Senate Standing Committee on Transportation

I'd also like to announce that our distinguished colleague, Senator Durazo will be joining us today on the Committee for purposes of this hearing, and we will have an opportunity for questions and answers after each panel, separately from the Committee Members, those here on the dais today. Today's hearing is to review the California High-Speed Rail Authority's 2024 Draft Business Plan and to discuss next steps for the project.

You can see the project, I understand that's live real-time on the screens here. Is that right, or is it from a drone view? All right. Last year, the Committee held a hearing on the 2023 Project Update Report, which provided extensive updates on cost, schedule, and ridership estimates since the 2020 and 2022 business plans. The 2024 Draft Business Plan keeps the same cost estimates and schedules and provides details of activities happening on the project since last year.

The biggest news is that the authority received over $3 billion in federal grant awards. Although this does not fully fund the early operating segment in the Central Valley, it is exciting that our federal partners are again showing their commitment to the project. Members, please recall that in 2022, as part of a $10 billion transportation budget package, the Legislature appropriated the final 4.2 billion Prop 1A bonds for the high-speed rail project. With the appropriation, the Legislature included provisions to refocus the project and increase oversight.

Specifically, we required the authority to prioritize the completion of a usable segment from Merced to Bakersfield in the Central Valley and restricted spending outside of that. We also created an independent Office of Inspector General to not only conduct audits and investigations of the project, but to also conduct independent fiscal analysis and reviews of future plans. We're happy to have our inaugural Inspector General, Ben Belnapp, here to testify today on the second panel. California High-Speed Rail is the largest infrastructure project in the country.

It continues to face serious challenges, as all megaprojects do. To date, the project has created over 12,000 construction jobs in the Central Valley and generated over $18 billion in economic activity. However, there is not enough funding to complete the 171 miles from Merceda Bakersfield the Central Valley line. Specifically, the authority identifies a roughly $7 billion gap to get high-speed rail trains up and running. The authority is targeting nearly $5 billion more in federal grants. Is this goal achievable?

If not, what will the state need to do to deliver a usable segment? Today, we'll hear from the authority and our respected oversight partners from the LAO independent peer review group and the Inspector General's Office. I will now ask Vice Chair Senator Niello for any opening remarks. Right on cue. And we'll pause before making some further announcements, during which I'll introduce the first panel. Senator Neillo. Vice Chair Neillo.

Thank you very much. Perfect timing. I'm looking forward to the presentations. I've read a lot of the material and I have lots of questions, and I'm quite frankly, very concerned about the status of this project and some of the thoughts they have relative to the raising of revenue from this point forward. So with that, I'll look forward to the presentations and we'll have a good discussion.

Okay. Thank you. Appreciate other transportation Committee Members being here. I think we'll go right to the first panel and just save comments and remarks for after the first panel. And then again, as I said, after the second panel, let's hear from our first presenters, Brian Kelly, CEO of the California High-Speed Rail Authority, and Brian Ennis, CFO of the California High-Speed Rail Authority. I do want to note that this may be the last time we have Mr. Kelly here before us in his current capacity.

We hope that we'll see him on many more occasions for other reasons. But in January, he announced he was leaving the Authority, and I do want to congratulate you on your time at the Authority. I think we'll be happy to hear much of what you have to say today on this current update, of course, in a positive vein. And of course, best wishes on all your future endeavors.

Thank you, Mr. Chairman.

With you and limited opportunity, I've had to do it thus far.

Thank you.

Welcome to both of you.

Thank you very much, Mr. Chairman and Members, as alluded to. I'm Brian Kelly, the Chief Executive Officer for the California High-Speed Rail Authority, and I'm pleased to be here today to present our 2024 Business Plan. Look forward to the discussion and answering your questions. I'm just going to make sure that we are technically ready to go. I think we are, yes. You ready?

Okay. Whoops. Okay. I'm going to jump right into the presentation. This is our 2024 Draft Business Plan. Just by way of reminder, there's a process for this business plan every even-numbered year. It's a 60-day process from the time we release the plan, have public hearings, take public comment, then return to our board in April for any revisions to that plan before it goes final.

