously as a proposal. As we saw in the January 2010 report, the LAO apparently does not have anyone with any knowledge of global HSR projects, and worse, does not appear to have even done any research at all on those projects. They describe the benefits of HSR, but to the LAO these benefits are merely “theoretical”:

The proposed high–speed rail system could have some positive fiscal benefits. For example, HSRA estimates that this project would alleviate the need to build 3,000 new lane–miles of freeway, and 5 airport runways and 90 new departure gates—at a cost of nearly $100 billion—that would otherwise be necessary to accommodate intrastate travel by 2030. This is because the state’s population is projected to grow steadily for decades and significant investment in transportation infrastructure is expected to be needed to accommodate travelers between Northern and Southern California. In theory, if those travelers choose the high–speed rail system instead of other modes, the project could reduce the state’s overall infrastructure costs.

In addition, beginning construction of the project could have some positive effects on the state’s economy. For example, the infusion of federal funds and potentially other private funds from outside the state, such as international partners who might invest in the project, would benefit the overall economy at least in the short run. Some work, such as the construction of rail cars, could be performed by California firms….

Finally, some have argued that investing in high–speed rail infrastructure instead of other modes of transportation could lead to improved environmental outcomes, such as better air quality. This is because the proposed system will be electrically powered and not require fossil fuels the way most automobiles and aircraft currently do. However, other studies have suggested that the project may not realize such improved environmental outcomes, especially if levels of ridership were low to moderate.

It’s really sad to see the LAO using weasel words here. They have no clue that HSR ridership around the world is very high, and apparently have no clue that private sector interest in the project is high.

The LAO report should not be taken seriously as a basis for policy discussions by the state legislature. All HSR supporters should rally against it and its findings. The LAO has overstepped its bounds here, trying to set policy for the state instead of dispassionately providing comprehensive analysis. The HSR project may need some reforms, but the LAO is proposing to gut it entirely. The legislature and the governor should reject it outright.