BILL ANALYSIS SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: AB 3034 SENATOR ALAN LOWENTHAL, CHAIRMAN AUTHOR: gALGIANI VERSION: 6/26/08 Analysis by: Art Bauer FISCAL: YES Hearing date: July 1, 2008 URGENCY SUBJECT: High-speed rail DESCRIPTION: This bill makes several changes to the Safe, Reliable High-Speed Train Bond Act for the 21st Century (bond act) scheduled to be on the November 4, 2008 general election ballot. ANALYSIS: The Legislature inaugurated the high-speed rail program when it enacted the California High-Speed Rail Act of 1996, SB 1420 (Kopp), Chapter 796. The statute established the California High-Speed Rail Authority (HSRA) as an independent entity with nine board members, five of whom are appointed by the Governor, two by the Senate Rules Committee, and two by the Speaker of the Assembly. The enabling legislation sunsetted the HSRA on December 31, 2003. SB 796 (Costa), Chapter 696, Statutes of 2002, repealed that expiration date, making the HSRA permanent. SB 1856 (Costa), Chapter 697, Statutes of 2002, placed The Safe Reliable High-speed Train Bond Act for the 21st Century on the November 2004 ballot and authorized the sale of $9.95 billion of general obligation bonds, including $9 billion of which would be allocated for planning and construction of a high-speed rail segment between San Francisco and Los Angeles. The additional $950 million was designated for rail projects to provide connectivity with the high-speed rail system and other modes of transportation. Because of budgetary constraints first in 2004 and again in 2006, the bond measure was removed from the ballot AB 3034 (GALGIANI) Page 2 twice. AB 713 (Torrico), Chapter 44, Statutes of 2006 now scheduled for the November 2008 ballot. Existing law: 1. Identifies a high-speed rail line linking San Francisco Transbay Terminal to Los Angeles Union Station to serve as a "backbone" of a 700-mile system linking all the state's major population centers and to be fully funded before funding other corridors. 2. Identifies the corridors in which high-speed rail is to be constructed after the backbone system if fully funded as: a. Oakland-San Jose b. Sacramento-Merced c. Los Angeles-Inland Empire d. Inland Empire-San Diego e. Los Angeles-Irvine 3. Authorizes the HSRA to undertake the following: a. Conduct planning, financial, environmental, and engineering studies to support decisions related to the selection and acquisition of rights-of-way and the selection of a franchisee. b. Select a proposed franchisee, a proposed route, and proposed terminal sites. c. Prepare a detailed financing plan, including any necessary taxes, fees, or bonds to pay for the construction of the system. d. Accept grants, fees, and allocations from the state, local governments, the federal government, foreign governments, and private sources. e. Issue revenue bonds guaranteed by state or federal funds or by project revenues. f. Prepare a business plan. g. Enter into contracts for the construction and operations of the high-speed rail system, including design-build or design-build-operate contracts. 4. Authorizes bond revenues to be used for acquisitions of right-of-way, construction of tracks, bridges and related infrastructure, acquisition of trains, and other related facilities. AB 3034 (GALGIANI) Page 3 5. Prohibits bond revenue from being used to defraying operating or maintenance costs of trains and facilities. 6. Permits bond revenues to be used only for one-half of the total cost of construction of track and stations for each segment of the high-speed train system. 7. Requires the State Auditor to perform periodic audits of the HSRA's use of bond revenue for consistency with the requirements of law. 8. Authorizes $9 billion of the bond revenues to be available without reference to fiscal year for the planning and construction of a high-speed train system consistent with the Final Business Plan of June 2000. 9. Authorizes $950 million to be allocated by the California Transportation Commission (CTC) for intercity, commuter, and urban rail systems that provide connectivity to the high-speed rail system. 10. Authorizes CTC to allocate $190 million of the $950 million for state supported intercity rail services, such as the service between San Diego and Los Angeles, Sacramento and Oakland/San Jose, and Bakersfield to Oakland. 11. Authorizes CTC to allocate $760 million to commuter and urban rail systems, including light rail, heavy rail, and cable cars. The funds are to be used for connectivity with the high-speed system or for rehabilitation, modernization, or safety improvements to tracks, signals, structures, and rolling stock. 12. Requires a dollar-for-dollar match by the non-state providers of eligible services. This bill : 1. Makes a finding that if the high speed rail bond is approved, construction will begin on a high-speed rail system linking the state's population centers, including Los Angeles, Sacramento, the Bay Area, the Central Valley, the Inland Empire, Orange County, and San Diego consistent with the HSRA's certified environmental impact report of AB 3034 (GALGIANI) Page 4 November 2005. 