And there will be changes to the plan between draft and final, and we'll talk a little bit about some of those today. Just 11 months ago, we introduced the 2023 Program Update Report to the Legislature, and that report had extensive changes to the cost estimates and schedule for completing our work in the Central Valley, and it laid out a long-term strategy to go after and receive federal funds to advance the project.

This 2024 Business Plan stays largely within the constraints of that 2023 Project Update Report in terms of the cost and schedule issues that we have not changed those in the 10 or 11 months since the 23 Project Update Report. And instead, this plan talks about the major changes to the program over the course of the last 11 months and the things that are in front of us, and the vision that we lay out to get the operating segment done in the Valley.

Advance the work on the bookends, or the bookend segments we call them, the stretches into the Bay Area and into the Southern California basin. I will make one note on the 23 Project Update Report, which I said was an extensive update report, the Inspector General that was put in place by the Legislature subject to a statute that was passed in the 2021 budget process.

The IG also had a chance to review that Project Update Report that we laid out, found it credible and responsive to the statutory requirements that we have for our reports to the Legislature. They did make some recommendations in the look of that report that we incorporate into our business plans.

And as this business plan goes from draft to final, we'll incorporate those things, including specific dates when funding is needed to keep the project on schedule, a breakout of costs for certain Merced to Bakersfield segment portions like right of way, and other things. Board policy on the timing of when we do our cost updates, which is something we'll pursue with the board when this report gets to final vote in April, and more specificity on our management of risk factors, which we identify in the Business Plan.

And again, we will speak more specifically about those as we get to the final draft of this plan. Again, as I mentioned, this plan works off of the 2023 Project Update Report. That set a target and schedule for the early operating segment in the Central Valley from Merced to Bakersfield of between 2030 and 2033. That's our schedule envelope to be operational.

We updated our cost estimates based on escalation, inflation, scope increases, and risk analysis, and we set a funding strategy informed by the California legislative budget decisions and the enactment of the federal Bipartisan Infrastructure Law. We also established new ridership and revenue forecast based on a new model that was developed by the authority's early train operator in coordination with the California State Transportation Agency.

We updated the program baseline schedule and informed by funding, we finalized several commercial agreements and laid down the process for our track and systems to move forward. Our construction schedule in that Project Update Report had the first construction package done in 2026, the second one also in 26, and what we call CP 4, the southernmost section in 2023, which today is substantially complete. We also set targeted goals for critical procurements such as tracking systems, train sets, and station and alignment extension designs.

That was all in the 23 PUR. Again, that was reviewed by the Inspector General and found credible and reasonable. In this 24 Draft Business Plan, we maintained the cost and schedule from the 2023 PUR released just 11 months ago. Merced to Bakersfield, our cost estimates are unchanged.

The current cost estimates while unchanged, the Business Plan does update cost risk for each construction package, with CP 2 carrying the highest risk due to some impacts from spring funding in 2022 and 23, a major change order that's now in arbitration, major third party issues that we are working to resolve, and the execution of our final revised baseline schedule, which is still in negotiation but will conclude in August of this year.

Our Phase I cost updates are pending completion of two environmental documents that we have left. When I started on this project in 2018, we had cleared 119 miles of the environmental work of the entire San Francisco to L.A. segment, and today we have cleared 422 miles of that segment. The last segment needed to clear all of downtown San Francisco to downtown L.A. is the Palmdale to Burbank segment, and that will come to our board in June of this year.

The final Southern California segment, which is L.A. to Anaheim, will be completed in 2025. The analysis to date suggests that the costs for these two sections will be within the range of the 2023 Project Update Report, but toward the higher end of that range. And as noted, we update our costs after we complete the environmental documents because there's a lot of cost swing during that process. This is discussed thoroughly on page 89 of the 2024 Business Plan. Major accomplishments since the 23 PUR came out.

