California officials knew all along bullet train wouldn’t attract investors

California officials knew all along bullet train wouldn’t attract investors

After being discussed for decades, a privately funded 170-mile high-speed rail link through the desert between Las Vegas and Victorville — 90 miles east-northeast of Los Angeles — could get final approval in coming weeks from the Federal Railroad Administration. After that happens, the California and Nevada state governments are expected to give final approval to $600 million and $200 million in tax-exempt bonds, respectively, to help finance the $4.8 billion Virgin Trains project. But these are not gifts. The train company, whose majority owner is famous entrepreneur Richard Branson, and its investors are obligated to pay off the bonds.

Branson’s ability to attract investors has led to media reports wondering why the state of California has had such trouble with financing for its bullet-train project, which was jump-started in 2008 when state voters narrowly approved providing $9.95 billion in seed money for the then-$33 billion statewide high-speed rail system.

“Virgin’s ability to access private financing could raise questions about why California’s public project hasn’t attracted the same investment,” the Associated Press reported in September. “As it stands, the state has less than half the $77 billion it needs to build the full line, and no private companies or donors have committed money.”

This lack of money is why Gov. Gavin Newsom and the California High-Speed Rail Authority are now only committed to building a 171-miles, $20.5 billion rail line from Bakersfield to Merced in the Central Valley.

But the little-known fact is that state bullet-train officials were skeptical they could ever attract private investors because of how Proposition 1A — the 2008 rail initiative — was written. And they never shared their concerns with the public until days after voters agreed to a massive gift of taxpayer funds.

The ballot measure forbids taxpayer subsidies for operations. In spring 2008, when the state rail authority was preparing a business plan for the bullet train that it was supposed to release five weeks before the election, its staff contacted potential investors. But most told authority officials that they would never invest without “both financial and political commitments from state officials that government would share the risks to their participation.” In other words, if revenue or ridership was lower than expected, investors wanted taxpayer subsidies.

The business plan was not released before the November 2008 election, the state rail authority said, because of delays blamed on the deadlock over the 2008-09 state budget, which wasn’t signed by then-Gov. Arnold Schwarzenegger until nearly three months after the fiscal year began in July.

Yet even after the business plan was issued, Schwarzenegger and his successor, Jerry Brown, continued to insist it was just a matter of time before massive outside investment revived a project that quickly fell years behind schedule. In 2014, authority officials even told the San Jose Mercury News that nine investors had expressed interest.

But the companies they cited — most notably VINCI Concessions, a Paris-based global transportation conglomerate — were more interested in operating the California system than funding it. The only projects they invested in were public-private ventures in which, yes, governments “shared the risks” and provided subsidies if the projects went astray. 

On Wall Street, if a company is proven to have hidden crucial facts about its fiscal health from potential investors, the repercussions can be huge — and CEOs go to jail. Adelphia Communications CEO John Riggas, for example, was sentenced to 15 years in prison in 2005 in part because prosecutors established he had hidden $2.3 billion in company debt. Corporate fraud is one of the FBI’s main priorities.

Yet in California, state voters were persuaded to provide nearly $10 billion in taxpayer funds to a state agency that knew it couldn’t keep the promises made to those voters. And if any state official has even apologized for this deceit, it didn’t show up in my lengthy search of the Nexis news database.

This is why the California bullet train project shouldn’t just be remembered as an over-budget, overdue example of incompetence with public works projects, such as Boston’s Big Dig. It should also be remembered for the rank dishonesty that got it approved. This is state government at its worst.

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Chris Reed is a contributing editor to California Policy Center, and an editorial writer and columnist for The San Diego Union-Tribune. You can follow him on Twitter @chrisreed99.

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