2. Makes a finding that the bond revenues are intended to encourage contribution from the federal government and private sector, and that the entire system is completed by 2020. 3. Defines a high-speed train as a train that can travel at least 200 miles per hour where conditions permit. 4. Deletes requirement that Los Angeles/San Francisco link be fully funded before funding other corridors. 5. Defines the corridors in which high-speed rail construction may occur as: a. Sacramento-Stockton-Fresno b. San Francisco Transbay Terminal-San Jose-Fresno c. Oakland-San Jose d. Fresno-Bakersfield-Palmdale-Los Angeles Union Station e. Los Angeles Union Station-Riverside-San Diego f. Los Angeles Union Station-Anaheim-Irvine g. Altamont Corridor connecting the Central Valley to the San Francisco Bay Area 6. Deletes the requirement that the high-speed rail system be consistent with the Business Plan of 2000 and requires the system be consistent with the HSRA's certified environmental impact report of November 2005. 7. Defines a segment as a portion of a corridor that includes at least two stations. 8. Deletes the requirement that revenues in excess of maintenance, operating, and financing obligations are to be transferred to the General Fund. 9. Requires revenues from operation above those needed for operating and maintenance costs, financing obligations, and debt service shall be used for construction, expansion, improvement, replacement, and rehabilitation of the system. 10. Defines capital cost for which bond revenues may AB 3034 (GALGIANI) Page 5 be used to include acquisition of property, acquisition and construction of tracks, structures, power systems, and stations; acquisition of train equipment; mitigation of direct and indirect environmental impacts; relocation assistance; and other related capital facilities, including financing and refinancing if authorized by a subsequent statute. 11. Authorizes the Legislature to prescribe the method of using bond revenues for acquiring capital assets in a separate statute. 12. Requires bond proceeds to be appropriated in the annual Budget Act or a separate statute for planning the high-speed rail system and associated capital costs. 13. Authorizes the Legislature to establish conditions and criteria on funds appropriated for planning and capital costs. 14. Authorizes the Legislature to appropriate not more than ten percent of bond proceeds for planning, environmental, and preliminary engineering activities. 15. Limits the expenditure of bond proceeds to not more than 50 percent of the total cost of the construction of track and station cost of each corridor or "usable" segment. 16. Requires the HSRA to prepare and submit to the Legislature, no later than October 1, 2008 a business plan that discusses sources of funding, patronage, project cost, foreseeable engineering and financial risks and other related factors. 17. Establishes an eight member independent peer review committee comprised of the following members: a. Two individuals appointed by the State Treasurer with experience in the construction or operation of high speed rail in Europe, Asia, or both. b. Two individuals, appointed by the Controller, one with experience in engineering and construction of high speed rail and one with experience in project finance. c. One representative, appointed by the Director AB 3034 (GALGIANI) Page 6 of Finance, from a financial service or financial consulting firm who has not been a contractor or subcontractor to the HSRA for the previous three years. d. One representative, appointed by the Secretary of Business, Transportation and Housing, with experience in environmental planning. e. Two representatives, appointed by the Secretary of Business, Transportation and Housing, from agencies providing intercity or commuter passenger train service in the state. 18. Requires the independent peer review committee to review and issue an analysis of the appropriateness and accuracy of the HSRA's assumptions underlying its planning, engineering, and financing plan and its viability for a project in a corridor for which it is seeking bond funds. 19. Requires the HSRA, 90 days prior to presenting a request to the Governor and Legislature for an appropriation of bond proceeds, to submit to the Director of Finance, the peer review committee, the Senate Transportation and Housing Committee, Assembly Transportation Committee and the legislative fiscal committees a detailed funding plan for a corridor or a usable segment. 20. Requires the HSRA to include in the funding plan: a. An Identification of the corridor in which the HSRA will expend the funds. b. A description of the expected terms and conditions associated with any lease agreement or franchise agreement proposed to be entered into by the HSRA for the construction or operation of passenger train services in the corridor or usable segment. c. An estimated full cost of constructing the proposed service, an estimate of construction cost escalation, and amount of contingency reserves. d. An identification of all funds to be invested in the project from public and private sources and the anticipated time of receipt of funds. e. An identification of forecasted ridership and operating revenue. f. An identification of all known or foreseeable AB 3034 (GALGIANI) Page 7 risks during the construction and operations of the service and the strategies for managing the risks. g. A certification that corridor or segment will be suitable and ready for high-speed rail service. h. A certification that one or more passenger service providers can begin using the tracks and stations. i. A certification that the planned service will not require a local, state, or federal operating subsidy. 