BILL ANALYSIS Ó SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: SB 325 SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: rubio VERSION: 4/4/11 Analysis by: Art Bauer FISCAL: yes Hearing date: April 12, 2011 SUBJECT: Railroads DESCRIPTION: This bill creates the Central California Railroad Authority (CCRA) to ensure the continuation of short line rail service in the San Joaquin Valley for shippers and receivers and to provide passenger rail service. ANALYSIS: In June 2008, the Surface Transportation Board (STB), the federal agency that oversees the United States' railroad industry, authorized the abandonment of 30.6 miles of service operated by the San Joaquin Valley Railroad (SJVRR) between Strathmore and Jovista in Tulare County. In the same decision, the STB denied a request to abandon the rail line from Strathmore to near Exeter. The STB documents show that the SJVRR sought authority to abandon the line because "there is insufficient traffic available to justify the cost of maintaining and operating the line, and that investing capital in the line would not be a prudent use of carrier resources." During the abandonment process, Tulare County sought to acquire the section being abandoned and asked the STB to set terms and conditions for the sale of the right-of-way. The STB set the purchase price at $3.3 million. Tulare County declined to purchase the line at that price. Matters related to railroad operations, corporate structure, ownership, service provision, and other aspects of the railroad business are preempted by the federal government. In fact, states and local governments cannot exercise the right of eminent domain to obtain railroad property and are unable to regulate shipping rates and other aspects of railroad operations. SB 325 (RUBIO) Page 2 This bill : 1. Makes findings and declarations that the counties of Fresno, Merced, Kern, Kings, and Tulare should continue receiving short line rail service should one or more short line operators discontinue service or abandon the rail facilities. Further, it declares the intent of the Legislature that a multicounty joint powers agencies formed by the designated counties' regional transportation planning agency administer the CCRA. Finally, it finds that the CCRA should also operate passenger rail service. 2. Defines the CCRA as a local agency for the purpose of receiving disaster assistance. 3. Defines the area of jurisdiction of the CRRA as the counties of Fresno, Merced, Kern, Kings, and Tulare and authorizes the counties of Madera, San Joaquin, and Stanislaus to join the CCRA. 4. Provides that the CCRA be governed by a board consisting of one person appointed by each of the regional transportation planning agencies of the counties of Fresno, Merced, Kern, Kings, and Tulare. Should the board be enlarged to include other counties, the regional transportation planning agencies of the counties shall each appoint a member. Board members shall serve two-year terms. 5. Exempts CCRA board members from existing law prohibiting a local official from simultaneously holding incompatible offices. 6. Authorizes the CCRA to exercise the following powers: a. Acquire, own, operate, and lease real estate and obtain property through the exercise of eminent domain. b. Acquire, own, lease, and operate railroad lines and equipment, track, rights-of-way, and facilities. c. Issue revenue bonds under the terms and conditions of the Revenue Bond Act of 1941 without an election within the counties comprising the area of SB 325 (RUBIO) Page 3 jurisdiction. d. Accept grants or loans from state or federal agencies. e. Operate railroads, including railroads outside its area of jurisdiction, to connect its lines with the lines of another railroad corporation. f. Select a public or private entity as a franchisee to acquire or operate a rail transportation system in CCRA's area of jurisdiction. g. Prepare a plan for the acquisition and operation of any railroad line in the area of the member agencies to further the purposes of the Act at no expense to the state. h. Conduct engineering and related studies related to the acquisition of a railroadline. i Evaluate alternative plans from firms to acquire, finance, and operate a railroadsystem consistent with the purposes of the act. 7. Exempts the state from any liability for contracts, debts, or other obligations of the CCRA. COMMENTS: 1. Purpose of the bill . This bill creates a public authority that may provide freight, and potentially passenger, rail service should the STB authorize the abandonment or discontinuance of service on an existing short line railroad operating in the counties of Fresno, Merced, Kern, Kings, and Tulare. According to the author, southern San Joaquin Valley communities that rely on short line rail service stand to lose access to shipping services unless an alternative provider is established. Further, the community representatives believe that without service SB 325 (RUBIO) Page 4 they are less attractive to potential commercial investors. The Tulare County Association of Governments commissioned a market analysis for rail service in the county. The analysis' conclusion was that there are customers desiring service and that the continuation of service would enhance the attractiveness of the county for economic development. A graduate school project by a group of students from the business school at California State University Fresno conducted an analysis of an abandoned segment and concluded there was a potential market for continuing freight service. 