As the Chairman referenced, we were awarded in that 11 month period just under $3.4 billion in federal funds to advance an electrified high-speed rail system in California. We have advanced some important procurements to move the project toward operations. Our first construction package, covering 22 and a half miles, is substantially complete today. Our construction jobs exceeded 12,200 from the time we started construction in 2023, which is a record high.

And our daily workers on the job sites now hovers between 1,500 and 1,600 every day, also a record number for the authority. And in 2023, we completed 17 structures, again a record for a calendar year for the authority. For a long time, right-of-way procurement and acquisition was a difficult process at the authority. We reshaped the management of how we execute that, and today we're coming into 99% of that right of way being complete.

And in 2023, the number of utilities we've moved in a single year set a record at 254. So our work pace and our rhythm in the Central Valley has really come into shape and into form, and we're moving that work along the schedules that we identified in the PUR. Also, we have entered contracts to design the extensions to Merced and to Bakersfield. This year, we will get to 30% of that design completed.

And with the federal funding we just received, our board approved us using that design money to get to 100% design of the Merced and Bakersfield extensions. And that's an important milestone, because with that, we can start to acquire right away and identify the utilities that need to be relocated, getting that sequencing of work correct going forward, so we do not make mistakes of the past. Next slide.

Central, again, I'd covered most of this in the prior slide is just an additional articulation of the achievements that we achieved in 2023 since the Project Update Report came out. This slide is just a scorecard, if you will, of each of the construction packages in the Valley and where they are. In terms of the status of the construction. You see that each of the construction packages is 100% designed. When I started in 2018, they were about 11% designed.

So again, we've got them fully designed now coming into 99% of the right of way done between 80 and 100%, depending on which CPU we're in of the utilities moved. You see the number of structures done, guideaway complete, and the overall contract we've worked through. And again, our schedules for the construction in the Valley are unchanged from the Project Update Report. The other place that we are moving forward on is the design of four key stations between Merced and Bakersfield.

There's a station in Merced where high-speed rail service will meet the Amtrak service on the San Joaquin system, and the ACE or Altima Corridor Express system that goes over the hill from the Valley to Oakland and San Jose. And so we're advancing that station. We're advancing Fresno, Kings-Tulare, and Bakersfield downtown stations through that design process. We executed the design contract in March of 2023.

We completed our concept designs for all four stations in November, and we are continuing that design work to the schematic design phase, which is a greater architectural detail, and roughly 30% of the design done by November of 2024. And with some of the federal money that we received, we're advancing much of that work to complete design for certain stations and pursuing federal funding for the rest.

Next slide. In Northern California, we've completed all the environmental clearance from Merced into San Jose and San Jose into downtown San Francisco. We are funding partners with Caltrain on the electrification of the commute rail corridor between San Francisco and San Jose. That is a $2.9 billion project that is managed by Caltrain. It's proposed to be completed by fall of 2024, and the authority has invested $714 in that project. Ultimately, the authority will use that corridor to gain access into downtown San Francisco.

There will be additional infrastructure needs through that corridor for the high-speed rail system to come through there, but again by the end of 24 for Caltrain purposes, in the short term, the electrification will be complete. We are also partners on design and ultimately helping find funding for the completion of what's known as the Portal, which is a downtown extension project, or the Trans Bay Joint Transit Center in downtown San Francisco, now known as the Salesforce Transit Center.

We also work in San Jose with partners in that area on the Diridon Integrated Concept Plan for the Diridon Station that will also host not just high-speed rail, but BART, VTA, Amtrak, and Caltrain. And we are actively seeking additional funding for design work and geotechnical studies in the Pacheco Pass, which is the mountainous region between Merced and San Jose that ultimately we'll go through. In Southern California, our focus is on both working with the local entities on key infrastructure improvements down there.

We have spent $80 million on a grade separation project in Los Angeles. Rosecrans Marquardt, which is at one time was the most dangerous grade separation or grade crossing in California. That project is now underway to separate trains from vehicles, and it will be completed in 2025.

