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.