March 17 marks the next critical date in legal action surrounding California’s high-speed rail project. By that date, the office of California’s Attorney General Kamala Harris, which represents the High-Speed Rail Authority, is expected to file a new appeal.

At issue before the Court of Appeal will be a March 4 ruling by Superior Court Judge Michael Kenny that allowed the continuance of the lawsuit by Kings County and two residents affected by the project, John Tos and Aaron Fukuda. Both residents own property that would be taken to build the project.

Kenny’s action was a blow to the California High-Speed Rail Authority, which had asked the court to dismiss the case.

Within 48 hours of Kenny’s new ruling, Harris’ office notified Stuart Flashman, who is representing Kings County and the residents, that the CHSRA was going to ask the Court of Appeal for a writ to again stop the case.

And CHSRA Spokeswoman Lisa Marie Alley told CalWatchdog.com, “We disagree with the March 4 Sacramento Superior Court’s ruling and are preparing to seek a review by the Court of Appeal.”

The CHSRA is asking for an “ex parte” decision by the Court of Appeal. Flashman explained to CalWatchdog.com, “Ex parte means a decision would be made without the usual about 20 days’ advance notice to the opposing parties of the intent to seek court action. Here, they’re wanting expedited handling of a motion asking for a stay of the trial court proceedings.”

Flashman said he doesn’t understand the need for urgency. He said it’s like someone yelling, “My house is on fire! My house is on fire! You have to do something!” Yet when firefighters arrive, they find the fire is only on a barbeque grill.

“There’s no fire here,” Flashman said. “Nothing has been decided. What is the damage? What is the harm? There is no decision.  It’s not as if there is an injunction in effect.”

Kenny’s March 4 ruling only gave the CHSRA the right to have its case heard in court, not halt the project.

Reasons

Flashman expects the next court filing by the CHSRA will show why it thinks the ruling to move forward with a trial is such an urgent matter.  He believes that, if the Court of Appeal decides the case based on the law, the court will summarily deny this latest request for extraordinary writ review.

This next hearing will review specific promises made in Proposition 1A, which authorized the high-speed rail project when voters approved it in 2008. Kings County and the two residents insist that parts of the project are not in compliance with those promises, such as mandated high-speed travel times between Los Angeles and San Francisco and the likelihood that an operational subsidy will be required, something strictly forbidden in Prop. 1A.

Flashman explained, “Our position is simply that if the Authority wants to use the bond funds, it has to build what it promised the voters. Our complaint says that the Authority’s project doesn’t meet requirements for the high-speed rail system that were set when California voters approved Proposition 1A.  Judge Kenny’s ruling means we get our day in court to prove our case.  If we’re successful, it will mean the Authority can’t use the bond funds to build its noncompliant project.”

The appeals court ruling is expected this spring at the earliest. It will decide whether to permanently overturn Kenny’s ruling.

Curiously, Harris’ brief before the court in this matter included a Washington Post article by editorial writer Charles Lane. Lane asked, “Who is more powerful, the president of the United States or Michael P. Kenny of Sacramento?”

That seemed to favor advancing high-speed rail through executive clout. But Lane continued:

“As it happens, Kenny’s ruling on the California rail plan was almost certainly correct; the Brown and Obama administrations have never plausibly explained where they would get the $68 billion needed to build the whole California system. Even if completed, high-speed rail would not enhance productivity; rather, it would consume subsidies, as it does in other countries. With teleconferencing a reality and driverless cars on the way, bullet trains don’t seem so cutting-edge anymore, anyway. …

“In 2009, Obama lauded high-speed rail in Europe and Asia, and declared: ‘There’s no reason why we can’t do this. This is America.’

“Actually, countries that have high-speed rail — China, Japan, France and Taiwan, for example — also tend to have much more centralized government than the United States.

“In other words, one reason we don’t have national high-speed rail, and probably never will, is that this is America.”

Ironically, Lane’s article, although submitted by Harris’ office, well could provide the Court of Appeal a reason to side against the CHSRA’s case, not for it.

The Godzilla roaring in the caboose of the High-Speed Rail project is: Where’s the money?

The Draft 2014 Business Plan from the California High-Speed Rail Authority pegs the cost of the project at $67.6 billion, just a bit below $68.4 billion of the 2012 Plan.