We are also partners with LA. Metro on remodeling, if you will, the L.A. Union Station and moving that into a track run-through system that will help the efficiency of regional rail in the short-term and ultimately accommodate high-speed rail in the long-term. We are working through two draft environmental documents in Southern California. One is that Palmdale to Burbank section, which I referenced earlier the second is the L.A. to Anaheim section.

And lastly, aside from the federal dollars that we received in Southern California, it should be noted that Brightline West was the recipient of just a little lower than us. They got 3 billion in federal funds on that public-private partnership program. And so part of our work this year will involve us working closely with Brightline and through the High Desert Corridor Joint Powers Authority to identify connecting points between our system and their system as we go forward.

The next slide just covers our funding for the program to date. The colorful bar chart on the right shows the different funding segments of federal and state dollars that come to this project. And then as you get toward the top of the chart, there's some Cap-and-Trade dollars. Assuming $1 billion a year, or assuming 1.25 billion a year from Cap-and-Trade, that is our only ongoing source of state funding today.

And in the last two years, the Cap-and-Trade has come in at about a billion a year for the project. The last three cycles, it's up to about 1.25 billion for this. And so with at a billion, we have a budget of about 28.7 between now and 2030. And at 1.5 billion, our budget is up to about just under 31 billion.

We also are continuing to work on our strategy with federal money to find 4.7 billion more in federal funds to go along with the 3.3 that was awarded today. The totality of this gives us a budget through 2010 of between 27 and $31 billion for the project. This next slide, while a little bit colorful and confusing, is designed to just show you the segments of the project that we are building in the Central Valley.

If you look at that right vertical line, it's the cities between Merced and Bakersfield. Along the top are different, moving left to right, are different phases of the project, from environmental to advanced design, right of way, final design, construction, track and system, second track, and of course, train sets. And if I was to simplify this, on the left is where we were last year when I was in front of the Committee. Everything not green is unfunded in that box on the left.

And when you move to the right with the award of federal funds we got this year, everything green is funded. And so obviously that federal funding goes a long way toward helping us advance the project. We'll probably get into this a little bit more later, but I would just like to say that the award of federal funds was more than just an award of $3.3 billion.

It was the first time that the Federal Government got to weigh in on the plan to get the Central Valley segment extended from 119 miles, which connected a town of Madera and literally an orchard, to the cities of Merced, Fresno, and Bakersfield. And when we shifted to that being the Central Valley-focused in 2019, this is the first time the Federal Government has had the opportunity to endorse that plan, and they did. Every dollar that we got is really about expanding that initial 119 miles to the 171-mile segment.

So we're very pleased with that, and we think it's an endorsement of what we're trying to do on this project. The federal investment that was the largest single award in 2023 was in December, and it was the award of the federal state program that was part of the Bipartisan Infrastructure Bill.

That $3.1 billion is funds six electric trains for testing and use, funds the design and construction of train set facilities, funds the design and construction of the downtown Fresno Station the final design and right away acquisition for the Merced and Bakersfield extensions, and funds the civil works traction power track, overhead catenary system and the systems for the Bakersfield interim extension, which is 13 miles toward downtown Bakersfield.

The next slide is the overall cost estimates that were in the Project Update Report in 2023 for all of the system from San Francisco to Anaheim. As you see, the base is 106. The high end is 127,993. And as I said earlier, as we finish our environmental work and we update those cost estimates, we will stay within this range.

But it will tick a little bit higher when we conclude the environmental work for both the L.A. to Anaheim section and the section from Palmdale to Burbank. Next slide. Again at $127 billion, which is the high end of the Project Update Report, you see that the cost of this and the capacity benefits that you gain from the people that you carry along this system.

In the transportation system with high-speed rail, to get the equivalent benefits in terms of carrying capacity of the system, you'd have to expand highways and airports, and the cost of doing that is roughly double the cost of what we're spending to do the high-speed rail system. I said earlier that our major source of funding at the state level is Cap-and-Trade dollars. There's been some question about what High-Speed Rail brings to the Cap-and-Trade objectives.

