BILL ANALYSIS Senate Appropriations Committee Fiscal Summary Senator Tom Torlakson, Chairman 3034 (Galgiani) Hearing Date: 7/7/08 Amended: 7/3/08 Consultant: Mark McKenzie Policy Vote: T.&H. 8-4 _________________________________________________________________ ____ BILL SUMMARY: AB 3034, an urgency measure, would revise a number of provisions of the Safe, Reliable High-Speed Train Bond Act for the 21st Century, which would provide $9.95 billion in general obligation bonds for the construction of a high-speed train network, if approved by the voters in the November 4, 2008 general election. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2008-09 2009-10 2010-11 Fund Bond interest: maturity extension increased interest of $3,777,000* General (from 30 year to 40 year term) --------(see staff comments)-------- HSRA accountability duties unknown increase in administrative Bond** costs for peer review, pre-appropriation review, and pre-expenditure review duties ____________ * Represents cumulative increase in interest payments if the term of bond maturity is extended from 30 years to 40 years, assuming 5 percent interest and 3 percent inflation. Annual General Fund debt service payments (assuming they are level over the term) would be $580 million for 40 years, rather than $647 million annually for a 30 year term, but the total debt service would be $23.195 billion for 40 year bonds, rather than $19.418 billion for 30 year bonds. These figures are in current dollars. ** Unspecified fund created by the High-Speed Train Bond Act _________________________________________________________________ ____ STAFF COMMENTS: This bill meets the criteria for referral to the Suspense File. SB 1856 (Costa), Chapter 697 of 2002, authorized the submittal of the Bond Act for voter approval at the November 2, 2004 statewide general election. Primarily due to budgetary concerns and competition with other bond authorization priorities, the Bond Act was delayed twice: SB 1169 (Murray), Chapter 71 of 2004, delayed voter approval to the November 7, 2006 election, and AB 713 (Torrico), Chapter 44 of 2006, delayed it again to November 4, 2008. Approval of the $9.95 billion Bond Act is intended to provide the state portion of funding for the planning and construction of the 800 mile statewide intercity high-speed passenger train system, which is projected to cost a total of $42-$45 billion, as well as complementary improvements to other specified rail systems to provide connectivity to the high-speed train system and for capacity enhancements and safety improvements to those lines. The remainder of the funding for the high speed rail system is expected to come from federal and private sources. The new high-speed train network would serve the major population centers in the state and link regional and local transit systems to form an integrated transportation network throughout California. Page 2 AB 3034 (Galgiani) Overall Bond Costs The Bond Act currently awaiting voter approval, as authorized by SB 1856 (Costa), would result in total General Fund costs of $19.4 billion, assuming a 30-year bond with a tax-exempt interest rate of 5 percent and a constant inflation rate of 3 percent. This would increase the annual debt service by $647 million for 30 years. AB 3034 would extend the maximum allowable bond maturity term from 30 years to 40 years. Assuming the same interest and inflation rates, this bill could result in an increase in total General Fund costs of $3.78 billion if the term of the bonds is extended to 40 years (to a total cost of $23.2 billion). Annual debt service payments would be $580 million for 40 years. High Speed Rail Authority (HSRA): accountability provisions The Senate Transportation and Housing Committee recently issued a "Report on the California High-Speed Rail Authority" based upon information gathered after convening two interim informational oversight hearings. This report offered six points for consideration in any bill that would amend the bond measure scheduled for voter approval in November of 2008: (1) the HSRA must update its business plan; (2) the Bond Act should include financial accountability standards for the development and management of the high-speed rail system; (3) the HSRA should create a risk management process; (4) the HSRA should be integrated more closely into state government to enhance accountability; (5) a peer review process should created to strengthen oversight; and (6) the HSRA should stage construction so that initial state funds are spent on improving travel segments involving shared rights-of-way. In furtherance of these points, AB 3034 would: Require the HSRA to prepare, publish, and submit to the Legislature a revised business plan by October 1, 2008 that includes a revised funding estimate and discussion of foreseeable