January 4, 2012 / 1:30 AM / 9 years ago

Funding concerns for California high-speed rail

SAN FRANCISCO (Reuters) - California’s effort to build a massive high-speed rail network suffered another setback on Tuesday when a peer review group charged with evaluating the project recommended lawmakers put it on hold.

Specifically, the group said the state should not move ahead with the sale of the nearly $3 billion in bonds to finance initial construction with the first tranche of $10 billion in state-backed high-speed rail bonds authorized by voters in 2008.

The recommendation is a blow to Governor Jerry Brown, who backs the project as a visionary piece of infrastructure-building that will create tens of thousands of jobs and benefit the state for many decades to come.

The proposed system would make the train competitive with air travel on the heavily trafficked Los Angeles-San Francisco route, and also vastly reduce travels times between those cities and Sacramento, San Diego and the state’s Central Valley.

But the cost estimate for the system has ballooned to $98 billion from $43 billion in 2008, the state’s finances are in disarray due to the economic slump and Republicans in Congress have vowed to block crucial federal funding for the project.

The first phase of the planned network, a 130-mile track connecting Fresno and Bakersfield, would be financed by $2.7 billion in state bonds and $3.5 billion from the federal government. Groundbreaking on the project won’t start until the legislature releases the bond funds, and the state risks losing the federal money if construction is delayed.

California voters, grappling with widespread cutbacks in basic government services, may also be having second thoughts. Nearly two-thirds of California voters would like another referendum on high-speed rail, and a strong majority would reject bonds for it in a new vote, according to a Field Poll survey released last month.

State Senator Joe Simitian, chairman of the budget subcommittee for transportation, said the California High-Speed Rail Peer Review Group’s recommendation, sent in a letter on Tuesday to the legislature’s Democrat and Republican leaders, was “sobering.”

Simitian, a Democrat, also told Reuters the review group’s recommendation supports his view that lawmakers should postpone the bond issue until the legislature can conduct a thorough review of the project’s feasibility.

“There may be some value in taking a time-out,” said Simitian. “Might we all be served by a one-year time-out?”

The peer review group in its letter said the planned rail system’s funding plan is fundamentally flawed because it fails to identify long-term sources of money - including federal funding - for the project.

The letter said moving ahead with the project “without credible sources of adequate funding, without a definitive business model, without a strategy to maximize the independent utility and value to the State, and without the appropriate management resources, represents an immense financial risk on the part of the State of California.”

John Chalker, vice-chair of peer review group and managing director of LM Capital Group in San Diego, said the California High-Speed Rail Authority needs to show how its statewide system could be built when state and federal budgets are tight and with private companies reluctant to get involved in the project.

“We think it would be appropriate to take a pause,” Chalker said.

Supporters of the project blasted the peer review group.

“With California facing a jobs crisis and an urgency to upgrade our failing transportation infrastructure, further delay in breaking ground on high-speed rail is neither prudent nor responsible,” said Art Pulaski, executive secretary-treasurer of the California Labor Federation.

The High Speed Rail Authority in a statement said the review commission’s letter to lawmakers was “deeply flawed, in some areas misleading and its conclusions are unfounded.”

“Although some high-speed rail experience exists among Peer Review Panel members this report suffers from a lack of appreciation of how high speed rail systems have been constructed throughout the world, makes unrealistic and unsubstantiated assumptions about private sector involvement in such systems and ignores or misconstrues the legal requirements that govern the construction of the high speed rail program in California,” the rail authority added.

Reporting by Jim Christie; editing by Jonathan Weber, Gary Hill

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