21. Requires the peer review committee to report its findings and conclusion to the Legislature no later than 60 days after receiving the plans. 22. Requires the HSRA prior to expending bond proceeds appropriated by the Legislature for the construction and acquisition of equipment and property to submit concurrently to the Director of Finance and the Chair of the Joint Legislative Budget Committee the following: a. A detailed funding plan for the corridor that indentifies the full estimated cost of the project, the sources of public and private revenues and their assumed time of availability, and a project ridership and operating revenue report; an estimate of construction cost inflations and the amount of contingency reserve; a report on any material changes that have occurred since the initial report to the Legislature, Director of Finance, and the peer review committee; and a description of any contract entered into with any party for the construction and operation of the proposed service. b. A report prepared by an independent financial services indicating that when completed the segment would be ready for high-speed service; one or more service providers can use the facilities; the service provided by the HSRA will not require an operating subsidy; and assessment of risk and risk mitigation strategies being proposed. The Director of Finance must review the plan described in (b) within 60 days and if the director finds that the plan is "likely to be successfully implemented," the HSRA may AB 3034 (GALGIANI) Page 8 proceed with the project. The Joint Legislative Audit Committee may communicate its findings to the director during the 60 day period. 23. Requires HSRA to give priority to those corridors or segments that are expected to require the least amount of bond revenues as a percentage of total cost of construction. Other criteria include projected ridership and revenue, the need to test and certify trains operating at speeds of 220 miles per hour, and the possibility that the corridor segments may be used by other passenger rail services. 24. Authorizes the HSRA to use up to 10 percent of the bond proceeds, ($900 million), for planning, preliminary engineering, and environmental studies. 25. Authorizes the HSRA to use up 5 percent of the bond proceeds ($450 million), for acquisition of property, right of way and its improvement for the preservation of high-speed rail uses third party improvements to ensure compatibility with the high-speed system, mitigation of incompatible improvements, mitigation of any direct or indirect environmental impacts, and relocation assistance for property owners and occupants. 26. Establishes that travel times between the points shall not exceed: a. San Francisco-Los Angeles Union Station: two hours, 40 minutes. b. Oakland-Los Angeles Union Station: two hours, 40 minutes. c. San Francisco-San Jose: 30 minutes. d. San Jose-Los Angeles: two hours, 10 minutes. e. San Diego-Los Angeles: one hour, 20 minutes. f. Inland Empire-Los Angeles: 30 minutes. g. Sacramento-Los Angeles: two hours, 20 minutes. h. Sacramento-San Jose: one hour, 12 minutes. 27. Mandates that spacing between trains, (headways), shall be five minutes or less. AB 3034 (GALGIANI) Page 9 28. Mandates that the number of stations on all corridors shall not exceed 24 and the stations shall be located with good access to local mass transit services or other modes of transportation. 29. Mandates that no station shall be constructed between Merced and Gilroy. 30. Mandates that the alignment of high-speed trains shall follow transportation and utility corridors to extent they are financial feasible. 31. Mandates that the high-speed system shall be planned and designed to minimize urban sprawl and impact on the natural environment, including mitigating impacts on the movement of wildlife. 32. Designates the bond act as Proposition 1. 33. Specifies both the ballot label and title and summary of Proposition 1. COMMENTS: 1. Purpose . This bill revises several provisions of the general bond obligation act Safe, Reliable High-Speed Passenger Train Bond Act for the 21st Century, which is on the November 4, 2008 general election ballot. This bill was original scheduled for the November 2004 ballot. Since the measure was enacted in 2002, the HSRA has refined its analysis of the need for high-speed rail in California, has completed a program environmental impact report on the proposed system, and has completed other activities related to system development. It is for these reasons that the Authority believes it is appropriate to revise the bond act. 2. San Francisco-Los Angeles corridor no longer the keystone of high-speed