Gov. Brown seeking funding for CA bullet train

Brown heading  to ChinaApril 16, 2013

By Wayne Lusvardi

Why did Gov. Jerry Brown travel to China on a trade mission to secure investment from them for the California High Speed Rail Authority?

The answer is that proposed public transportation projects keep chugging along because of subsidies and cost shifting that can be generated through political deals.

The bullet-train project has run into financial trouble because the state can’t afford any more of its bonding capacity for the project beyond the $9.95 billion from Proposition 1A, the 2008 initiative voters passed. Voters are highly unlikely to approve more bonds for the project. Additionally, private U.S. investment markets are reluctant to invest in such an obviously unprofitable venture.

As shown in the table below from the U.S. General Accounting Office, the project would generate no effective positive cash flow and needs an infusion of $13.1 billion of private capital to be economically feasible. The project would be even more shaky if there were cost overruns typical of most large government public-works projects.

California High Speed Rail Funding Sources

Funding Source Total In Billions of Dollars Percent Total
PUBLIC FUNDING
Federal $42.0 61%
State high-speed rail bond $8.2 12%
Locally generated $5.0 7%
Subtotal Public Funding $55.2 81%
PRIVATE FUNDING AND CASH FLOW
Private investment $13.1 19%
Operating cash flow $0.2 0%
Subtotal private funding and cash flow $13.3 19%
Grand Total $68.5 100%
Source: U.S. Government Accountability Office (GAO), Preliminary Assessment of California’s Cost Estimate and Other Challenges, Dec. 6, 2012.

Borrowing

But why would California seek Chinese investment and why would China be remotely interested?

One reason: California is seeking China to be an investor because the U.S. Treasury is dependent on borrowing from China. China could be recompensed by the U.S. Treasury for investing in California’s bullet train by paying a slightly higher interest rate on bonds sold to China.  Moreover, the U.S. Congress would be less likely to cut any future subsidies to the bullet train. The federal government already has pledged to spend $3.5 billion on the project.

California unsuccessfully sought to use $1 billion of annual funds generated from its Cap and Trade pollution permit auctions to pay for green power to run its high-speed trains.

If California could alternatively secure an annual transportation subsidy from Congress to operate the train, this could serve as an indirect subsidy to green power companies and to its regulated electric utilities that have a green power mandate. This funds transfer would be a federal transportation subsidy indirectly subsidizing California’s green power mandate.  It would be a “subsidy subsidizing a subsidy” — also known as an indirect fund transfer that would shift costs from state taxpayers to federal taxpayers.

But the Republican-controlled U.S. House of Representatives has been reluctant to pop for any such subsidies.

China takes a financial bullet?

But suppose the House did go along, perhaps after switching to Democratic control after the 2014 election? China could cut a more favorable deal with the Obama-run U.S. Treasury in return for investing in California’s bullet train. The U.S. borrows $120 billion from China each year, or $10 billion per month. And, in turn, the U.S. Congress might approve transportation subsidies to California’s Bullet Train.

China would appear to be taking a bullet in the head if it invested in California’s High Speed Rail Authority. But in the complex world of public financing, China may be willing to sink money into a loser bullet train project if it were to get a premium on its purchase of bonds from the U.S. Treasury.

Yet even this scenario seems implausible. While Brown was in China, an independent study by the Reason Foundation found that bullet train ridership is way overestimated and a trip from San Francisco to Los Angeles would take a slow 4 hours, much more than the 2 hours and 40 minutes promised to voters by Prop. 1A.

This comes only four months after the U.S. Government Accountability Office study mentioned above, which found the train ould generate effectively no profits and was based on inflated assumptions.

It is hard for the average voter to understand why China would invest in a project with negative cash flow because it is so irrational on its face. The Chinese, who have re-learned capitalism fast after dumping Maoist communism in 1979, also are unlikely to make sense of funding the project.

19 comments

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  1. Sean Morham
    Sean Morham 16 April, 2013, 16:40

    We should give them control over the Cal prison system. The overcrowding problems would mysteriously disappear and complaints about the system from the inmates would dramatically decline. Federal inspectors of the prison system would find that is not a welcome place to audit, after a few auditors go AWOL. Hey, there is an alternative workforce to build HS rail. Holy s,,t, let them run the prisons, build HS rail, fees to be determined.
    What a country!!

    Reply this comment
  2. Hank
    Hank 16 April, 2013, 17:29

    Why would China want any more paper from the USA? They have warehouses of the stuff, currency, bonds and notes. But the idea of hard assets, now that’s attractive. Of course it will “private” investors” from China, not the government. A couple of pen strokes and Bingo, the rules are changed. Such blatant corruption could only happen in a single party government, oops. I mean not here.
    California Government lives one day at a time, without the abstinence.

    Reply this comment
  3. BobA
    BobA 16 April, 2013, 18:34

    Hank:

    It’s called leverage. If the Chinese buy up enough assets in California they would have an all but guaranteed leverage in the state’s policy towards Chinese businesses operating in California.

    Euphemistically speaking, we’re playing checkers while the Chinese are playing chess. We think short term. They think long term. The Chinese understand us far better than we understand them.

