Thursday, July 24, 2008

Prop 1 and State Bond Debt

NOTE: We've moved! Visit us at the California High Speed Rail Blog.

For my last post until the first week in August (the wedding is coming up on Saturday and I'll have the laptop taken away and thrown in the Sound if I keep writing!) it seemed fitting to briefly discuss the Legislative Analyst's Office overview of bond proposals that was published last week and is making its way into the state media. The LAO concludes that California can afford Prop 1 - but the analysis does not fully take into account all the benefits of HSR to the state budget and the economy. It's a good but imperfect overview.

The LAO assessment of Prop 1 is mostly a rehash of the basic facts about the system that we all know. The interesting stuff comes at the end:

The costs of these bonds would depend on interest rates in effect at the time they are sold and the time period over which they are repaid. The state would make principal and interest payments from the state’s General Fund over a period of about 30 years. If the bonds are sold at an average interest rate of 5 percent, the cost would be about $19.4 billion to pay off both principal ($9.95 billion) and interest ($9.5 billion). The average repayment for principal and interest would be about $647 million per year.

That $647 million per year figure is what the state media are latching onto, because they feel it fits their "omg trains will break the budget" narrative - the Central Valley Business Times article certainly implies this to be the case. But in fact the bond spending won't be an average of $647 million per year - some years, especially the next few years, it will be much smaller, and will ramp up in the next decade as contracts are signed and construction begins.

Obviously our opponents will latch onto this figure and claim either that this proves a state with a budget deficit can't afford the trains or that this is guaranteed to raise our taxes. Neither is true. As I have explained before HSR and the budget deficit are separate issues - the deficit will have to be closed no matter what happens to Prop 1.

But more important - and totally absent from the LAO report - is an assessment of what would happen if we do not build HSR. The cost of doing nothing is not zero. The LAO has a narrow mandate in assessing something like Prop 1, but by not assessing what the cost to the state budget would be of not building the project - in freeway and airport expansion, or in lost tax revenue from declining intrastate travel due to high gas prices - their report does not actually give us a complete picture. It has been estimated that to expand freeways and airports to meet capacity demands would cost the state between $80 and $120 billion, whereas HSR can handle much of that capacity for a cost to the state of $10 billion.

Some might quibble and say "well the true figure isn't $10 billion - it's $19 billion!" That's become a new tactic of the anti-transit forces. In Seattle they helped kill the monorail project by claiming its "true cost" was $11 billion once all financing costs were included, but that is an accounting method rarely EVER used to assess projects. Even if it were, it is dishonest to calculate all the financial costs of HSR alone while not comparing it to the financial costs of NOT building HSR.

More fundamentally the LAO report does not examine the broad economic impact of HSR. That too is beyond the LAO's too-narrow mandate, but we can and must include that in our own assessment and our explanation of the project to Californians. The HSR bonds will create as many as 450,000 jobs, providing an economic stimulus as well as tax revenue. As the world now recognizes, HSR is vital to a prosperous 21st century economy. We can have broad economic growth or we can not build HSR - but we cannot do both. Those who oppose HSR on fiscal grounds have their heads in the sand and are missing what is happening to the economy all around us. We have used up the infrastructure investments of 50 and 75 years ago - without investment in 21st century infrastructure our state will be hostage to ever-rising gas prices, while will hurt tourism, business, and everything else in our economy that depends on travel...which is everything.

The LAO also discussed operating costs:

When constructed, the high-speed rail system will incur unknown ongoing maintenance and operation costs, probably in excess of $1 billion a year. Depending on the level of ridership, these costs would be at least partially offset by revenue from fares paid by passengers.

"At least partially" is such an understatement as to almost render this section useless. Every HSR system currently in operation generates a surplus - meaning they pay for their own operating costs. The ridership issue that was once the cornerstone of HSR deniers has now receded as even they must understand that since passenger rail ridership in the US is soaring, and that HSR lines around the world do a booming business, California's HSR system is unlikely to face low ridership.

Finally, the LAO offered a overview of state bond debt that demonstrates Prop 1 would not really change the state's overall bond picture or debt level:

In short: California can afford high speed rail. And even though the LAO did not analyze this, over four months of posts on this blog shows the corollary to be true: California cannot afford to NOT build high speed rail. It is an investment in our future that will repay itself many, many times over. We cannot let a temporary budget crisis or a lingering, foolish anti-spending mindset turn us from those crucial facts.


Brandon in California said...

DOes the LAO consult with any one in developing their analysis and statement? It seems to me that the CHSRA and LAO should have hooked up to communicate areas of concern.