And the new CHSRA plan identifies the main current funding sources to build high-speed rail as:

• $9.95 billion in bond money from Proposition 1A, which voters passed in 2008. (Of that, $950 million want to other transit projects, leaving $9 billion for high-speed rail.)
• $3.3 billion from the American Recovery and Reinvestment Act of 2009, President Obama’s stimulus program during the depths of the Great Recession. The ARRA funds were supposed to go to “shovel ready” projects and must be spent by Sept. 2017.
• An unspecified amount from state cap-and-trade revenues. This refers to the quarterly cap-and-trade auctions of “greenhouse gas emissions” begun by the California Air Resources Board in Nov. 2012. The auctions are carried out as part of AB32, the Global Warming Solutions Act of 2006, which mandated reductions in state greenhouse gas emissions to 1990 levels by 2020. That’s now only six years away and the first leg of the HSR system won’t be operable until two years later, in 2022.

The 2014 Plan reads:

“High-speed rail has been a priority investment for state cap-and-trade funding for several years, as described in the Authority’s 2012 Business Plan and the ARB 2008 Scoping Plan and recent investment plan. The 2012 Business Plan identified state cap-and-trade revenue as a potential backstop for the project.

“The Governor’s 2014-15 Budget … proposes to use cap-and-trade proceeds as an investment in statewide rail modernization in order to reduce greenhouse gases and modernize the state’s interregional transportation system (with $250 million for high-speed rail and $50 million for urban, commuter and intercity rail projects).” 

Initial Operating Section

The 2014 Plan then looks to the sources of funding for the Initial Operating Section of 300 miles. But as Exhibit 6.5 on p. 53 shows, Uncommitted Funds are $20.9 billion to finish the entire IOS.

This is a huge gap and this is one reason why Judge Michael Kenny (see below) said they had an illegal funding plan.

Yet the plan reads:

“First, combined with the remaining Proposition 1A bond funds, it will allow the Authority to proceed without delay and continue construction past the initial Madera to Bakersfield segment – to tunnel through the Tehachapis to create the first dedicated passenger rail connection between Northern and Southern California. Connecting to the multi-modal transit center in Palmdale, connecting rail service will be available throughout Southern California initially via the Metrolink commuter rail system.”

Metrolink, of course, is not a high-speed system.

Of the original $9 billion set aside for high-speed rail from Prop. 1A, only $4.4 billion has not yet been appropriated by the Legislature for the project. That’s what the 2014 Plan, as quoted above, calls the “remaining Proposition 1A bond funds.”

The quoted section assumes that the CHRSA will be able to get its hands on that $4.4 billion.

And that section also assumes that four things will not happen:

1. The bond funds, currently blocked due to court action, will be available. Just Tuesday, Sacramento County Superior Court Judge Michael Kenny ruled that “Kings County and two of its residents can forge ahead with a challenge to the California High-Speed Rail Authority over its statewide bullet-train plans,” as reported by the Fresno Bee.

2. A 50 percent match to the state bond funds can be found. Prop. 1A was put on the ballot in 2008 by AB3034. In Section 2704.08, that bill stipulated, “Proceeds of bond funds … shall not be used for more than 50 percent of the total cost of construction of each corridor or usable segment thereof of the high-speed train system.” That means half of the funds for the train must come from matching funds from the federal government or the private sector. So far, only $3.3 billion has come in from the federal government, as noted above. Nothing has come from the private sector.

3.  Pressure from environmental  groups might prevent the Legislature from appropriating cap-and-trade funds.

4. The LAO in January said using cap-and-trade funds for high-seed rail might not be legal.

Not as advertised

The new 2014 Plan details diverge from how the high-speed rail project was advertised to voters in 2008, and how the plan has been sold since then. The following chart is from the LAO’s April 2012 analysis; essentially nothing fundamental has changed in two years:

In reality, future federal funds for this project have been blocked by Congress and there is no current interest by private investors. That means the only solid funding for the Phase 1 Blended system is $8.2 billion (12 percent) from Prop. 1A and $3.3 billion (4.8 percent) from Secure Federal Funds. Total: $12.1 billion, or 16.8 percent of what’s needed.

Now in the 2014 Plan, cap-and-trade revenue is expected to fill that gap.

Skeptical Leg Analyst

In February, Legislative Analyst Mac Taylor released an analysis, “Cap-and-Trade Auction Revenue Plan.” As diplomatically as he could, Taylor says the train project doesn’t qualify for the cap-and-trade money.