rail system . The bond act requires that the San Francisco-Los Angeles system must be fully funded before funds can be committed to other corridors. This bill deletes the San Francisco-Los Angeles Corridor as the keystone corridor. In testimony at this committee's oversight hearings six months ago, there was no indication that San Francisco-Los Angeles Corridor, which was to go through San Jose, Gilroy, the Merced area, Fresno, AB 3034 (GALGIANI) Page 10 Bakersfield, Palmdale/Lancaster on into Los Angeles was going to lose its signature status. The reason for the change, according to the HSRA's documents, is that the high value business trips between Los Angeles and San Francisco would generate 91 percent of the system's revenue, but carry only 16 million of the 94 million trips forecasted for 2020. At the committee's oversight hearing, it was understood that the San Francisco-Los Angeles corridor would be built out incrementally, segment by segment, but in the end there would be a San Francisco-Los Angeles route. Having removed its commitment to the only corridor that links the state's two population centers, the HSRA has diminished the statewide benefit. This bill's lack of clarity as to exactly how the collection of high-speed rail corridors will emerge as a statewide system leaves the impression that the expenditure of the bond revenues might result in the construction of corridor segments without achieving linkage between the state's largest regions. Six of the seven corridors are defined by pairs of cities comprising the corridors' end points. The seventh corridor, added by this bill, The Altamont Corridor connecting the Central Valley to the San Francisco Bay Area, is vague. The committee may wish to amend the bill by renaming the corridor, as the Merced to Stockton to Oakland/San Francisco via the Altamont Corridor. 3. Oversight of the HSRA is needed . One of the important findings of the committee's oversight hearings is that there is a need for greater oversight of the HSRA's activities by both the administration and the Legislature. This bill addresses oversight in three ways: creation of a peer review committee; a pre-appropriation review; and a pre-expenditure review. Each is discussed below. a. Creation of a peer review committee . This bill creates an eight member peer review committee to review and analyze the planning, engineering, and financial assumptions underlying a proposed project to be funded with bond proceeds and report to the Legislature and the Department of Finance its findings. Two individuals are appointed by the Treasurer and two are appointed by the Controller both of whom must have in the construction and operation of high-speed rail. One appointment is made by the Director of Finance with experience in project AB 3034 (GALGIANI) Page 11 financing. The Secretary of Business, Transportation & Housing appoints an individual experienced in environmental planning. The Secretary also appoints two representatives from providing commuter rail and intercity rail services in the state. On page 4 of the bill where the peer review committee is authorized, the committee may wish to authorize the Senate Rules Committee and the chair of the minority caucus in the Senate to each appoint on individual with technical, financial, and environmental expertise to peer review committee. Similarly, the committee may wish to authorize the Speaker of the Assembly and the chair of the minority caucus in the Assembly to each appoint on individual with technical, financial, and environmental expertise to the peer review committee. An additional amendment may be appropriate requiring the HSRA to provide the peer review all the information that it request. b. Review of a request from the HSRA for an appropriation of bond proceeds . Ninety days before the HSRA submits a request for an appropriation of bond proceeds, the HSRA must submit a financing plan for the project it intends to fund to the peer review committee, the Director of Finance, the policy committees, and the fiscal committees of the Senate and the Assembly. This plan is a detailed plan which includes the identification of revenues, construction and operating risks, sources of non-state funds, the expected terms and conditions of the franchise agreement associated with the project, and other related information. Within 60 days of receiving the information, the peer review committee must report its findings to the Legislature. With this information the Legislature will be in a position to hold public hearings on the merits of the HSRA's proposed investment before the budget committees begin their consideration of the Governor's budget. Depending on the outcome of the Department of Finance's review, the request may be placed in the Governor's budget. The Legislature and the administration will have the same period of time to review the proposed project to be funded by the project. AB 3034 (GALGIANI) Page 12 c. Review of the HSRA's request to expend bond proceeds . Prior to expending an appropriation to begin construction of a project the HSRA must report to the Director of Finance and the chair of the Joint Legislative Budget Committee (JLBC) a detailed funding plan and a statement of any material changes from the information provided in the submittal associated with the request for an appropriation, plus a description of the contract that the HSRA is proposing to enter with a contractor or consortium to construct, maintain, and operate high-speed rail service. Department of Finance is require to commission a report from an independent financial services warranting that the service would not require an operating subsidy and an assessment of the risks and risk management process established by the HSRA. The JLBC may submit its comments to the Department of Finance during the 60 day period. 