2. Background . With the deregulation of the American railroad industry in 1980, mergers, acquisitions, and bankruptcies have reformed the railroad industry. Large railroads, like the Union Pacific (UP) and the Burlington Northern Santa Fe (BNSF), both of whom operate in the San Joaquin Valley, are allowed to discontinue unprofitable branch line service which link customers to their trunk lines. The STB, the successor to the Interstate Commerce Commission, which oversees the surface transportation industry, may require that service be continued to the branch line customers. Short line railroads provide the branch line service and hand-off the freight cars to the major railroads. A short line either acquires the large railroad's branch line property outright or, more frequently, enters into a long-term lease agreement for the facilities. Short lines can afford to provide service in the smaller markets because they have a lower cost structure than the large railroads. RailAmerica, operating as the SJVRR, is among the short line operators providing service in the San Joaquin Valley. RailAmerica, a publicly traded company with a market capitalization of $934 million, operates forty railroads in every region of the county. In California, the company operates five railroads, including the SJVRR. The term short line is a misnomer, since SJVRR operates over 477 miles from the Bakersfield area through Fresno and west to Firebaugh and Oxalis. 3. Local agencies' experience with short line rail operations . Generally, local agencies' experiences with short line railroads have been good. For example, the agency that operates the San Diego Trolley acquired a 114-mile subsidiary of the Southern Pacific Railroad in the late 1970's to use a portion of the right-of-way for SB 325 (RUBIO) Page 5 trolley service. As a condition of the acquisition, the public agency had to ensure federal authorities that freight service would continue. To satisfy this condition, the trolley operator contracted with a short line rail operator. Another short line operator provides a variety of services associated with the movement of rail freight for the Ports of Long Beach and Los Angeles. Typically, the agencies contracting for the short line services have not tried to operate the service themselves, but have done so through a contractor. In comparison, the North Coast Railroad Authority, established by state legislation in 1990 to restore railroad service from the Bay Area to Eureka, does not have an independent source of public funds and has not contracted with a short line railroad to plan service. Its source of operating revenue is supposed to be shippers and receivers along the line. Since its formation, the authority has received over $70 million from the state and from federal capital grants for rail improvements, but it has been unable to meet its goals. State and federal auditors have examined the authority since 1993 for unacceptable business practices, including an unacceptable internal accounting system, weak procurement and management practices, an inadequate payroll system, and an inadequate inventory control systems. The required business practices, the cost of restoring the railroad, including repairing a 100-mile washed out section in the Eel River Canyon, and restoring collapsed tunnels have overwhelmed the authority. To be sure, the authority may be in an unusual situation because of geography, but its experiences underscore the fact that successfully operating a commercial railroad is challenging. 4. Central California Rail Authority has unusual organizational structure . CCRA, as created by this bill, includes several unusual futures. To begin with, the CCRA is a special district, but it is not activated until an abandonment or discontinuance of service on a rail line in the CCRA's area of jurisdiction occurs. According to the statement of findings and declarations, it is the intent of the Legislature that the CCRA operate as a joint powers agency comprised of the regional transportation planning agencies of its member counties. Statements of intent are not operative statutory language, and establishing the management of an agency through the creation of a joint powers agreement is not the typical practice for SB 325 (RUBIO) Page 6 establishing an agency. Moreover, a joint powers agreement is an agreement between public agencies to collaboratively provide a service that they have the authority to provide individually. Regional transportation planning agencies in the San Joaquin Valley do not have the authority to operate railroads. Therefore, the committee may wish to consider two amendments: a. Remove the intent language regarding the management of the CCRA by a joint powers agency from the statement of findings and declarations and include it in the operative language of the bill. b. Authorize the regional transportation agencies to operate rail service within CCRA area of jurisdiction only for the purposes of this bill. 5. The membership of CCRA's governing board is unclear . The bill requires the five regional transportation planning agencies to each appoint a member to the board of directors. It is unclear if the appointee is a sitting member of the regional agency, a member of the public, or an elected official who is not on the regional agency's board. In addition, the appointees are not subject to incompatible office statute. This allows the board members to serve without the possibility of having conflicts of interest between the interest of the agency on which they sit and the CCRA board. The committee may wish to amend the bill to require that the appointees be sitting members of the regional agencies' governing boards. 