    By the way: All Chinese business people allowed to do business overseas are members of the Chinese communist party in good standing and all Chinese businesses, either directly or indirectly, are organs of the Chinese peoples Army. It is foolish and naive for Americans to think otherwise.

    Reply this comment
  4. us citizen
    us citizen 16 April, 2013, 18:39

    The Chinese would not think twice about stabbing anyone in the back.

    Reply this comment
  5. Ted
    Ted "Eddy Baby" Steele, Associate Prof. 16 April, 2013, 22:51

    Hmmm— puts people to work AND lowers our carbon footprint helping to reduce greenhouse warming….. you fellas would complain if they hung ya with a new rope!

    Reply this comment
  6. NovAKs47
    NovAKs47 17 April, 2013, 07:37

    Ted,

    Put who to work exactly? You mean the union workers that already have jobs and are set for life?

    Reply this comment
  7. CalWatchdog
    CalWatchdog Author 17 April, 2013, 07:46

    Ted: The bullet train only would put some people to work by getting others fired through higher taxes. It would not lower our carbon footprint because few would use it, preferring planes. And recent studies show there is no “global warming.”

    But basically, the train won’t be built because the state doesn’t have another $54 billion, and can’t get it. (I’m assuming $68 billion official cost estimate, probably way too low for a government project, minus the $14 billion already allocated).

    — John Seiler

    Reply this comment
  8. Ted
    Ted "Eddy Baby" Steele, Associate Prof. 17 April, 2013, 08:15

    Oh John– I thought you were smarter? No global warming? Don’t you think it wiser to go with the vast majority of climate scientists on this? You’re funny.

    Job loss from taxes from the train? — Prove it.

    Reply this comment
  9. fish
    fish 17 April, 2013, 09:51

    Good work Ted! Finally you’ve been able to “let go” of public sector compensation issues!

    It’s important to move on.

    Perhaps proving GlobalWarmingClimateChangerificCatatrophe is what the associate prof should do before he commits billions in money not his to a choo choo project serving the busting Madera to Fresno corridor.

    I think it would be a worthwhile project…therapeutic if you will.

    Reply this comment
  10. Ted
    Ted "Eddy Baby" Steele, Associate Prof. 17 April, 2013, 10:17

    LOL Fishlips!

    Of course like the Fox News ™ type of troll you re, you resonate to ALL of the tea brewy right talking points!

    Guns
    Abortion
    Tax
    Immigration
    Global warming
    Aliens at Roswell
    Building 7

    zzzzzzzzzzzzzzzzzzzzzzzzzz nite nite!

    Reply this comment
  11. fish
    fish 17 April, 2013, 11:32

    Troll? Teddy why do you say such hurtful things. I expect more “goodthink” from a loyal party member!

    Fox news?? Oh Teddy have you learned nothing about me during these “therapy “sessions” at CWD. I care my friend….I care deeply.

    Teddy much like O’Brien speaking to Winston Smith, “I enjoy talking to you. Your mind appeals to me. It resembles my own mind except that you happen to be insane.’

    Reply this comment
  12. Ulysses Uhaul
    Ulysses Uhaul 17 April, 2013, 15:33

    Carp….we are winners in State elections year in and year out….we bring policy to the people that they want and truly deserve…..

    Tell us Carp what the heck good do doomers do for the people of California.

    Reply this comment
  13. fish
    fish 17 April, 2013, 16:16

    Carp….we are winners in State elections year in and year out….we bring policy to the people that they want and truly deserve…..

    Good boy “Ulysses”. That’s a very good boy!

    Yes, you are a winner (somewhere I’m sure mommy is clapping for you) just the bestest little winner in all of California. Do “you” currently hold elected office in the state? What “policy” has Ulysses Uhaul bestowed upon the grateful citizens of California?

    Oops sorry….yours was a “mouse in the pocket” “we”.

    But you are correct (unintentionally I’m sure) in an Menckenesque way, Californians will certainly get what they deserve from their State government.

    Reply this comment
  14. Ulysses Uhaul
    Ulysses Uhaul 17 April, 2013, 17:57

    Carp……your rant is disturbed…..actually….alarming.

    Reply this comment
  15. fish
    fish 17 April, 2013, 18:57

    “Disturbed…?”

    Funny coming from one of Teddy’s “lesser” personalities.

    Reply this comment
  16. Ulysses Uhaul
    Ulysses Uhaul 17 April, 2013, 21:42

    Yawn.

    Reply this comment
  17. fish
    fish 17 April, 2013, 21:50

    Pack and Ship U.

    Reply this comment
  18. Ted
    Ted "Eddy Baby" Steele, Associate Prof. 18 April, 2013, 10:45

    The poor sleepy carp thinks I am everyone……..zzzzzzz……..reminds me of one of the other little buddies now gone……

    Reply this comment
  19. fish
    fish 18 April, 2013, 12:50

    I expect more more from Ted “Slapped and Shaken Baby” Associate Prof. You’re slipping Teddy.

    And what’s all this chatter about Roswell Aliens?

    Reply this comment

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