Bonds

California bullet train enters key funding stage

The next few months will be key for California’s embattled and costly high-speed train project as the agency overseeing the project works to assemble state and federal financing needed to complete the first leg.

The California High-Speed Rail Authority may hit the market as soon as November with a fresh tranche of state-backed bonds.

At the same time, officials have launched an aggressive push to capitalize on federal infrastructure dollars and political support from the Biden administration. If it’s successful in winning all its targeted grants, federal funds could make up 37% of the cost of the next stage of the project, which features a 119-mile electrified corridor in the Central Valley.

The San Joaquin River Viaduct will span the San Joaquin River in north Fresno and Union Pacific tracks. It will feature a pergola structure to allow high-speed trains to cross over the top of the Union Pacific tracks.

California High-Speed Rail Authority

The bond deal would mark the first tranche of $4.2 billion of general obligation debt approved in June by the state Legislature as part of the fiscal 2023 budget.

The window of political support for the complex and long-delayed project has been cracked wide open by the $1.2 billion Infrastructure Investment and Jobs Act, which the authority estimates provides up to $70 billion for high-speed rail projects across the country. President Joe Biden is a well-known train aficionado and Transportation Secretary Pete Buttigieg has said he hopes to set up high-speed rail projects in two or three areas of the country.

But the window could slam shut —as it did under former President Donald Trump— if Republican lawmakers, many of whom oppose the project and have dubbed it Frankenrail, gain a majority in one or both houses in midterm elections.

The authority’s last significant infusion of federal aid came more than a decade ago, under the Obama administration, shortly after the project’s inception in 2008.

“We’re optimistic that with the support of the Biden administration and our alignment of Biden’s and California’s climate goals, we think our project is well-placed to see some significant awards to get that first passenger piece up and running,” said Brian Annis, the authority’s CFO.

With a price tag as high as $113 billion, the California bullet train is considered the most expensive infrastructure project in the country. The 500-mile line promises a ride time of less than three hours between San Francisco and Los Angeles along a route that extends through the Central Valley. It’s one of only a handful of high-speed train projects in the U.S., and the only one that’s publicly owned.

If it ever gets built, they will come
In a July House Committee on Transportation and Infrastructure hearing, Buttigieg said it’s important to get a bullet train up and running to demonstrate the value to Americans and show the country has the ability to build one.  

“It’s enough not to build out a full high-speed rail network across the U.S. but to begin to demonstrate that the U.S. can do high-speed rail as effectively as anyone,” Buttigieg said. “And we look forward to supporting as many routes as possible. It’ll probably be a handful stacked alongside all the other rail needs in the U.S., but enough I hope to show that America can lead here as well.”

The technology has proven successful in every country that’s tried it, said Andy Kunz, president and CEO of the U.S. High Speed Rail Association.

Among the fledging U.S.-based projects, California is the leader, he said. 

“In terms of the level of technology and progress of the system, California is ahead of everybody,” Kunz said. The length of the California line, at 500 miles, is “almost the entire height of the United States,” Kunz added. “That’s the beauty of this, and it’s also part of the reason why it’s so expensive. It would be like if New York were planning a line all the way to Georgia.”

Other high-speed projects remain at various levels of development.

Texas Central, the private firm planning to build a 240-mile route between Dallas and Houston for $30 billion, is mired in management turnover even as it notched a recent victory from the Texas Supreme Court.

Brightline, which operates a Florida train that runs slower than a high-speed train, has struggled to ramp up amid COVID-19 shutdowns, though officials say they are back on track to finish construction. The company is also trying to develop a line between Las Vegas and southern California, which could eventually connect with California’s bullet train.

Amtrak’s Acela, averaging less than 80 mph between New York and Washington, falls far short of any definition of high-speed rail even as it plans to reach speeds of up to 150 mph on some sections.

A proposed line in the Pacific Northwest, called Cascadia Rail, which has the support of Microsoft, gained traction when the Washington Legislature this year allocated $150 million to be used as matching funds for federal grants over the next six years. 