6. Powers of the CCRA . Among the powers of the CCRA is the authority to acquire property and to operate railroads outside of its area of jurisdiction. It is difficult to understand why CRRA needs to acquire railroad property outside its area of jurisdiction. Similarly, it is difficult to understand the reason for the CCRA to operate trains outside of its jurisdiction. Because a short line network is not required to be contiguous, a short line may have trackage rights on either the UP or BNSF in order to connect with a noncontiguous segment of it network. The committee may wish to consider the following amendments: a. Page 4 line 31, after "domain" add "within its area of jurisdiction". This limits property acquisition to CCRA's area of jurisdiction. b. Page 4 line 34, after "corporation" add "provided the service begins within CCRA's area of jurisdiction". This prevents the CCRA from operating SB 325 (RUBIO) Page 7 an orphan service outside its service area. 1. Funding for the CRRA . Although this bill permits the CRRA to issue revenue bonds, it provides no funding for debt service. In addition, no funding is made available for the day-to-day operations of the CRRA. It is unclear how this agency will carry out its responsibilities. Funding for transportation is scarce in California. There are two state authorized funding sources for local mass transportation and intercity passenger rail service. The Transportation Development of 1971 provides that a percent of each county's local sales tax be set aside for public transportation purpose. These funds support existing transit services throughout California. A second source of funding is the state Public Transit Account, which is funded with sales tax revenue from the sale of diesel fuel. A portion of this revenue is distributed to local agencies by formula for public transit purposes and to the Department of Transportation (Caltrans) for the support of intercity passenger rail services provided by Amtrak under contract to Caltrans. The last source of funding is voter-approved local transportation sales taxes. Agencies that have access to this source of revenue may allocate funds to the CRRA, provided the ordinance approved by the voters governing the use of revenue does not preclude such an allocation. In light of the fiscal uncertainty of the CRRA and the scarce resources for public transportation, the committee may wish to consider the following amendments: a. The signatories to the joint powers agreement activating the CRRA shall be liable for contracts, debts, or obligations of the CRRA. b. The Transportation Development Act revenues shall not be used to fund the administration, planning, and services provide by the CRRA. c. The CRRA shall not be entitled for funding from the Public Transit Account. 1. Should the CRRA operate passenger rail service ? White the bill authorizes the CRRA to provide passenger rail services, no local plan exists for passenger rail service in CRRA's area of jurisdiction. There have been discussions about developing rail transit to serve future SB 325 (RUBIO) Page 8 high-speed rail stations in the San Joaquin Valley, although it is unclear when the high-speed rail service will be operational. The segment the High Speed Rail Authority proposes to construct first in the Central Valley will not offer service, until a longer segment is completed. Based on information received from the author, it is clear that the purpose of the bill is to establish an organizational framework to assume the operation of discontinued or abandon short line freight railroad service. Including passenger service among the CCRA's responsibilities at this time may diminish the agency's focus on its principle mission of ensuring the continuation of freight service. In addition, there are several financial and related issues that would have to be defined, analyzed, and resolved before proceeding with passenger service. The committee may wish to remove the authorization of authority to operate passenger rail service. POSITIONS: (Communicated to the Committee before noon on Wednesday, April 6, 2011) SUPPORT: Kern Council of Governments Fresno Council of Governments Merced County Association of Governments Madera County Transportation Commission Tulare County Association of Governments City of Blythe City of Lemoore City of Lindsay City of Parlier City of San Joaquin City of Taft City of Wasco County of Kern County of Tulare Tricor Refining, LLC Central California Rail Shippers& shippers Association Richard Best Transfer, Inc. Superior Soil Supplements Golden Empire Transit District Tulare Frozen Foods, LLC San Joaquin Refining Co., Inc. SB 325 (RUBIO) Page 9 OPPOSED: None received