The Safe, Reliable High-Speed Passenger Train Bond Act for the 21st Century, approved by the voters as Proposition 1A at the November 4, 2008, general election, provides for the issuance of $9.95 billion in general obligation bonds for high-speed rail and related purposes. The California High-Speed Rail Act creates the High-Speed Rail Authority to develop and implement a high-speed train system in the state, with specified powers and duties. Existing law requires the authority, no later than 90 days before the submittal to the Legislature and the Governor of the initial request for appropriation of proceeds of specified bonds authorized for any eligible capital costs on each corridor, or usable segment of a corridor, to approve and submit to the Director of Finance, a specified independent peer review group, and the transportation policy committees and fiscal committees of the Legislature, a detailed funding plan for that corridor or a usable segment of that corridor, as provided. defines Phase 1 of the high-speed train system as the corridor of the high-speed train system between San Francisco Transbay Terminal and Los Angeles Union Station and Anaheim, and requires the authority to include information on Phase 1 as part of a biennial business plan, as provided.

This bill would require the High-Speed Rail Authority, or its successor, to approve and submit an independent third-party analysis, as contracted by the California State Auditor, of the high-speed train system to the Director of Finance, the independent peer review group, and the policy committees with jurisdiction over transportation matters and the fiscal committees of both houses of the Legislature. The bill would require the third-party analysis to include a determination of the economic and financial justification for the high-speed train system. inspector general to conduct an independent review of the economic and financial justification for the high-speed rail project, including a review and assessment of a specified benefit-cost analysis submitted by the High-Speed Rail Authority to the United States Department of Transportation. The bill would also require the inspector general to conduct an independent review of the ability of the high-speed rail project to operate without subsidy before the Legislature recommits to the full Phase 1 system. The bill would require the inspector general to consult with industry experts for these reviews, as provided.

Existing law creates the Public Employees Retirement System, which is administered by the Board of Administration of the Public Employees Retirement System. Existing law creates the Department of Human Resources and prescribes its duties, which include administering and enforcing the laws pertaining to personnel. Existing law creates the State Personnel Board and requires it to prescribe rules consistent with a merit-based civil service system, including those relating to disciplinary actions, consistent with the boards authority under the California Constitution. Existing law creates the Office of the Inspector General, which provides oversight of internal affairs investigations and the disciplinary process of the Department of Corrections and Rehabilitation.

This bill would create the Office of the Inspector General for the Public Employees Retirement System (Inspector General), which would not be a subdivision of another governmental entity. The bill would require the Governor to appoint the Inspector General, subject to Senate confirmation, to a six-year term and would prohibit removal except for good cause. The bill would prescribe certain powers of the Inspector General, who would be a department head, and would collocate Inspector General staff within the offices of the Public Employees Retirement System (CalPERS), as specified. The books, writings, and records of the Inspector General would be public records, except as specified.

The bill would require the Inspector General to be responsible for the oversight of internal investigations and the disciplinary process of CalPERS under policies to be developed by the Inspector General, as well as advising the public, as specified. The bill would require the Inspector General to establish a method and process for receiving communications regarding potential improper governmental activities, as defined, at CalPERS or by a CalPERS employee. The bill would authorize the Inspector General to conduct background and qualification reviews of executive-level positions within CalPERS. The bill would require, if requested by the Governor, the Senate Committee on Rules, or the Speaker of the Assembly, the Inspector General to initiate an audit or review of policies, practices, and procedures of CalPERS, and would authorize the Inspector General on its own accord to initiate an audit or review. The bill would require the Inspector General during the course of an audit or review, to identify areas of full and partial compliance, or noncompliance, with CalPERS policies and procedures, specify deficiencies in the completion and documentation of processes, and recommend corrective actions. The bill would require the Inspector General to make available certain reports, including to the Governor and the Legislature, and the public, and would require certain of those reports to be published on a website to be maintained by the office.

Existing constitutional provisions require that a statute that limits the right of access to the meetings of public bodies or the writings of public officials and agencies be adopted with findings demonstrating the interest protected by the limitation and the need for protecting that interest.

This bill would make legislative findings to that effect.

SENATE COMMITTEE ON TRANSPORTATION

Senator Dave Cortese, Chair

2023 - 2024 Regular

Bill No: SB 1260 Hearing Date: 4/23/2024

SUBJECT: High-speed rail: independent review: High-Speed Rail Authority Inspector General

DIGEST: This bill requires the Inspector General of the High-Speed Rail Authority (IG) to conduct two independent reviews related to the high-speed rail project.