“We cheer on all the other projects,” Annis said. “The more of these projects we can see nationally, once they’re in place, they’ll be well-used and the public will call for more of them, because that’s what’s happened everywhere else in the world,” he said. “There’s usually a starter line and countries never stop with the starter line, because once it’s up and running it’s very popular.”

Assembling the financing
Over the next few months, as the federal government opens funding opportunities on IIJA grant programs, the authority will apply for them and expects to hear back soon on programs it already applied for, Annis said.

It also hopes to come to the bond market as soon as November with the first of multiple issuances over the next few years to take advantage of the $4.2 billion of newly authorized state-backed general obligation bonds, Annis said.

The authority issues through the State Treasurer’s Office. A spokesperson for that office declined to provide information on a potential transaction.

The $4.2 billion marks the last piece of the $9.95 billion in Proposition 1A bonds approved by California voters in 2008 for the project.

When voters authorized the borrowing, the entire bullet train was estimated to cost $33 billion and be finished by 2020. The Central Valley segment is now set to be complete by 2030 with a price tag of around $24 billion.

The projection date for completion of Phase I, which would connect San Francisco to Anaheim, is 2033. The authority’s revised 2022 draft plan estimates Phase I costs at between $86.7 billion and $88.2 billion, an increase of about $4.3 billion over the 2020 business plan, according to a February 2022 report from the Legislative Analyst’s Office, the Legislature’s non-partisan fiscal advisor.

Of the $9.95 billion of bond funds approved in Proposition 1A, the Legislature has appropriated $5.6 billion, and about $4.6 billion has been spent.

According to the governor’s 2022-23 budget, $3 billion of the $4.6 billion of bonds remains outstanding and $1.46 billion has been redeemed.

As part of the bond authorization in the budget, lawmakers established an inspector general that calls for the IG to “report regularly to the Legislature and governor with a summary of findings and on the authority’s progress in delivering the project,” according to the budget.

On the federal side, the IIJA marks the first major opportunity for the bullet train project since 2010, and the authority hopes to win around $8 billion in grants, Annis said.

“There haven’t been large funding opportunities for rail but those have returned now with the IIJA,” he said. “Some big dollar levels are anticipated and that’s why we have the $8 billion target.”

Since 2010, the authority has received roughly $3.5 billion of federal money, about 15% of the $23.4 billion available or authorized for the project as of 2022.

If the authority secures all the funding, the federal share would be about 37% of total available authorized funding, according to a June 16 board presentation.

Out of the six grant programs, a total of $4.8 billion would go to complete the first segment from Merced to Bakersfield — according to the board report. The authority also plans to request $2 billion from three federal programs for the start of a Bay Area connection and $2 billion from four programs for early investments around the state, such as electric vehicle charging stations and connections between transit and HSR stations.

The authority in May applied for just under $1.3 billion in two federal programs, including funding that could be used to buy six electric train cars that would be capable of reaching 220 mph, which would mark a milestone for the project.

Besides bonds and federal grants, a chief revenue source for the project is cap-and-trade dollars, which the state began providing in 2014 under a deal that gives the project 25% of revenues from cap-and-trade auction proceeds.

Through October 2021, the project has received $4.52 billion in cap-and-trade trade funds and has spent about $2.5 billion, according to the LAO.

The state’s cap-and-trade program sets a cap on statewide greenhouse gas emissions from major sources and creates credits that the companies are allowed to trade for funding at quarterly auctions.

The LAO notes in its report the authority’s estimates for future costs beyond the Central Valley segment are “subject to substantial uncertainty.” That’s particularly true in light of inflation, which Annis acknowledged is a risk to this, and all infrastructure projects in the U.S.

The authority expects to provide a comprehensive update on the project in March 2023.

Advocates, like Kunz, said getting even one section of a bullet train operable will advance the full bullet train cause as people see how it works.

“It’s hard to get it done when all everyone hears about is cost overruns in California,” he said. “Once it’s up and running, everyone’s attitude will change.”

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