4. HSRA may use up to 15 percent of bond proceeds for preliminary activities . This bill authorizes the HSRA to use 10 percent of the bond proceeds, which is $900 million, for planning and preliminary engineering. It is the intent of the HSRA to develop plans in one or more corridors to about 30 percent completion. The HSRA would then solicit proposals from firms seeking to design, build, operate, and maintain a high-speed line for a specified period of time. The HSRA is also seeking to use 5 percent of the bond proceeds, which is $450 million, for the acquisition of right-of-way and other property that may be under the threat of development. Committee staff is unaware of any written justification explaining how this funding need was reached. In light of increasing construction costs, setting aside $1.350 billion for essentially "soft costs" may be viewed as excessive. The committee may wish to amend merge paragraphs (g) and (h) on page 12 into a single paragraph and limit the total amount of bond proceeds for engineering and property acquisition to 10 percent. Page 10, line 7 is redundant language and should be removed as it is repeated on page 12. 5. Limit on the state's share of bond proceeds committed to a project . This bill limits the state's share to 50 percent AB 3034 (GALGIANI) Page 13 of track and station costs. In fact, the cost of these elements of the system may be the least expensive of the system. The cost of bridges, viaducts, tunnels, rolling stock, and the electrification system may likely cost more on a per unit basis. There is no cap on the state's share of these costs. To be sure, among the criteria the HSRA is to use when selecting between corridors is that the corridor requiring the least amount of bond funds as a percentage of total construction cost would get priority. Because there is no documentation that describes the likely financing scenarios and construction strategies, the Legislature is at a disadvantage in assessing what it might expect the state commitment to the capital cost may be. The committee may wish to consider an amendment that would mandate that "the state's share of the total cost of a project may not exceed 50 percent of the project's cost." Although the Legislature would know that there is a cap on total project expenditures of bond proceeds, the HSRA could negotiate an arrangement with contractors where some cost elements might be 100 percent state revenue and the state would bear no cost responsibility for other elements. This does not limit the HSRA's flexibility, but it clearly puts all parties on notice that there are limits as to what the state can commit to the project. 6. Information regarding the financing of the project, its risks, and the sequencing of project development lacking . The high-speed rail project is being proposed to be developed and partially financed as public private partnership. However, it is difficult to understand the scope of the HSRA's intention in regard to funding, the sequencing of corridor development, and the many risks associated with the project. This is important because the HSRA has removed the San Francisco-Los Angeles link as the central feature of the system. The last comprehensive document was the published in June 2000, the High-Speed Rail System Business Plan . Until this bill was introduced, the expenditure of bond act revenues was to be consistent with the Business Plan. This bill deletes that requirement and now requires that the expenditures be consistent with the certified environmental impact report of November 2005. An environmental document is not a financial analysis that discusses the funding strategy for the project, assesses the likelihood of federal matching funds and explains the requirements of a public-private-partnership (PPP). At the AB 3034 (GALGIANI) Page 14 committee's January oversight hearing, the chair asked for the HSRA to prepare an updated business plan. `The HSRA has now agreed to submit the plan by October 1, 2008. This bill defines the elements of the business plan that the HSRA is to provide. If this analysis is done correctly, it will be the first updated narrative discussing the financing of the HSRA's program since 2000. 