ANALYSIS:

Existing law:

1. Establishes the California High-Speed Rail Authority (Authority) and vests with it the responsibility to develop and implement a high-speed rail system in California.
2. Authorizes the sale of $9 billion in general obligation bonds to partially fund the development and construction of California's high-speed rail system.
3. Continuously appropriates 25% of the state’s Cap and Trade program funds for the high-speed rail project.
4. Requires the Authority to complete and submit to the Legislature funding plans and financial analyses, as specified, prior to requesting an appropriation of bond funds for eligible capital costs and prior to committing bond proceeds for expenditure for construction, real property and equipment acquisition.
5. Requires the Authority to submit to the Legislature a report prepared by an independent financial services firm, which indicates, among other things, that the planned passenger train service to be provided by the Authority, or pursuant to its authority, will not require an operating subsidy.

This bill:

1. Requires the IG to conduct an independent review of the economic and financial justification for the high-speed rail project, including reviewing and assessing the Benefit Cost Analysis submitted by the Authority to the U.S Department of Transportation to support the grant application for federal funding, as specified.
2. Requires the IG to conduct an independent review of the ability of the project to operate without a subsidy as required by Proposition 1A, before the Legislature recommits to the full Phase I system.
3. Requires the IG to consult with industry experts, such as the University of California Institute of Transportation Studies (UC ITS) for the reviews.

COMMENTS:

1. Purpose of the bill. According to the author, “On Tuesday March 12, 2024 the Senate Transportation Committee held an informational hearing on the Review of the California High-Speed Rail Authority (CHSRA) Draft 2024 Business Plan. While many concerns were raised during that hearing, the High Speed Rail Peer Review Group made a recommendation for an independent review. Specifically they said, “we suggested that the Legislature might want to commission an independent review of the economic and financial justification for the project, including the ability to operate without subsidy as required by Proposition 1A, before recommitting to the full Phase I system.” Given the massive cost of this project to the taxpayer and the equally massive deficit the state is facing, this makes good sense to take this type of review under consideration.”
2. California High-Speed Rail. Development of high-speed rail in California began more than 20 years ago. SB 1420 (Kopp), Chapter 796, Statutes of 1996, created HSRA to direct development and implementation of intercity high-speed rail service that would be fully coordinated with other public transportation services. The Authority is part of the California State Transportation Agency (CalSTA) and is governed by an eleven-member Board of Directors. The Governor appoints five members of the board, the Senate Rules Committee appoints two, and the Assembly Speaker appoints two. Additionally, the board includes two ex-officio, non-voting members, one member of the Assembly and one member of the Senate.

In 2008, voters approved Proposition 1A, the Safe, Reliable, High-Speed Passenger Train Bond Act, a $9.95 billion general obligation bond to fund the proposed California high-speed rail project and related improvements. As envisioned at the time of the ballot measure, the project was to consist of an 800-mile dedicated high-speed passenger rail system capable of speeds up to 220 miles per hour, initially serving the major metropolitan market of San Francisco through the Central Valley into Los Angeles and Anaheim (Phase I), with service eventually extending to Sacramento, the Inland Empire, and San Diego (Phase II).

When the bonds were approved in 2008, costs for the entire project were estimated to be $45 billion, to be paid by a mix of state bonds, federal grants, and private investments. Since then, estimated costs for the project have risen markedly. The 2024 Draft Plan estimates are a range between $106 billion (base) to $127 billion (high).

In July 2012, the Legislature approved SB 1029 (Committee on Budget and Fiscal Review, Chapter 152, Statutes of 2012), that appropriated nearly $8 billion in federal and state funds to begin the construction between Madera and Bakersfield. SB 1029 funded three components of the project, including $5.8 billion ($3.2 billion federal grants and $2.6 billion Proposition 1A) to fund the construction of the high-speed rail “backbone” in the Central Valley; $819 million of Proposition 1A bonds for “connectivity” projects on existing rail and transit systems throughout the state; and $1.1 billion for the “bookends” projects in the Bay Area and Southern California ($600 million for the electrification of Caltrain and $500 million for projects in the Los Angeles Basin) to improve existing rail corridors for eventual use by the high-speed rail system.

Further, a 2014-15 state budget trailer bill SB 862 (Committee on Budget and Fiscal Review, Chapter 36, Statutes of 2014), continuously appropriated 25 percent of the revenues derived from the state’s Cap-and-Trade program to the project. In July 2017, the Legislature extended the state’s Cap-and-Trade program through 2030, in AB 398 (Garcia, Chapter 135, Statutes of 2017). The Authority estimates that this equates to a range of $750 million to $1.25 billion annually in funding for the program.

In 2015, the Authority broke ground on the first construction segment in the Central Valley, starting work on 119 miles from Madera to Poplar Avenue outside of Shafter.

1. It all starts in the Central Valley. In February 2019, Governor Newsom delivered his first State of the State address and he appeared to signal a change in the project, shifting emphasis to completing a workable rail line in the Central Valley, but casting doubt over the completion of the full Phase I. Specifically, Newsom noted, “the project, as currently planned, would cost too much and take too long. There's been too little oversight and not enough transparency.” He outlined a new Central Valley construction plan, including extending the line currently under construction north to Merced and south to Bakersfield.

