On Monday, the Assembly Transportation Committee voted against a bill that would have increased high-speed rail’s financial transparency. The measure, AB 66, would have implemented recommendations from the Legislative Analyst’s Office (LAO), a non-partisan official body that analyzes budgets and proposed legislation.
In its analysis of the High-Speed Rail Authority’s 2016 draft business plan, LAO concluded:
However, information provided by HSRA can be difficult to compare over time, for example the cost, scope, and schedule of each construction segment. The Legislature may want to consider defining specific segments of the system and requiring future business plans and reports to provide information on the cost and schedule of these fixed scopes of work. The Legislature will also want to consider requiring future business plans to include all costs associated with the planned system, such as financing and administrative costs.
AB 66, authored by Jim Patterson (R-Fresno), put these suggestions into legislative form. Adding the extra reporting elements would not have required much additional work on the part of the High-Speed Rail Authority. Yet, despite its consistency with recommendations from a neutral body, the bill received only five yea votes in the committee, three short of the number needed to advance to the full Assembly.
Curiously, some legislators who had voted for a similar bill last year, voted against the legislation this time. According to off-the-record comments I have heard, many legislators on both sides of the aisle have reservations about high-speed rail. But many Democrats are afraid to express opposition given the fear of reprisal from leadership and the Governor. Their fears seem justified: after Assembly Member Rudy Salas (D-Bakersfield) voted against SB1, the gas tax increase, he was relieved of his role as Chair of the Assembly Business and Professions Committee.
With Governor Brown “all in” for high-speed rail, members voting for even the most minor reforms could find themselves in his crosshairs. This is especially unfortunate given recent state and federal actions. With the decision to extend Altamont Corridor Express (ACE) service to Merced, there is now a less costly way to connect Central Valley residents to the Bay Area, undermining one of the near-term justifications for high-speed rail. Meanwhile, Transportation Secretary Elaine Chao is holding up federal funds for Caltrain electrification largely because of its links to high-speed rail. A bipartisan compromise that would improve mobility between San Francisco, San Jose and the Central Valley at a much lower cost than the high-speed rail project should be possible with more open-minded state leadership.
My Testimony On AB 66
Chairman Frazier, Vice Chairman Fong and members of the committee: thank you for giving me the opportunity to speak to you about Assembly Bill 66 today. My name is Marc Joffe, and I am the Director of Policy Research for the California Policy Center, a non-partisan think tank. Before becoming a policy researcher, I was a Senior Director at Moody’s Analytics. Given this background, I thought it would be most useful for me to address the financing cost transparency aspect of Assemblymember Patterson’s bill.
Last week’s high-speed rail bond issue is illustrative of the need for greater transparency around the project’s financing plans. Although the Treasurer completed the sale of these bonds last week, we still do not know their total debt service costs. The preliminary Official Statement included a blank debt service schedule, but should release a final Official Statement in a few days.
From the preliminary Official Statement and information available from industry media, we know that the $1.248 billion offering had some unusual features. Most notable is the fact that the bonds are federally taxable, even though the state had the option to issue tax exempt securities, potentially at a lower cost. However, yields on the new bonds appear to be quite reasonable, perhaps because they were sold to yield-hungry overseas investors who cannot take advantage of the federal tax exemption.
I estimate that lifetime interest costs on the bonds will be about $150 million, which seems low. One way the state achieved such modest debt service costs is that it plans to retire much of the issue well before the 2047 final maturity date. In fact, $648 million of the bonds mature between 2018 and 2022 – well before high-speed rail is expected to begin operations. Principal and interest payments on these shorter term bonds must come from general fund tax revenues.
Another $300 million of the bonds are variable rate securities paying 78 basis points above the one-month US London Interbank Offer Rate, or LIBOR. Currently, this rate is just under 1%, making these securities a very good deal for the state. However, a sudden rise in short term rates could make this issue much more expensive for taxpayers.
The Authority has discussed the possibility of securitizing cap and trade revenues and/or operating revenues. Relative to general obligation bonds, securitizations are more complex, require additional administrative effort and pose greater risk for investors. As a result, securitization deals have higher financing costs.
The gap in financing costs widens as securitized revenue streams become more uncertain. Recently, cap and trade revenues have proven quite uncertain. According to a recent LAO report, the last four auctions earned the state 10, 8, 364 and 8 million dollars respectively. Barring miraculous results in the May auction, total cap and trade revenues for the fiscal year will come in well below budget. Investors will likely demand strong protections or higher interest rates to advance money against such a volatile revenue stream.
I just want to conclude by saying that I understand and appreciate the motivations of some of those who wish to defend the high-speed rail project against the additional level of transparency and oversight in AB 66. Looking at such engineering marvels as the Golden Gate Bridge and the Los Angeles Aqueduct, it is reasonable for us to ask what great structures can we leave to our children and grandchildren. But in the decades since the early 20th century, public policymakers have developed the discipline of cost benefit analysis. We owe it to future generations to conduct cost benefit analysis on major projects in a thorough and transparent manner. It is only be following this discipline that we can honestly say that the debts we leave to our descendants were justified by the projects we built for them.