Rulings deal financial blow to high-speed rail

California’s proposed high-speed-rail system ran into a legal barrier Monday when a Sacramento judge ruled that the funding plan for the $68-billion project must be rescinded and refused to endorse the selling of bonds for the project.

The two ruling by Sacramento Superior Court Judge Michael Kenny dealt what opponents of the project described as “dual body-blows” to the California High Speed Rail Authority, which is charged with building the rail line between San Francisco and Los Angeles. The project received a major boost in 2008, when state voters approved a $9.95-billion bond for the project, and another one in July 2012, when the state Legislature authorized spending the first $2.7 billion from this bond, as well as $3.2 billion in federal grants, on the line’s first segment.

The Monday rulings, spurred by a lawsuit from Central Valley, threaten to halt the project in its tracks. One of them orders the rail authority to rescind the 2011 business plan that the Legislature had relied on to authorize the funds for the first segment of the line, a 130-mile stretch between Fresno and Bakersfield. In late August, Kenny ruled that the business plan violated state law because it only listed the available funds for this $6 billion “construction segment,” rather than the first segment that could actually be used, as required by law. The first usable segment would cost more than $20 billion under current estimates and would stretch either from Bakersfield to San Jose or from Merced to San Fernando.

The rulings came in response to a lawsuit from a group of Central Valley plaintiffs – John Tos, Aaron Fukuda and Kings County – represented by attorney Stuart Flashman; and to a request from the rail authority to “validate” the issuance of more than $8 billion in bonds. In both cases, Kenny sided with opponents of the rail project, though in some cases he didn’t go as far as the plaintiffs had hoped. He declined, for instance, to order the rail authority to rescind its existing two contracts for the construction of the first segment, which total about $1.1 billion. He also did not challenge the rail authority’s ability to spend the federal funds, despite arguments from Flashman that doing so would commit future expenditure of “matching funds” from the state.

Rail authority Chair Dan Richard said in a statement that the agency is “reviewing both decisions to chart our next steps” and stressed that the judge did not invalidate the bonds and that the court “again declined the opposition’s request to stop the high-speed-rail project from moving forward.”

Even so, the rulings could delay, if not derail, a project that become hugely unpopular in various parts of the state, including sections of the Peninsula, but that continues to garner the support of Gov. Jerry Brown. Last year’s funding allocation came by a single vote in the state Senate, with several Democrats joining every Republican in opposition. Palo Alto, Atherton and Menlo Park had all been involved in lawsuits against the rail authority, with Flashman representing them in those efforts. Their most recent effort resulting in the rail authority rescinding its approval of an Environmental Impact Report and a revision of the report. The Palo Alto City Council, which supported the project in 2008, has since taken an official and unanimous stance against it.

Flashman called the Monday rulings “major roadblocks.”

“If you’re the captain of the Titanic and you’ve just been hit by two icebergs, what do you do?” Flashman told the Weekly. “It seems like what (rail authority board Chair) Dan Richard is saying is, ‘Full speed ahead!'”

The timing of the decisions is particularly striking, he said. In refusing to validate the issuance of bonds, Kenny effectively rejected a March resolution by the High-Speed Rail Finance Committee, a body that oversees the 2008 bond, that the issuance of bonds was the “necessary and desirable.” To get the funds, the rail authority would need the Finance Committee to make such a finding again. However, the second ruling, which rejects the 2011 funding plan and finds that the rail authority violated state law in approving it, would make it tougher for the committee to make such a finding.

In his ruling on bond validation, Kenny seemed puzzled by the Finance Committee’s uncritical acceptance of the rail authority’s request for funds. He wrote that the Court can find “no evidence in the record of proceedings” submitted by the rail authority that justify the committee’s finding.

The record, Kenny wrote, “consists of little more than the Authority’s resolution requesting that the Finance Committee authorize issuance of bonds, and the Finance Committee’s resolution doing so.”

“Specifically, the findings contain no summary of the factors the Finance Committee considered and no description of any content of any documentary or other evidence it may have received and considered.”

He rejected the argument that the rail authority request, in itself, “constitutes sufficient evidence to support the Finance Committee’s action.” Rather, Kenny argued, the rail authority’s opinions do not necessarily represent the views of the broader taxpayer public or the state government as a whole.

“An agency that is specifically assigned the task of building a project, like the Authority in this case, may have a very different view of what is desirable than the public officials who sit on the authorizing committee, whose responsibilities include taking a view of the State’s finances that is broader than a single project,” Kenny wrote in a decision not to validate the bonds. “Some evidence other than the Authority is necessary to establish that the Finance Committee actually exercised its discretion in deciding on that request, and did not merely accept it without question.”

In approving Proposition 1A and giving the Finance Committee the authority to accept or deny bond authorization, the voters intended to “empower the Finance Committee to serve as an independent decision-maker, protecting the interests of taxpayers by acting as the ultimate ‘keeper of the checkbook,'” he wrote.

“Treating the Authority’s request, by itself, as sufficient evidence to support the Finance Committee’s action authorizing issuance of bonds tends to negate the Finance Committee’s independent decision-making role in the process,” Kenny wrote. “The Court cannot conclude that this is the result the voters intended.”

Though the rail authority’s two existing contracts — with the state Department of Transportation and the company Tutor-Perini – are unlikely to be impacted by the rulings, Kenny’s findings could have major repercussions for future expenditures. Flashman noted that the rail authority only has a budget of about $900 million, along with the $3.2 billion in federal funds, for a project whose price tag has climbed from $33 billion in 2008 to $68 billion today. Given the timings of both the Tos and the bond decisions, the Finance Committee might have a hard time justifying any more expenditures, he said.

“How is the committee supposed to find evidence to be able to say that it is ‘necessary and desirable’ to issue bonds at this time when they know they can’t use those bonds probably for another two years?” Flashman told the Weekly. He also noted that the federal government may reconsider its grants if matching state funds become unavailable, which means the “project will never break ground.”

Attorney Michael Brady, who joined Flashman in representing the Central Valley plaintiffs, shared Flashman’s enthusiasm about Monday’s rulings. He said the protections of Proposition 1A, the 2008 bond measure, “have served their purpose well.”

“Our litigation to enforce those provisions will protect the state from financial risk,” Brady said in a statement. “Our clients are very pleased.”