There are three important objectives from Cap-and-Trade that are articulated in statute with the Greenhouse Gas Reduction Fund dollars. One of them, of course, is to reduce greenhouse gas emissions. The second is to reduce criteria air pollutant reductions. And the third is economic development or job creation. And this project scores well on each of those. To date, just in the construction that we've done thus far, we've reduced about 500,000 metric tons of CO2 emissions.

Once we are in operations, on an annual basis, we'll be reducing about 600 tons of CO2 annually. With respect to the criteria air pollutants thus far, with clean construction equipment, we have reduced between we are 65% to 76% cleaner in terms of reactive organic gases, particulate matter, black carbon, and NOx or nitrogen oxide compared to standard construction projects. And we've avoided about 500,000 pounds of air pollutants since the start of construction. In full operations, or when we're done, we'll, on an annual basis, reduce 1,400 tons of criteria air pollutant annually.

Economically, to date, we've created 92,000 jobs since the start of construction, 12,200 construction jobs in the Central Valley, and the 11.7 billion we've invested to date has had an economic output in excess of $18 billion. Most of our funding consistent with SB 535 and AB 1550 passed by the Legislature. Much of it has been focused on disadvantaged communities. We've delivered 220 million in wages to disadvantaged workers.

We've provided thousands of living wage jobs for the more than 65% of our workers who live in disadvantaged communities, and we've invested 5.5 billion to date in disadvantaged communities, more than 50% of our total investment, and more than 215 small businesses that work on the project are located in disadvantaged communities. We altered our ridership projections in the 2023 Project Update Report.

That's in the yellow boxes on this slide, and then they've been adjusted as we've done further analysis coming into this year and this year's Project Update Report. Sorry, this year's business plan. So the yellow reflects where we were in 2023 for the Valley-to-Valley and the Phase I systems. Just to give you some perspective on this, Valley-to-Valley is the Central Valley system from Bakersfield in the south all the way into San Jose and San Francisco.

That's expected to carry between 12.2 and 12.5 million riders annually. To give you some perspective on that, the largest or the busiest single intercity rail passenger segment in America is the Northeast Corridor, and Amtrak carries about 12 million riders a year on that corridor. So Valley-to-Valley would be on par with the busiest Amtrak corridor in America.

And as we move to Phase I, that's San Francisco all the way to L.A. and Anaheim, we're carrying on the order of 30 million passengers a year. Again, about two and a half times what the Northeast Corridor carries today, the Business Plan does talk about our risks, including things we've done through active risk management. That includes, as I mentioned earlier, improving and accelerating the parcel acquisition process in the Central Valley. We resolved several commercial issues with contractors. We settled litigation with the Burbank-Glendale-Pasadena Airport.

We've entered stay agreements with two cities in the Bay Area who had challenged the environmental document, and we are in active settlement negotiations with them. And we completed a major water storage district canal in Kern County. Top risk going forward. The Business Plan in Chapter Four on page 76 lists all 13 risks that we are currently managing. I'll note here that the Inspector General has asked us to say more about how we are managing those risks.

So we will do that as we move this draft plan to a final plan in May. And the top risks that we identified here are funding uncertainty for the program, which has been the risk since the program was started. Third-party management, workforce planning, and program integration management. In terms of what's next for the project, the things we are focusing on, is finishing the construction on the 119 miles in the Valley and the design work for the Merced and Bakersfield extensions.

We are continuing, as I mentioned, the environmental review for the remaining project sections. Again, all of downtown San Francisco to downtown Los Angeles will be environmentally cleared come June, and we'll finish the last segment from L.A.. to Anaheim in 2025. We are advancing collaborative projects in Northern and Southern California, including what we call the bookend projects, as well as supporting funding requests for joint-use projects both in Southern and Northern California.

We also are executing procurements to advance our rail strategy, train sets, track and systems over at catenary system in 2024. And we are doing that in a methodical way, including the use of not to proceed segments of the contract so that we do not get in front of available money. In other words, we'll only do the work sequentially as we can afford as we go forward. We are continuing our work on design stations, and we'll continue to advocate for additional future federal funding.

