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Funding challenges cloud high-speed rail's future

Judge to consider impacts of rail authority's flawed business plan

With California's high-speed rail system preparing for a groundbreaking in Central Valley, the fate of the $68-billion project remains clouded by allegations that the agency charged with building it has violated state law -- an argument that was at the heart of a Friday court hearing in Sacramento.

The question of whether the California High-Speed Rail Authority broke the law by committing to construction contracts for the first 29-mile stretch of the line before figuring out the cost of the line's first "usable" segment features prominently in the latest lawsuit spearheaded by attorney Stuart Flashman. Flashman previously represented Palo Alto, Menlo Park in Atherton in their own lawsuits against the rail authority.

In late August, the plaintiffs -- John Tos, Aaron Fukuda and the County of Kings -- scored an early victory against the rail authority when Sacramento Superior Court Judge Michael Kenny ruled that in submitting a business plan that doesn't identify funding for the first usable segment, the rail authority "abused its discretion" and violated provisions on Proposition 1A, which voters approved in 2008 and which allocates $9.95 billion in state funds for the rail system.

In about three weeks, Kenny is expected to determine what should be done about it.

For Flashman and Redwood City-based attorney Michael Brady, who is working with Flashman on the suit, the rail authority should be forced to rescind and correct its defective business plan before taking on any new financial commitments or compiling further business plans. Specifically, the updated business plan would have to identify how the rail authority would pay for the "initial operating segment" of the San Francisco-to-Los Angeles line.

Under current projections, the initial segment would cost more than $20 billion and would either stretch from Bakersfield north to San Jose or from Merced south to San Fernando. Instead, the rail authority only identified funding sources for the first "initial construction segment," a 130-mile stretch between Fresno and Bakersfield that carries an estimated price tag of $6 billion.

For Flashman and Brady, that's a key difference. The business-plan requirements of Proposition 1A were specifically designed to give taxpayers assurance that the bond money would be spent wisely, they argued in their opening brief. The rail authority has violated these requirements, and the question of remedy is "key to assuring that the promises made to the voters remain meaningful." The mistakes in the early funding plan, they wrote, "created a 'house of cards' that was due to collapse."

"The remedy for those violations must include not only rescinding the defective funding plan and replacing it with a properly-prepared plan, but also repairing subsequent steps in the approval process that relied upon the defective plan," the brief states.

But even if the court rescinds the business plan, it's not clear what effect, if any, the action would take. In July 2012, the rail authority scored its biggest victory to date when the state Legislature appropriated by a single vote $2.6 billion in bond funding for the first construction segment, in addition to the $3.2 billion in federal funds.

At the Nov. 8 hearing, the rail authority's attorney argued that a court order to rescind the business plan would be a moot gesture. The business plan, argued Deputy Attorney General Michelle Inan, was intended to provide Sacramento legislators with the information they needed to consider whether to appropriate the funds. In that sense, it has done its job. Inan argued that "to the extent that there are any protections for costs of taxpayers in the plan, they are exercised through the legislative process." She disputed the plaintiffs' argument, and Kenny's ruling, that the rail authority did not comply with state law.

"There is no non-compliance with Proposition 1A," Inan said. "There's a finding that certain reporting requirements were not satisfied. But the person who reviewed the entity was the Legislature and it appropriated the funds."

The violation of the reporting requirements of Proposition of 1A, she argued, "do not create an enforceable cause of action in favor of taxpayers like Tos," Inan said. When Kenny asked what would happen if the rail authority were to rescind the business plan, she replied, "Nothing practical happens."

In its brief signed by Inan, Attorney General Kamala Harris and Supervising Deputy Attorney General Tamar Pachter, state officials argue that the court doesn't have the authority to tamper with the Legislature's appropriation. So far, the rail authority has used the funds authorized in July 2012 on two major contracts totaling more than $1.1 billion – a $225,900 contract with Caltrans on design work in Fresno and a $970 million one with Tutor-Perini for design and construction work within the counties of Madero and Fresno. These contracts were based on the federal appropriation on state bonds, according to the Attorney General's brief.

"The authority did not enter into either contract until it successfully obtained that appropriation," the brief states. "As this Court found, the appropriation functions independently of requirements in the bond act that the Authority submit a funding plan before it may ask for an appropriation to spend bond money."

The court, the brief argues, "lacks authority to invalidate contracts validly entered into based on that appropriation merely because of inadequacies in the funding plan that the Authority was required to submit before requesting an appropriation."

Flashman and Brady strongly dispute this stance. Even if the contracts aren't invalidated, forcing the rail authority to rescind the plan and correct it will help ensure that future plans are based on accurate documents that comply with the law. In their view, unless the court takes action, the colossal project will continue to travel down a slippery slope toward an uncertain future.

"When you find yourself in a hole, the first thing you do is stop digging," Flashman said at the Nov. 8 hearing, adding that he doesn't believe the rail authority has gotten that message.

"We feel the court needs to step in and say, 'You need to stop digging,'" Flashman told Kenny.

Kenny did not indicate on Friday whether he will rescind the business plan. In his prior ruling, he wrote that the court "is not yet convinced that invalidation of the funding plan, by itself, would be remedy with any real, practical effect."

Even if the rail authority comes away from the latest legal challenge relatively unscathed, the project's future remains murky. The funds appropriated by the Legislature so far are just a fraction of the system's projected cost of $68 billion. For the balance of the funding, the rail authority is banking on private investments that have yet to materialize and on federal programs that don't currently exist, such as tax credit bonds. The 2012 business plan that Kenny found deficient acknowledges that "it may take several years working with other stakeholders in the high-speed rail sector to obtain passage of the desired federal legislation."

Still, local officials in Palo Alto and elsewhere are bracing themselves for changes that may come to the rail corridors well before high-speed rail is in place. This includes the long-awaited electrification of Caltrain, which will be funded by high-speed-rail dollars and which is expected to be completed in 2019. The project will allow the commuter service to expand the number of trains and provide faster service. Ultimately, the electrified tracks are expected to support both Caltrain and high-speed rail as part of a "blended system" design on the Peninsula.

Anticipating these changes, the City Council approved on Nov. 5 a study that will consider the costs of building a trench for Caltrain in the southern part of the city and submerging roadways at three rail crossings. Councilman Pat Burt pointed to Caltrain's expanded service, rather than high-speed rail, as the main reason to commission the analysis.

"I don't believe high-speed rail is likely to come to the Peninsula," he said.

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