His reasoning:

• As noted above, AB32 mandates greenhouse gas emission reductions by 2020. But the first part of the high-speed rail project wouldn’t be finished until 2022.
• Gov. Jerry Brown asked for $250 million from Cap and Trade for the 2014-15 budget. But he’s eying one-third of all cap-and-trade revenues in the future. Now, for the first five cap-and-trade quarterly auctions, from Nov. 2013 to Nov. 2013, $532 million in mitigation fees were collected. The LAO says several economists have estimated these fees would be substantially higher through 2020, as much as $15 billion. Yet no one knows for sure how much money will be raised because of many variables. There is also the question of the eligibility of the high-speed rail project, legal challenges and better choices available today to use the money.
• The LAO points out that the cap-and-trade fees, which required only a majority of voters for approval in Prop. 1A, are being challenged in court. As the Chronicle reported last November, the California Chamber of Commerce and the Pacific Legal Foundation “argued that California’s landmark global warming law, AB32, didn’t give state officials the authority to sell the allowances. Further, they said the allowances amounted to an illegal new tax, because the state legislature approved AB32 by a simple majority vote. Under California law, new taxes require the approval of two thirds of state legislators.”
• The LAO cautions the state to go slowly and develop measurable standards to prevail against legal challenges.    

The Monte Carlo Model 

The CHSRA came up with a new way to show that its assumptions are reasonable. It’s called the Monte Carlo Plan. It uses Monte Carlo Analysis, which Microsoft explains here for use on its Office programs, as a statistical tool for estimating “the probabilities of uncertain events.”

In brief, the CHRSA’s Monte Carlo Plan takes operating costs, maintenance and capital expenditures and simulates thousands of possible outcomes. The outcomes allow the CHSRA, in the 2014 Plan’s words, “to quantify and analyze the resultant potential variability in the estimate and determine the probability of different cost outcomes.”

Sounds complicated. But is it reliable?

CEO Jeff Morales thinks it is. He said at the Feb. 11, 2014 board meeting:

“[T]he Monte Carlo analysis shows that we can be very confident in those results by running some 5,000 variations of the different outcomes that produces then a level of certainty that is extremely high, that when we say we will hit the break even cost of this, meaning that we will not require a subsidy, a key component of Prop 1-A, we can say that with as close to 100 percent certainty as I think anybody could get. It is still a forecast, obviously, but by utilizing these tools, we’re able to provide a much higher degree of assurance of what that outcome will be.” 

Note the phrase, “It’s still a forecast.”

Reality

William Warren has a different opinion. The Stanford MBA with 40 years of financial experience in Silicon Valley companies doesn’t think the Monte Carlo Analysis is useful or dependable for this project because of the large number of unknowns with the high-speed rail project. Along with a team of financial experts, he analyzed the HSRA’s financial reports.

He told CalWatchdog.com:

“The more you know about your reality, such as costs, and the less you have to define as unknown variables, the better off you are, as you are reducing the range of probable outcomes. 

“Our friends at the Authority have very little data which is known (i.e. — based on facts) and a great deal which is unknown (and therefore must be estimated), so the range of results is very wide and very subjective. It is the classic house of cards. Actually, it is the classic case of an apartment complex of cards….   

“I believe the truth test is found in this question: ‘Is there any HSR operator who believes the projected outcomes that show profitability, such that that the operator will sign an operations contract for the IOS, where they take a risk position based on these projections?’ So far it seems that the answer in ‘No.’ So why should the public believe these profitable projections?”

That’s a good question, and one that increasingly will be asked by legislators, the courts and Californians who voted for Prop. 1A.

This is Part 2 of a three-part series on the Draft 2014 Business Plan of the California High-Speed Rail Authority. Part 1 is here.

On Friday, California’s 3rd District Court of Appeal kept California’s high-speed rail project chugging at least a little longer. The court stayed a November order by Sacramento County Superior Court Judge Michael Kenny to delay the project because of violations to Proposition 1A, the High Speed Rail Act, which voters approved in 2008.

Reported the Los Angeles Times, “The state is still restricted from issuing bonds. The appeals court asked the original plaintiffs, Kings County and two farmers, to file a brief by March 17 and the state to respond within 15 days.”

The stay effectively freezes Kenny’s ruling requiring the California High-Speed Rail Authority to rescind its funding plan by March 21. 

Despite the continued legal uncertainty, the CHRSA on Feb. 7 to issue its Draft 2014 Business Plan with few changes from its 2012 plan, as was reported in Part 1 of this series on the many  questions still being raised about the project.

By statute, the final version of the 2014 plan must be presented to the Legislature by May 1.

If the Court of Appeal does not make a ruling without a new bill in the Legislature extending the May 1 deadline, the CHRSA may have to proceed with its  current plan, plus any comments it receives from the public. And if Kenny’s ruling is upheld, significant changes later could call for a new funding plan and a revised business plan.

The 2014 Draft Business Plan does take into account litigation risks:

“In the normal course of business associated with implementing a complex transportation infrastructure project, public agencies typically address a range of litigation challenges and adjudicatory administrative processes related to project funding, environmental clearances, property acquisition and contract disputes. These litigation challenges have the potential to affect project schedules, costs and financing.”