7. Public-Private-Partnership (PPP) will be critical financial component . The PPP concept is both a project delivery and project finance strategy. To date, the PPP bills that have been before the committee have related to highway construction. The usual revenue source to finance project and provide a rate of return to investors have been tolls. This project will be very different. State and federal funds will make up two-third of the construction revenue. Although Congress has yet to enact a federal high-speed funding program, it does appear it may do so this session. The final leg of the funding stool is private funds. It is unclear exactly what will be required of the state to attract private funding. For example, will the negotiated rate of return to the private investors be derived from the fare revenues or will the state have to provide a secondary revenue source to guarantee the rate of return? There may be other requirements financial requirements that the state will have to negotiate to attract private participation. The updated business plan required by this bill should include a comprehensive discussion of this and related issues. 8. Technical amendments . The words segment and useable segment are used interchangeably. It is recommended that "useable segment" be used throughout the bill in place of segment. A second amendment on Page 4, line 12, subdivision (d) should read subdivision (c). 9. Opposition . The Professional in California Government (PECG) is opposed to this bill. PECG is seeking amendments that "would assign essential public-interest functions-preparation of environmental documents, right-of-way acquisition, construction inspection and materials testing, for example-to the California Department of Transportation on the high-speed rail project." To address its concerns, PECG has suggested the following amendment to the Authority's enabling statute: AB 3034 (GALGIANI) Page 15 (a) Notwithstanding Section185036, the authority shall utilize the department's services for project design and engineering, including construction inspection. The authority and the department shall enter into agreements, upon those terms as they may agree to in writing, for the department to provide design and engineering services on a project for the authority. The agreements shall provide for payment in advance for all design and engineering services provided by the department. (b) Any project utilizing the department's services shall be included in the department's capital outlay support program for workload purposes. (c) For the purposes of this section, the following terms have the following meaning: (1) Project design and engineering, including construction inspection" means preliminary engineering, pre-bid services, right-of-way acquisition, environmental documents, construction inspection including surveying and materials testing, and quality control inspection including highway and utility relocation and grade separations shall be performed by the department consistent with current practices for state highway projects. Committee staff notes that this language may be unconstitutional as it mandates that the HSRA enter into an agreement with Caltrans for services. It is unclear what the response of the private sector market for a PPP project, if the firms are unable to use their engineers for inspection and materials testing. It is also questionable if Caltrans management would want to do inspection and materials testing on a project where there are elements, such as the rail design, for which its engineers do not have the design experience. More permissive language regarding the HSRA utilizing Caltrans services may avoid the constitutional issues. AB 3034 (GALGIANI) Page 16 Existing law requires all state contracts for public works to be under the charge and direct control of the Department of Transportation (Caltrans), unless there is a specific exemption. This bill provides authority to the Authority (CHSRA) to let contracts for constructing a high-speed rail project. Assembly Votes: Floor: 60-3 Appr: 12-0 Trans: 10-0 POSITIONS: (Communicated to the Committee before noon on Wednesday, June 25, 2008) SUPPORT: California High Speed Rail Authority (Sponsor) Antelope Valley Board of Trade Association for California High Speed Trains and its 90 firms, individuals and associations California State Association of Counties CALPIRG CELSOC City of Elk Grove City of Hanford City of Lemoore City of Palmdale City of Sacramento City of San Jose County of Kern County of Los Angeles County of Merced County of Sacramento County of Yolo Merced County Association of Governments Orange County Transportation Authority Rail Passenger Association of California Sacramento Area Council of Governments Sacramento Metropolitan Air Quality Management District San Diego Association of Governments San Francisco Chamber of Commerce San Francisco Democratic Party San Francisco International Airport San Joaquin Valley Regional Planning Agencies AB 3034 (GALGIANI) Page 17 Directors' Committee San Mateo County Economic Development Association Santa Clara Valley Transportation Authority Silicon Valley Leadership Group Tri-Valley Regional Rail Policy Working Group University of California, Merced OPPOSED: Alameda County Congestion Management Association California Rail Foundation Professional Engineers in California Government Service Employees International Union (SEIU) Transportation Solutions Defense and Education Fund