I agree with you Robert on each of your points.

Further, $647million in average annual bond debt payment would work out to be approximatley $13 per person per year (assuming 50 million people in state (we're on our way from 38m to 60m by 2050)).

That is essentially $1 per month. Or, a quarter per week.

Sound similar?

Unknown said...
This comment has been removed by the author.
Unknown said...

So these are the reasons against HSR.

Reasons Against HSR

I dont like to link to sites that oppose HSR but this was comical. They have 6 reasons against it. The first 5 are exactly the same so its basically one reason: Its expensive. The 2th (#6) reason is that rail lobbists support it.

NICE! Really convincing. Keep up the good work.

Anonymous said...

It is the job of the LAO to give conservative financial estimates. In the worst case, the project would have an operating deficit, so that is what the analysis says. Just because other, better-run and better-managed HSR projects have operating surplus does not necessarily mean CAHSR can do so too.

And since we don't even have a business plan yet, it is anyone's guess what the final number will be. Nor is it clear who pays for depreciation of the infrastructure. For example, when BART aerials and trains needed replacing, that funding came from a new bond measure, and never appeared in BART's farebox recovery figures. Those depreciation costs simply didn't exist on the balance sheet.

Rafael said...

While I agree that the cost of not building HSR needs to be considered, I don't think it's within the LAO's charter to attempt that computation. The modal alternative to HSR, i.e. more freeway lane-miles and airport runways - is not on the November ballot.

If it were, perhaps voters' minds would be concentrated on the notion that this is an either-or proposition. Doing nothing at all at this time could turn out to be the most expensive option of all, because future population and economic growth will be constrained by a hopelessly overburdened transportation infrastructure. Infrastructure is one of the things the state is supposed to provide.

Claiming that California cannot afford HSR because it needs to provide health care to a burgeoning prison population just proves how short-sighted the three strikes law was.

In closing, a few remarks on assessing total bond cost:

a) as with mortgages, the repayment schedule is negotiable up front. A constant numerical amount per month pays off mostly interest first and mostly principal toward the end. It also becomes easier to afford toward the end because general inflation reduces the net present value of the payment relative to the first one.

If desired, the monthly payment can be indexed to inflation, which means the state rather than the bond issuer assumes the inflation risk. The interest rate charged is then real rather than nominal. Other variations exist.

b) the modal alternative would receive matching funds from the federal government. The private sector might participate if tolls of some sort could be collected. Those might take the form of traditional toll booths for brand-new corridors or else, usage fees for upgraded existing corridors. In Europe, the notion that those who use freeways should pay more than those who do not is gaining currency. Examples include vignettes (decals) in Switzerland, Austria and the Czech Republic, RFID boxes in Italy and satellite-based metering in Germany.

In other words, a fair comparison of HSR and modal alternative cost to the state of California would likely show that the latter would costs about twice as much - not eight times.

c) California taxpayers are net contributors to the federal budget. While there will be no federal tax hike to fund the federal matching contribution sought by CHSRA, it is misleading to imply that money from Washington is manna from heaven.

Anonymous said...

You guys need to start posting this stuff in newspapers ect ect..I have already seen that Jarvis whooe on 3 or 4 internet news sites. How do we show people that there wrong and confusing people?

Anonymous said...

Knowing that most viewing this site have a very much "build it at any cost" attitude. (Rafael is an exception and there are others as well), it probably is a waste of time to post this, but anyway.

Here now is an article pointing to design deficiencies inherent in this project while complementing the French with their knowledge.

A rail expert the other day told me what a mistake it was to not bring in an expert team or teams from countries where HSR has been successful and let them do the design work, including route structure. Not so with this project.

Even proponents would do well to keep an open mind about what is being proposed here and this article makes some very interesting comparisons.

Anonymous said...

Gee still has to run thru Menlo Park.SO why is this plan better for you? and YES it is going to use existing rails in urban areas ...and not at 220mph. SO now do you approve of it??

Spokker said...

Haha that article is hilarious. Oh no! The train is too fast and it's going to knock me on my ass.

Woah, no one died and I assume the camera man still has hearing in both ears. Phew.

Spokker said...

From the above video comments, the guy who took the video explains, "At Shin-Iwakuni, which is where I took the video, Nozomis and Hikari Railstars do not reduce speed, since the tracks are straight for very long stretches, and there are passing tracks far enough from the station platforms.

At other stations, they may reduce speed due to curves, noise restrictions, lack of passing tracks, and numerous other factors."


Rafael said...