Focus on the Valley construction is detailed in the 2024 Draft Business Plan, committing the Authority to completing an initial “building block” of a high-speed system in the Central Valley. The full Central Valley Line is detailed as a 171 mile electrified high-speed rail line from Merced to Bakersfield, double tracked, stations (platforms) at Merced, Fresno, Kings/Tulare, and Bakersfield, maintenance and energy facilities, and the purchase of trainsets is expected to be completed between 2030-2033. It includes all of the current Central Valley construction (119 miles), with extensions to Merced and Bakersfield. The Central Valley Line is estimated to cost $32.9 billion, with an additional $2.3 billion for bookends projects and program wide support for a total of $35.3 billion. The new line would be operated by an interim passenger rail operator, likely a partnership with the existing San Joaquins service.

1. Legislature focuses in on completing an initial segment. As part of the 2022-2023 State Budget, the Legislature approved a $10.8 billion transportation package, which included funding for transit, freight related infrastructure, active transportation, and climate adaptation projects. The package also included an appropriation of the remaining $4.2 billion Proposition 1A bonds for the high-speed rail project. Additionally, the Legislature approved SB 198 (Committee on Budget and Fiscal Review, Chapter 71, Statutes of 2022), which required the Authority to focus its resources on finishing a usable high-speed segment from Merced to Bakersfield, which is defined as 171-mile electrified dual-track segment with a new combined station in downtown Merced. SB 198 also limited spending outside of the Merced to Bakersfield line.
2. Newly created Office of Inspector General. SB 198 also created a California High-Speed Rail Authority Office of the Inspector General to not only oversee audits and investigations of the Authority and its contractors, but to provide independent fiscal estimates and reviews of the Authority’s business plans and project updates for project advancement. The IG is required to make a finding of the reasonableness of those plans and estimates. In 2023, Benjamin Belnap was named the inaugural Inspector General.
3. More federal money. In 2021, Congress passed the Infrastructure Investment and Jobs Act (IIJA, P.L. 117-58), otherwise known as the Bipartisan Infrastructure Law (BIL), which will provide over $550 billion in funding for infrastructure including roads, bridges, transit, rail, water infrastructure, and broadband over the next five years. The Authority has identified over $75 billion in the BIL for which the Authority could compete. The idea being to break down component parts of the project and apply for specific pots of federal funding.

The Authority set a goal of $8 billion of federal funds needed for the Central Valley Line. This amount would bring the federal funding total to 35% of the project, with the state paying for 65%. The Authority has been successful in vying for these federal grants. In 2023, the Authority received roughly $3.3 billion in grant awards from various BIL grants, with the largest, $3.1 billion, coming from the Federal-State Partnership for Intercity Rail Grants (Fed-State Partnership). The grant award is for work on the Merced and Bakersfield extension, signaling the first federal funds to be used outside of the original 119 miles. Specifically, the grant award calls for final design and right-of-way acquisition for the Merced and Bakersfield extensions, civil, track, and systems construction for 13 miles of the Bakersfield extension (not all of the way to F Street Station), design and construction of the Fresno Station, and design and procurement of trainsets.

1. A Positive Benefit Cost Analysis. As part of the Fed- State Partnership grant application, the Authority submitted the required Benefit Cost Analysis (BCA) for the full Phase I. The BCA was developed by the Authority’s financial advisor KPMG. The BCA estimates the societal benefits and costs tied to the Phase I high-speed rail system, from construction through 30 years of operations. The analysis was conducted in accordance with the benefit-cost methodology outlined by the U.S. Department of Transportation (USDOT).

Specifically, the BCA captures the net welfare change created by a project, including cost savings and increases in welfare (benefits), as well as disbenefits where costs can be identified (e.g., project capital costs). The BCA involves defining a Base Case or “No Build” Case, which is compared to the “Build” Case. The BCA assesses the incremental difference between the Base Case and the No Build Case, which represents the net change in welfare. BCA’s are forward-looking exercises which seek to assess the incremental change in welfare over a project life cycle. The importance of future welfare changes is determined through discounting, which is meant to reflect both the opportunity cost of capital as well as the societal preference for the present.

A project is considered cost-effective when the Net Present Value (or Net Benefits) is positive and when the Benefit Cost Ratio (BCR) is 1.0 or greater. The overall project Net Present Value is $16.9 billion and a BCR of 1.32. Some of the benefits measured include Travel and Transfer Time Savings, Automobile Cost Savings, and Auto and Air Emission Reduction.