risks. Establish an independent peer review committee to review and issue an analysis of the HSRA's assumptions underlying its planning, engineering, and financial plan and its viability for a project in a corridor for which it is seeking bond funding. Require the HSRA, 90 days prior to a request for an appropriation of bond proceeds, to submit a detailed funding plan for a corridor or usable segment to the Department of Finance (DOF), the peer review committee, and specified policy and fiscal committees of the Legislature. This funding plan must include, among other things, a description of all funding sources, identification of risks and proposals to manage them, and a description of terms and conditions of any proposed lease or franchise agreements with private entities. Require the HSRA, prior to expending any bond proceeds appropriated by the Legislature, to submit to DOF and the Joint Legislative Budget Committee (JLBC) an updated detailed funding plan for the corridor and a report prepared by an independent financial services firms and/or consultants on the viability of the project and its funding plan. The JLBC may communicate findings to DOF, and DOF would be required to make a finding that the plan is likely to be successfully implemented prior to the HSRA proceeding with the project. Page 3 AB 3034 (Galgiani) The Transportation and Housing report indicates that the proposed High-Speed Rail Bond Act presents voters with a business proposition, rather than a typical public works project that relies on more traditional pay-as-you-go financing or longer term funding with revenue bonds or general obligation bonds. The high-speed rail system would be funded with a combination of state funds provided by the Bond Act, unspecified federal funds, and unspecified private funds. The HSRA has initiated discussions to pursue federal funding for high-speed development in the next reauthorization of the federal surface transportation funding act. Private funds are expected to be realized through public-private partnerships (PPP) that may include lease or franchise agreements that would provide a private company or consortium of firms with a negotiated rate of return on an infusion of private capital into the construction of one or more usable segments. Any proposed PPP agreement must be enumerated in the pre-appropriation and pre-expenditure reporting requirements specified as part of the accountability provisions included in AB 3034. Staff notes that AB 3034 would require the HSRA to complete an updated business plan, establish a peer review committee, prepare detailed funding plans prior to appropriation, and facilitate the preparation of independent financial analyses prior to expenditure of bond proceeds. The addition of these accountability provisions would result in unknown ongoing administrative costs to the HSRA. Fiscal Provisions Existing law, the General Obligation Bond Law, requires that state general obligation bond proceeds be used only for specified purposes, including issuance costs, administrative costs, and the construction or acquisition of "capital assets," which is generally defined as tangible physical property with a useful life of 15 years or more. This provision also allows up to 10 percent of bond proceeds to be used for capital assets with a useful life of 10 to 15 years. Equipment purchased with bond proceeds must have a useful life of 2 years or more. AB 3034 would update the standard language in the fiscal provisions pertaining to the actual issuance of the bonds. Staff notes, that while this bill generally makes the Bond Act consistent with the GOBL, AB 3034 would provide an exception to the useful life provisions of the GOBL. This could lead to expenditures for short-term purposes using bond funds that are repaid from the General Fund over a long period of time. It is unclear why this is necessary. Staff recommends an amendment to delete the exception to the useful life requirements of the GOBL. Staff notes that neither the current Bond Act nor AB 3034 specifies a cap on the use of bond proceeds for administrative purposes. Staff recommends an amendment to specify that: (1) up to 2.5 percent of bond proceeds may be used for administrative purposes; (2) the actual amount available shall be appropriated in the Annual Budget Act; and (3) the administrative cap may be adjusted in a future statute if it is in furtherance of the Bond Act. Page 4 AB 3034 (Galgiani) Summary of Proposed Amendments: Delete the proposed change to fiscal provisions that allow an exception to the useful life requirements of the General Obligation Bond Law. Cap the use of bond proceeds for administrative purposes at 2.5 percent, as specified. Several technical amendments requested by the Secretary of State relative to the ballot label provisions.