@ morris brown -

you are forgetting that California isn't a nation state, it is not the highest authority in the land. Specifically, the Federal Rail Administration maintains a set of crash safety standards and regulations that are different from those used in Europe and Japan.

Consequently, FRA differentiates between compliant and non-compliant locomotives and rolling stock. The latter refers to designs that conform to international crash safety standards. For now, FRA essentially considers passenger trains to be freight trains whose freight happens to be people. The saga of the Acela Express in the Northeast Corridor is a good example of what this mindset can lead to.

Unsurprisingly, FRA considers its own standards to be superior, at least until someone proves otherwise. At least with regard to collisions with motor vehicles at level crossings, recent computations by Caltrain challenge that assumption.

Of course, FRA is also concerned about collisions between trains. US freight trains tend to be much longer than European ones and, feature pairs of containers stacked one one top of the other (video). Europe and Japan have concluded that collisions between trains should be avoided at all costs and have invested in active safety technologies (advanced signaling, positive train control etc.) to that end. FRA is still focused on passive safety, i.e. ensuring that people survive low-speed crashes, a policy consistent with DOT's philosophy for motor vehicles.

The upshot is that FRA generally does not permit compliant and non-compliant equipment to share tracks. Caltrain is in a position to prepare a waiver application only because it owns the ROW between San Jose and San Francisco and, very few freight trains run in that corridor. It can afford to rely on strict time separation to address that issue.

CAHSR sensibly wants to use off-the-shelf European and/or Japanese trainsets for its service. Anything else would substantially increase capital and operations cost and, delay completion of the project. Unfortunately, the price tag is dedicated HSR tracks for the entire 800-mile network. Note that the agency has consulted with various trainset vendors and other foreign experts.

The French run their TGVs on legacy tracks wherever speeds are anyhow relatively low and cut over to dedicated track only where high speed is required. In California, FRA would not allow that even if UPRR and BNSF did. Don't blame CHSRA for the legal environment in which it has to design its solution.

Robert Cruickshank said...

That article from Michael Mahoney is hilarious. France is the ONLY HSR model?! What of Spain, Japan, Taiwan, Germany?

And railroads as city-busters? Mahoney clearly doesn't realize that the railroads came first and the cities grew up around them. The attempt to paint HSR builders as a 21st century Robert Moses is absurd. The tracks are still there and have been there for nearly 150 years.

As far as I can tell Mahoney's article is more of the usual anti-rail sentiment, just dressed up in very different but ill-fitting clothing.

As to morris, I'm not a "build it at any cost" person - because I don't accept your ridiculous and unfounded assertions that we're going to see massive cost overruns on this. The final price tag might come in around $50 billion and that is quite fine with me - because the factors that'll drive up the HSR's final cost (inflation and dollar devaluation) will drive up the cost of the alternatives, including the no-build alternative.

Jack Duluoz said...

Morris and his crew don't give a crap, their possiton is quite clear "Kill HSR at anycost" no matter what misinformation they need to propagate in order to scare people.

Why is it that they always seem to fail to mention that their "Big Dig" reference is a freakin' highway project!

They also cleary don't care about the much higher cost of building more freeway lanes and airports, afterall 101 goes through East Palo Alto and not by their condos.

Anonymous said...

The Menlo Park "Golden Oldies" are
well know for killing anything that might change/improve things!
they want to live in a 1964 time bubble. they dont care about the future..they wont be here.ITS that
thinking why we have poor transit
broken up roads,schools ect..they
and the Jarvis whiners have left us this wonderful legacy!

Jack Duluoz said...

As a Menlo Park native I can tell you that it is really quite embarassing. These guys have been fighting progress tooth and nail for decades, Martin Engel is one of our transit commissioners for crying out loud!!

We are one of TWO cities along the peninsula that have NO grade-seperations with caltrain. You wanna talk about waisting money, they could have been built and paid for 20 years ago for a fraction of today's costs.

Maybe then my friend wouldn't have hit and killed by the train years ago when she was 15.

btw, I'm from the side of town that the NIMBYs say will be cut-off by a "great wall" should HSR be built, Morris and Martin are NOT. Furthermore, I know for a fact that most of my neighbors support Prop 1.

Anonymous said...

Not to pile on, but here are examples of the intermediate metro areas that the TGV lines serve directly rather than bypassing, as the Mahoney op piece erroneously claims:

Lille (metro population 1,091,438)
Rouen (metro population 541,410)
Tours (metro population 297,631)
Le Mans (metro population 293,159)

And the populations of the Central Valley cities that are being served:

Fresno (metro population 1,002,284)
Bakersfield (metro population 780,711)
Stockton (on the Sacramento spur; metro population 685,660)

So, no, serving the Hwy-99 corridor cities is not at all inconsistent with the French model. If anything, the case for serving these intermediate cities is stronger than the case for serving the intermediate cities that the TGV does (in the sense that their populations are larger than all but Lille).