Legal risk

So although the actions of  Kenny are not specified in the Draft 2014 Business Plan, the CHRSA clearly is taking into account the legal risk to the program.

The petition to the Court of Appeal to stay Kenny’s order came from the CHRSA, Gov. Jerry Brown, Treasurer Bill Lockyer and other state officials. It suggested a serious situation: 

“The high-speed rail project may have been able to tolerate a two-year delay in access to bond funds, but the delay it now faces as a result of the trial court’s decisions risks the catastrophic, for two reasons. First, the federal grant funds, by their terms, must be matched by the State and must be spent by 2017. The kind of delays the Authority now faces puts those billions of dollars in jeopardy, because it is not clear that bond proceeds will be available in time to match. Second, opponents of the project have used the trial court’s ruling to fuel political efforts to withhold the federal grants entirely.”

Yet just last December, the response to Kenny’s order was less alarming. CHSR Chairman Dan Richard insisted, “[N]othing in those rulings changes our ability to move forward. We’re ready to build this project.”

The Court of Appeal is a three-judge panel and  could be late spring at the earliest that it makes it makes a decision on this first part of the CHSRA court case.

Another court matter heard

Coincidentally, the same day in Sacramento Superior Court, Judge Kenny heard arguments on whether the second part of this complicated case should move forward.

According to AP, “Attorneys representing Central Valley landowners asked a Sacramento County Superior Court judge Friday to hear arguments about whether California’s high-speed trains would be able to travel as fast as voters were promised when they approved financing for the project.”

The landowners, whose property would be taken under eminent domain to build the train, insist that the failure to meet the speed requirements of Prop. 1A means breaking the project’s contract with voters.

Last August, the Independent Peer Review Group reviewing the train project wrote a letter to legislative leaders. The letter warned that the San Francisco-to-San Jose route produced non-stop run times of 37 and 39 minutes, exceeding the maximum 30 minutes mandated by the bond measure. The CHRSA’s new 2014 Draft Business Plan even included the peer letter, attached at the end.

State’s case

In court, Sharon O’Brady of the state Attorney General’s office presented the state’s case. She argued it was too early to go to trial since the CHSRA could change directions on the project. She said the judge’s ruling meant the CHRSA needed to come up replacement for the first funding plan and write a second funding plan before it can proceed to construction.

And she pointed out the Legislature entrusted judgment to the CHRSA, which has an extensive administrative record to rely on.

Stuart Flashman, co-counsel for the landowners, noted that the CHRSA’s Revised 2012 Business Plan from April that year outlined a “blended system” — including both high-speed and lower-speed segments — between San Francisco to San Jose. Flashman told the court the blended system did not comply with Prop. 1A, and therefore could not be paid for with its bond funds.

Judge Kenny has 90 days to rule on whether or not this second part of the case will move forward.

These are not finessable problems. The state's own estimate is that the 300-mile segment will cost $31 billion, and the absolute most it has available is $13 billion potentially available from Prop. 1A bonds and federal funds. Some reports say the state now only has $6 billion of that $13 billion left.

So on Nov. 9, Kenny will hold a “remedies” hearing at which the rail authority's lawyers will explain how it intends to respond to his concerns. But five weeks before that, we'll get a look at their strategy, as the Hanford Sentinel reports. Project opponents are …

” … asking Kenny to put teeth into his ruling and order the Authority to scrap the existing funding plan.

“That would effectively freeze construction slated to start this year on a $1 billion, 29-mile initial construction segment from Madera to Fresno.

“'The state was not interested in incurring a big financial risk,' said Michael Brady, an attorney for [project opponents] … . 'You run the risk of an incomplete project, an abandoned project, a mess. There’s just no more money.'

“High-speed rail spokeswoman Lisa Alley declined to comment, saying the Authority would file an opposition brief by Oct. 3.”

Brief likely to outline Brown strategy to keep boondoggle alive

And so by Oct. 3, we'll know how the Brown administration will try to get out of this jam. We will probably also have a sense from the tone of the opposition brief if the rail authority is preparing to appeal Kenny's Aug. 16 ruling on the grounds he was wrong about the state law governing the bullet train.

That could be a tough course to take, given that the guy who helped write Prop. 1A — former state judge Quentin Kopp — is already on record as saying that Kenny interpreted the law just as he was supposed to.

The measure included many protections to reassure California voters that the ambitious rail project wouldn't be a boondoggle or a white elephant. But it was only Aug. 16 that the high-speed rail authority was put on notice that it had to take these protections seriously.