1. Who will operate the Central Valley Line? As mentioned above, after the completion of the Central Valley Line, the Authority envisions an independent operator for the interim high-speed service. As detailed in the 2020 Business Plan, numerous independent studies and analyses were conducted to develop this interim service model, including a Business Case Assessment Study by KPMG and the Early Train Operator Side-by-Side study. The approach they refer to as an “infrastructure owner” approach. This will likely be the San Joaquin Regional Rail Commission (SJRRC), which currently operates the San Joaquins intercity passenger rail (Amtrak) service in the Central Valley and the Altamont Corridor Express (ACE) to the Bay Area. It is unclear how this agreement would work in practice and how much it may cost the state. Proposition 1A requires “planned passenger train service to be provided by the Authority, or pursuant to its authority,” to operate without a subsidy. The Authority believes that by leasing the state rail asset to the SJRRC to provide “interim service” as a “universal operator” that they would not be in violation. However, SJRRC may need additional subsidies from the state if revenue from the farebox does not cover operating expenses.

In November 2020, the Authority entered into a Memorandum of Understanding with the California State Transportation Agency and San Joaquin JPA for the “cooperation and coordination in the development of an interim service plan.” The 2024 Draft Business Plan lays out a timeline for specific “sub-agreements” under development that are necessary to detail the operating relationships and requirements for each agency for asset leasing and operating cost responsibilities. Final agreements would need to be completed by 2031.

For all of the Phase I system, numerous studies and independent analyses have been conducted regarding the Authority’s financial plans and specifically the ability to operate without a subsidy. The most recent analysis, conducted by Project Finance Advisory Ltd. (PFAL), looked at the methodologies and assumptions used in the 2020 Business Plan. In summary, it concluded that “To evaluate whether the Phase 1 service will require an operating subsidy, we reviewed the Authority’s Central Case in the 2020 Business Plan and then applied the PFAL adjustments to both revenue and O&M cost. In both cases, (with and without PFAL’s adjustments), revenue exceeds O&M costs throughout Phase 1 operations.

1. SB 1260 calls for two analyses by the new IG. SB 1260 requires the new IG to conduct two independent reviews of the high-speed rail project. Specifically, the first would be a review of the economic and financial justification for the project, including reviewing and assessing the Benefit Cost Analysis submitted to USDOT, as detailed above. The second would be a review of the ability to operate without a subsidy. Additionally, the bill requires the IG to consult with industry experts including the UCITS.

As noted by the author, as part of its review of the 2024 Draft Business Plan, the High-Speed Rail Peer Review Group states, “Given that there will be many large claims on the state’s budgets in the coming decades, we suggest that the Legislature might want to commission an independent review of the economic and financial justification for the project, including the ability to operate without a subsidy as required by Proposition 1A, before recommitting to the full Phase I system.”

As outlined in SB 198, the IG is tasked with the responsibility to provide independent fiscal estimates and reviews of the Authority’s business plans and project updates to make a finding of the reasonableness. With the IG already having these responsibilities, groups like the State Building and Construction Trades Council of California (SBCTC) have voiced opposition to SB 1260 stating, “The SBCTC supported the Legislature and Governor in the creation of the office of the High-Speed Rail Authority’s Office of the Inspector General (HSR-IG) to ensure independent review of one of the most critically important projects in California and our Nation. The HSR-IG was created for the SOLE PURPOSE of providing independent oversight of the California High Speed Rail Authority outside of the potential push and pull of other political institutions…this is a bill in search of a problem since the office of HSR-IG’s mandate is to specifically conduct independent reviews of the California High Speed Rail Authority.”

It also should be noted that the IG is just getting up and running, including establishing a budget, hiring staff, and setting a work plan, the reviews called for in the bill will likely have financial and workload impacts. Additionally, the bill requires the IG to consult with outside experts and suggests the UCITS. This may be needed if the IG does not have the expertise in- house for a complete review, but the author may want to consider allowing the IG to make this determination.

Related Legislation:

SB 198 (Committee on Budget and Fiscal Review, Chapter 71, Statutes of 2022) -- Appropriated the remaining $4.2 billion Proposition 1A bonds for the high-speed rail project, and created the High-Speed Rail IG.

SB 862 (Committee on Budget and Fiscal Review, Chapter 36, Statutes of 2014) -- Continuously appropriated 25 percent of the revenues derived from the state’s Cap-and-Trade program to the project.

SB 1029 (Committee on Budget and Fiscal Review, Chapter 152, Statutes of 2012) -- Appropriated nearly $8 billion in federal and state funds to begin the construction between Madera and Bakersfield

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

POSITIONS: (Communicated to the committee before noon on Wednesday,

April 17^th.)

SUPPORT:

None Received

OPPOSITION:

California State Council of Laborers

District Council of Iron Workers of the State of California and Vicinity

International Union of Operating Engineer, Cal-Nevada Conference

State Building & Construction Trades Council of California

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