Anonymous said...

Mahoney does have a point. A fair amount of care was taken in choosing the routing into SF and LA, but the Central Valley route just seems to take the most convenient freight rails from point A to point B.

This puts the trains through large stretches of urban areas (CV cities are completely sprawl), which will either mean long slower at-grade sections or a very expensive grade separation projects. It also creates numerous opportunities for NIMBY opposition to sprout up.

Furthermore, it's not even clear that HSR can use the freight ROWs, which means very expensive urban land acquisition.

This will create cost and time delays to the project, like it or not.

Anonymous said...

The "fair amount of care that was taken in getting into SF" is nothing more than satisfying the interests of San Jose, San Francisco and CalTrain.

It has been pointed out here in previous postings, the major advantages of Altamont over Pacheco; about how the CHSRA fudged the travel times in favor of Pacheco by introducing an un-needed 30 minute delay for a turn around in San Jose.

The evidence is there, illustrating what a devious bunch the CHSRA really represents.

After 10 years, they don't have a valid business plan; they haven't gotten an agreement with the UPRR or the Sante Fe to use their corridors. They will no doubt be subject to a legal suit now claiming the EIR/EIS is invalid, because they can't use that corridor.

This project needs new leadership. The bond measure should be removed. SB-53 should be passed, which would take the project into new hands.

If we are going to spend these billions, we need to spend them for a useful project, not for a project meant to only satisfy certain political and development interests.

Brandon in California said...

It is easy for an anonymous person to be a naysayer about this or that. Dump and run. That is the naysayer and NIMBY modus operandi.

But, how would you know? Where or what is your evidence? What are your credentials?

Time and time again the merits of this project are forwarded. Yet zero credible argument against it survives beyond a few moments.

60 million people will be in this state by 2050!

Statewide travel will grind to a halt if zero is done.

I5 & SR99 will be parking lots. LAX, Lindberg, SFO... the same.

Air pollution will prematurely kill thousands with others left with asthma and what-not.

Do you want to want to build more highways and expand airports at x2 the cost of HSR? ...because it's what we've always been doing?

...while at the same time ratchet up the dependency on foreign oil? ...sending more US $ to countries and cultures that hate us and want to see us exterminated instead?

Honestly, when I see a stubborn naysayer I increasingly imagine an extremist right-wing conservative nut job that thinks the solution is belief in a GOD that will answer our prayers and *poof* provide a solution. Maybe they are creationists?

Please remove your head from the hole in the sand.

Anonymous said...

@ Brandon M. Farley

Well Mr. farley --- just who are you? I don't see your identity exposed, yet you complain about someone signing in as anonymous.

You represent almost the worst of an advocate. Our system of government requires that the LAO be independent from advocacy that is why the agency is there -- to represent to the best of their abilities a fair un-partial statement of the facts.

You say, the "deniers" arguments are all nonsense and are immediately dismissed. Only in your mind sir. Why did the Senate T&H committee have to issue a 35 page report with all those specific items of concern?

The project right now is a mess. There will no doubt be a lawsuit filed, since the EIR/EIS is without a doubt invalid because of the UPRR corridor not being available. Just wait until you see who is going to join into that suit.

Your economics make no sense. Why do you think AB-3034 now wants to stretch the bond to 40 years? The state needs to conserve its cash.

This project is going to solve air pollution? This project is going to cure the central valley of its air quality problems?

That was maybe the most ridiculous thread that Robert ever ran. The project is supposed to create 450,000 new jobs. Jobs mean people and families and homes and lots more autos. If Fresno wants to solve its air quality problems, they sure should not want HSR, which is going to bring expansive urban sprawl to their area.

Are you a developer or land speculator? That’s what this project is all about. It’s all about the money to be made from the billions to be spent on construction and land development. It’s about San Jose insisting upon the Pacheco pass or coming out against the project.

Don't tell us to get our heads out of the sand -- that’s where yours is buried.

Brandon in California said...

As if Brandon M. Farley is not my name? Am I making it up?

While not only is Anon July 25th, 10:54am nameless and unidentifiable... their post was a dump and run complaint.

I think the avergagte Joe would be hard pressed to locate quality in that post. ... which is a trend among naysayers. ... whom also tend to post as anons.