Once Again, Legislative Analyst Ignores Benefits of High Speed Rail
This week the Legislative Analyst’s Office issued its fiscal analysis of a proposed ballot initiative to prevent further issuance of high speed rail bonds authorized by voters when they passed Prop 1A in 2008. They were asked to do the fiscal analysis of the potential impact of the initiative before it goes out for circulation, and what the LAO came up with was a flawed examination that focuses on costs but downplays and almost ignores the benefits.
Savings in Debt-Service Costs. This measure would prevent the sale of up to $9.4 billion in bond funds previously authorized by Proposition 1A. The actual reduction in bond sales would depend on such factors as: (1) how many bonds would have been sold absent this measure and (2) the amount of bonds sold prior to the passage of the measure. It may be, for example, that the state would otherwise be unable to sell all the state bonds due to an inability to raise the necessary matching funds. Moreover, it is possible that up to a few billion dollars of Proposition 1A bond funds could be sold prior to the passage of this measure in order to support high-speed and existing passenger rail projects currently under consideration. The cost to the state of repaying the principal and interest on the $9.4 billion in unsold bonds, assuming they would have been sold at an average interest rate of 6.5 percent and repaid over a period of 30 years, would be $709 million annually. Based on the above factors, however, the estimated annual debt-service savings could be far less.
But there are several flaws with this reasoning. All $9B in authorized bond funds won’t be sold at once, therefore in the initial years the repayment will be far smaller. By the time the state actually sells all $9B in bond funds, the state will be in much better financial situation, both generally and in terms of the budget. High speed rail can help with that, as we’ll explain in a moment.
The LAO’s assumption for $700 million a year is based on a high interest rate assumption of 6.5%. It is likely to be lower. California’s debt ratings were recently improved, and a state bond sale last week paid interest rates of between 1.28% and 4.13%. That’s an average of 2.7%, not 6.5%.
For each dollar in bonds borrowed, a matching non-state dollar is required to be procured by law per Prop 1A. This means that if we borrow the full $9B (which the $700M/yr payback rate is based on), a minimum of $9B in outside money must be injected into California’s economy.
To summarize: Unlike almost all other bonds, legally California is not allowed to suffer economically by borrowing for the HSR project due to requirements for outside matching funds in Prop 1A.
Of course, a proper study of HSR funding does not merely assess the costs. It also has to assess the benefits of such spending, including economic activity and tax revenues generated by the project. The LAO did look at these “other effects” but the examination was cursory:
Other Impacts. The state has received $3.5 billion in federal funds dedicated to high-speed rail that require matching state funds. To the extent that Proposition 1A bonds are not sold prior to the passage of this measure to satisfy this match requirement, the state would lose up to $3.3 billion of these federal funds. The state could also incur a loss of potential matching funds from state, federal, and local governments, or the private sector that would be required in order to spend any remaining bond funds. Unlike the federal funds that have already been committed, there are currently no funding commitments from these other entities. The loss of federal funds and potential other funds, in turn, would reduce somewhat the level of economic activity in the state over the next several years resulting in unknown reductions in state and local tax revenues. However, the loss of any state and local matching funds would not have a significant net fiscal impact on the economy to the extent that they were otherwise spent in the state for other purposes.
That last sentence is key. The $3.3 billion in federal funds – as well as tens of billions more in future federal and private funding that repealing Prop 1A would reject – aren’t coming to California in some other form. If the LAO thinks so, they are completely deluded. When Tea Party governors in Wisconsin, Ohio and Florida rejected federal stimulus funds, the Obama Administration made it clear those funds could not be used for any other purpose. They’re not coming back in another form.
The LAO analysis also skims right over the economic benefits of the project. It doesn’t look at projected numbers of jobs created, and only briefly mentions state and local tax revenues. Significantly, it does not mention gas prices at all, even though the green dividend is well known.
In short, the LAO obsesses over the costs and pretty much ignores the benefits. They’d make terrible investment advisers, yet they are the in-house analyst for the state legislature.
As to the initiative, so far there’s no financial backing to get it onto the ballot, so it doesn’t yet need to be taken as a threat to the project. But it should be taken seriously as a possible way to mobilize and legitimize anti-HSR sentiment and arguments. And pushing back against flawed fiscal analysis is always important too.