Our goal remains electrified service between 2030 and 2033 in the Central Valley. And then I'll just end where I began, which is the process we're underway now on this business plan. We released this on February 9, had our first public hearing with public comment on the 29th, Assembly Transportation Committee yesterday. We're here before you today.

We'll go back to our board on April 11 to revise the Business Plan to make some adjustments from the draft, and our final 2024 Business Plan will be submitted to the Legislature under the statutory deadline of May 1. With that, Mr. Chairman, I'm happy to answer any questions. Thank you.

All right. Thank you, Mr. Kelly. I appreciate it very much. And again, thank you to the entire panel for being here. I know you're available to answer questions, and we'll get to that next. Senator Blakespear, I know you want to be recognized, followed by Senator Archuleta.

Yes, thank you. Thank you, Mr. Kelly, for the information. You packed a lot of information into that PowerPoint and flew through it. So thank you for providing so much data. I am chairing a Subcommittee on the LOSSAN Rail Corridor, which is the 350 miles that runs from San Diego to San Luis Obispo. And I had the opportunity to tour L.A.'s Union Station and see the really important bookend project.

So one of the bookends of your project, which would improve the run-through tracks at L.A. Union Station and the 2024 Draft Business Plan, also highlights the importance of the bookend investments. And I was listening closely to what you just said verbally about it, and you said, we're partners with L.A. Metro to help with efficiency in the short-term and high-speed rail in the long -erm.

But it appears very much as if that project is not moving forward quickly, it's not going to be making it in time for the Olympics in Los Angeles. And there are a lot of shared benefits and early value from doing that project. It's particularly important because, as you may know, the trains that come through on the LOSSAN Corridor have to go beyond the station and then back in, and it creates a tremendous delay for all of the rail that's going through there.

And so I understand that this year you'll be looking at how to proceed given rising costs and various priorities. And this is a particularly important project that's also very much in line with the Draft Business Plan. So I just wanted to ask your perspective on that and what is being done to prioritize that project or what more could be done to prioritize that.

Yes, a little background on that. I want to say in 2012, the Legislature, under a budget agreement, directed that we hold some of the bond dollars from the Prop 1A Bond not specifically for high-speed rail projects, but for priority projects in both Northern California and Southern California. That totals about 1.3 billion out of the bond dollars in Northern California. The two projects are a grade separation in San Mateo and the electrification of the Caltrain project.

In Southern California, the two projects are a major grade separation that Rosencrans/Marquardt grade separation, and based on the priority that the L.A. region gave us the L.A. Union station. There's two phases to improving the L.A. Union Station, and Phase I is what we had funded. We provided 423 million toward that Phase I project. Now, at the time that Metro came to us with that project, they had identified a total cost need of, on the order of 1.1 billion, we provided 423 million.

I believe the California State Transportation Agency provided roughly the same amount. So about 90% of that project was being funded by the state. But L.A. Metro in 2023 informed us that they had some cost and schedule issues with that project. So under our financing agreement with them, they are required to come back to our board with a remediation plan where they may alter some of the scope of that project to reduce costs and try to pick up schedule.

That remediation plan will come to us, we think, in early summer of this year, and then my board will take that up and we'll decide, working with them, the right path forward. It is an important project for the efficiency of moving local and regional transit through that station. The run-through tracks means also that not only is it more efficient, but it also means that trains are not sitting in the station idling for as much time as they have to today.

And all of that is the beginning of a two-phase project that not just helps the local and regional transit systems, but ultimately helps accommodate high-speed rail when we get there.

So you're the lead agency on that project, right?

No, the lead agency on that project is L.A. Metro. We are funding partners on it. And under our funding agreement, if there's changes to cost and schedule, they have to come back to our board and give us a remediation plan. And so that's where it stands right now. But they are the construction leads on that project.

Okay, thanks very much.

Senator Archuleta.

