Cuts to California rail may signal trouble for federally funded infrastructure

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The Trump administration's latest action against California's high-speed rail project may have a chilling effect on other federally funded multi-year projects.

The Federal Railroad Administration cited repeated failures by the state to forecast accurate schedules, report key milestones and show it can meet deadlines to complete work on the Central Valley segment of the line by 2022 in a 25-page letter Thursday announcing the decision to withhold $929 million of appropriated funds.

The FRA's technical arguments aside, the action faces the perception that it results from President Trump's ongoing animus toward California, a state where he won less than 32% of the vote in the 2016 election.

That doesn't bode well for any project with a long enough time frame to overlap federal election cycles.

“I think investors and issuers need to assume that the federal government may not always be a good-faith partner in infrastructure transit projects,” said Matt Fabian, a partner at Municipal Market Analytics. “It is another sign that states are on their own.”

Investors need to be careful in a multi-part transaction that has a federal funding leg that hasn’t been fully or legally secured, Fabian said.

“Just like with Build America Bonds, the feds can and will renege on funding obligations,” Fabian said. “They cut the subsidy multiple times, because of federal sequestration.”

That bond program, which like the high-speed-rail funding was part of the federal stimulus response to the 2008 recession, allowed state and local governments to issue taxable bonds and receive federal subsides as an alternative to issuing tax-exempt. Under GOP control, Congress subsequently cut BAB subsidies as part of a budget sequestration process.

“This is a little different from what occurred with Build America Bonds, but the economic effect is the same. Federal funding can be changed,” Fabian said. “Issuers need to rely on it less and investors need to make sure they aren’t investing in a project that falls apart if the federal part is withdrawn.”

Though the loss of the money could be devastating for the California project, state officials said work will continue, because the federal government’s action may be reversed in court.

"The Trump administration action is illegal — this is California's money, appropriated by Congress, and we will vigorously defend it in court," Gov. Gavin Newsom said in a statement.

FRA Administrator Ron Batory also suggested that the federal government might try to claw back the $2.5 billion already awarded to the project.

Jeff Davis, a senior fellow at the Eno Center for Transportation says the project has several characteristics that make it unique and therefore hard to draw examples from.

“No one else has started a project this big with this little financing," Davis said.

There is no denying the high-speed rail project's problems. It was to run from Los Angeles to San Francisco with extensions to Sacramento and San Diego and cost $38 billion when it was first proposed to voters, who approved $9 billion in bond funding in 2008. Since then, the projected cost of the project has soared to $77 billion for a shortened project that doesn’t include legs to San Diego or Sacramento.

When the project began, voters were told the $9 billion in bonds would cover 22.5% of the cost, but given inflation and the current cost of the project, the bond money would cover 12%, Davis wrote in an Eno Center weekly publication.

“They have never had a realistic funding plan for building the entire system, but they started construction anyway and the Obama administration let them,” Davis said.

Though Fabian said he doesn’t know the specifics of the financing for New Jersey and New York’s Gateway Hudson River tunnel project, he would also caution investors there not to lend it money until all of the federal funding is secured.

Financing for projects with multi-leg financing, before the federal government money has been received, will now be seen as much more speculative than lending once the money is in hand, Fabian said.

One transportation expert called the California defunding decision a positive development because, she said, there needs to be more accountability.

“We have infrastructure bills, but they don’t result in the grand infrastructure they promise,” said Nicole Gelinas, a senior fellow at the Manhattan Institute, a free-market think tank. “I am no fan of the Trump administration, but I think this is a positive development.”

During the Obama Administration, the stimulus money was supposed to create a network of rail and improve the country’s transportation projects, Gelinas said. Instead California spent billions on a project that has little prospect of reaching either major city that was to anchor it. Construction is underway on 119 miles of the planned route in the Central Valley, without firm construction plans to link to either Los Angeles or the San Francisco area.

“I don’t know why they think they should be able to keep the money, when they haven’t built the project the money should go for,” Gelinas said.

“This type of thing should be clear in any future infrastructure bill — that this isn’t a slush fund bailout for states,” Gelinas said. “If you get money, and you can’t build it on time and on budget, you give the money back.”

Many California Republicans, including House Minority Leader Kevin McCarthy, treat the high-speed rail project as a punching bag; Democrats are more supportive.

State Sen. Jim Beall, D-Santa Clara, called the action unfounded and clearly politically motivated as the project was on track to meet its federal timeline requirements.

“To cancel funding for the nation’s largest infrastructure project during national Infrastructure Week shows the administration’s priorities are not aligned with what is best for California workers and families,” Beall said.

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Infrastructure Transportation industry Build America Bonds State of California California Washington DC