Against California High Speed Rail by Mark R. Powell

New Plan Says Phase 1 of California High Speed Rail Could Cost $117.6 Billion…..Plus Finance Charges of another $94 Billion

Rail Authority suggests simply charging it all to the American Debt card
California’s High-Speed Rail Authority (the Authority) rolled out their 2011 Business Plan first to the press and then later put the entire plan on-line.  The Authority’s practice of dribbling out selective information to the press resulted in banner headlines across the state that read, “High-Speed Rail Could Cost $98.5 Billion”.  A thorough reading of the Authority’s plan reveals that $98.5  Billion is merely the low end of a range of cost estimates that go up to $117.6 Billion  depending on the route and the construction features. [Note 1]  And these costs totally ignore the interest over the next 22 years on the borrowed money required to build Phase 1 (Los Angeles to San Francisco) of a proposed statewide system.  Fortunately, the Business Plan details the timing of expenditures out to 2033, the year Phase 1 is scheduled for completion, making it possible to calculate the accrued interest charges and the American Debt card balance in 2042.

Business Plan Exhibits 8-30 and 8-33 [Note 2] show cash flow by year starting with construction of the Initial Construction Segment in the Central Valley in 2013 and ending with completion of Phase 1 in 2033.  As might be expected, the Authority provides this level of detail only for their low end cost of $98 Billion.  However, this cash flow can easily be scaled up to equal the high end of the range of projected costs, $117.6 Billion.  The Business Plan assumes a constant inflation rate of 3%/year.  This analysis uses an interest rate of 4%/year to net the debt holders a real rate of return of 1%/year.  The balance on the American Debt card in 2033 is then readily calculated by Excel to be $155 Billion. 

Proponents of high-speed rail might point out that the analysis above ignores the operating profits that begin in 2022 once the Initial Operating Section (IOS) is complete (i.e. IOS North – Central Valley to San Jose or IOS South – Central Valley to San Fernando).  True, the Business Plan does speculate that either of these segments would generate profits.[Note 3]  However, once profits are “proven” in 2022, the Business Plan calls for the stream of future profits beginning in the year 2023 to be sold to private investors in exchange for $11 Billion in private funding used in years 2023-2026 to help complete Phase 1. [Note 4] 

The Business Plan is vague on how many years of future profits it would sell in exchange for a cash infusion of $11 Billion.  The Business Plan does, however, detail projected profits through 2060 [Note 5] and it uses an 11% rate of return to entice private investment. [Note 6]  The private investment of $11 Billion is spread out over 4 years starting in 2023 [Note 7] and if discounted at 11%/year it has a value of $8.9 Billion on January 1, 2023.  The projected profit stream shown in Exhibit 8-13 [Note 8] for years 2023 through 2041 discounted back to January 1, 2023 at 11%/year also has a value of 8.9 Billion.  And so it appears the Authority is suggesting the first 19 years of projected profits from high-speed rail be sold to private investors in exchange for $11 Billion in cash to help finance Phase 1.

As stated previously, the balance on our American Debt card will be $155 Billion in 2033.  But with no profits accruing to the government until 2042 to make payments on the American Debt card, its balance will continue to rise.  In January 2042, the first month where any profits will belong to the government, holder of the American Debt card, its debt balance will be $212 Billion and the annual interest charge will be $8.2 Billion.

In fairness to the Authority, the American Debt card balance would only be $177 Billion in January 2042 if their low cost estimate is used in the calculation.  Likewise, in fairness to the American taxpayer, were they to receive the same 11% rate of return needed to entice private investors into a risky investment in high speed rail, then the American Debt card balance would exceed three-quarters of a trillion dollars on January 1, 2042.

For those Californian’s who live along proposed routes for high-speed rail linking up with Sacramento and San Diego, the Business Plan calls for building those lines with the profits from Phase 1. [Note 9]  Given that profits are not planned to be available until 2042 and high-speed rail seems to require 20-year timeframes for construction, you can expect the fast train to bankruptcy to reach your city by 2062…the 100th anniversary of high-speed train technology.  You may even live to see the train arrive if you are now under 30 years of age and you live to be 80.

Statements made in this article are supported by footnotes shown below.  Original source documents can be obtained by clicking on the highlighted notes imbedded in the article.

Footnotes:

Note 1  California High-Speed Rail Program Draft 2012 Business Plan, November 1, 2011; section 8, page 2, bottom paragraph
http://www.cahighspeedrail.ca.gov/assets/0/152/302/c7912c84-0180-4ded-b27e-d8e6aab2a9a1.pdf

Note 2  California High-Speed Rail Program Draft 2012 Business Plan, November 1, 2011; section 8, pages 33 and 37,  Cash Flow Exhibits for IOS-South and Completion of Phase 1
http://www.cahighspeedrail.ca.gov/assets/0/152/302/c7912c84-0180-4ded-b27e-d8e6aab2a9a1.pdf

Note 3  California High-Speed Rail Program Draft 2012 Business Plan, November 1, 2011; section 8, pages 20,  Exhibit 8-13 Net Operating Profit
http://www.cahighspeedrail.ca.gov/assets/0/152/302/c7912c84-0180-4ded-b27e-d8e6aab2a9a1.pdf

Note 4  California High-Speed Rail Program Draft 2012 Business Plan, November 1, 2011; section 8, page 33,  Cash Flow Exhibit for IOS-South
http://www.cahighspeedrail.ca.gov/assets/0/152/302/c7912c84-0180-4ded-b27e-d8e6aab2a9a1.pdf

Note 5  California High-Speed Rail Program Draft 2012 Business Plan, November 1, 2011; section 8, pages 20,  Exhibit 8-13 Net Operating Profit
http://www.cahighspeedrail.ca.gov/assets/0/152/302/c7912c84-0180-4ded-b27e-d8e6aab2a9a1.pdf

Note 6  California High-Speed Rail Program Draft 2012 Business Plan, November 1, 2011; section 8, page 32,  Exhibit 8-28 Discounted Cash Flows for Medium Revenue Scenario
http://www.cahighspeedrail.ca.gov/assets/0/152/302/c7912c84-0180-4ded-b27e-d8e6aab2a9a1.pdf

Note 7  California High-Speed Rail Program Draft 2012 Business Plan, November 1, 2011; section 8, page 33,  Cash Flow Exhibit for IOS-South; line item titled “Private Capital”
http://www.cahighspeedrail.ca.gov/assets/0/152/302/c7912c84-0180-4ded-b27e-d8e6aab2a9a1.pdf

Note 8  California High-Speed Rail Program Draft 2012 Business Plan, November 1, 2011; section 8, pages 20,  Exhibit 8-13 Net Operating Profit
http://www.cahighspeedrail.ca.gov/assets/0/152/302/c7912c84-0180-4ded-b27e-d8e6aab2a9a1.pdf

Note 9  California High-Speed Rail Program Draft 2012 Business Plan, November 1, 2011; section 5, page 14,  bottom paragraph, Future Value From Ridership Revenue
http://www.cahighspeedrail.ca.gov/assets/0/152/302/c7912c84-0180-4ded-b27e-d8e6aab2a9a1.pdf

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