Thank you, Mr. Kelly, for appearing before the Committee here. I'm excited to hear that we're talking about jobs. 12,000 jobs, construction jobs, about 1,500 people per day actually on the job site. But I've got to turn it to Los Angeles County for just a minute, as my colleague had just mentioned. And you've mentioned the Union Station in downtown Los Angeles, historical site up there. Give me an idea what construction you're talking about. Are you expanding the tracks?

Are you going to do anything to the building itself? It's been there since the '30s I believe. Tell me about that. And then if you'd finish up with purchasing all these high-speed trains, because I'd like to see, God willing, that the manufacturing of these trains would be here in California again, for California jobs, if you can elaborate on that. Thank you.

Thank you. So I'll give you at least a high-level. And of course, my office can provide your office with more detail on each element of the L.A. Union Station project. But at a high level, it's a two-phase project. The first phase of the project is less about broad station improvements and more about improvements so that you add a couple more tracks coming into the station area, and we take care of the run-through track issue today.

It's a dead end going into that station. So trains have to go in there, they wait, they board, and then they go back out. Aisling times are longer than they need to be, as opposed if the trains can simply run through and continue their service. So the first part is to add run-through tracks. So it becomes a station that's not a terminal station, a terminating station, but one that the trains can go through.

That's an element of the construction in the first phase of the project. The second phase of the project involves additional work, including station redesign, where there is now a full station that's accommodating not just the local and regional services, but is also capable of accommodating full high-speed rail service with tracks dedicated to a high-speed rail system. And so that's kind of the second phase of the project. Initially, the first phase project was, as I said, estimated at about 1.1.

The State of California, through our contribution, and the state agency, was covering about 900 million of that. And L.A. Metro has indicated that they're revisiting the cost and the schedule on that project. So again, we're waiting on the remediation plan for that. We have detailed data on both phases of that project, and I'm happy to provide that to your office. And then on the second issue is on the train sets.

We are currently in a request for proposals earlier in the year, in 2023, we went out for a request for qualifications, and that was just a qualified bidders who could build the electrified high-speed trains for us. We got two bidders. One is Alstom, which is a company that is building trains in upstate New York. The other qualified is Siemens, who is building trains and building light rail systems for probably every district on this panel here in Sacramento.

And so those are the two qualified bidding teams right now. That RFP process, we moved, so we qualified, and now we are writing the RFP in real time. We'll be going to our board to approve the RFP in April, and then we're looking to award that contract toward the third quarter of this year. After we go back to the board. I will say this, I know it's garnering a lot of attention in terms of who and where.

And obviously, our job in an RFP is to have a fair and open competition which we're dedicated to in the bidding process. I just say that our project has a long history of good relations with labor. We entered one of the first and most comprehensive community benefit agreements, or PLAs, on the construction side of this project. And that's been in place since 2013 for the construction work.

Last year, when we see operations and maintenance on the horizon as we get into the operating sphere here, we entered a second labor agreement, an MOU with national labor groups to make sure that operating and maintenance folks were going to follow federal statute that applies to operating and maintaining railroad in America and in California. And now on this process, there's been a lot of talk and conversation about whether a bidder is a unionized shop or not a unionized shop.

We can't, through the RFP, make that happen one way or the other. But we are doing things in this RFP that I think are relevant and helpful to understanding the differences between the shops.

For example, we are voluntarily at the authority using something called the U.S. Employment Plan in this RFP where we ask each bidders to give us a sense of where they're going to manufacture, how many employees they expect to use, what's the training and workforce planning for the employees at that site. Are they employing and what's their plan to employ folks from disadvantaged communities?

That's all in the spirit of what the history of this project has been about in the Central Valley and that will be applicable to the RFP for the train sets as well. So because we're in the RFP, it's got to be fair and open. That's about as much as I can say about it today. But again, one more thing just on process.

We will be returning to our board to approve the RFP in April and a comprehensive summary of what's in that RFP, including how the U.S. Employment Plan information applies, that will be made available publicly about a week in front of that hearing. So there will be a public hearing and an opportunity for people to review and to comment at the public hearing about where that is.

Okay. Thank you. We're going to Vice Chair Niello, followed by Senator Newman and Senator DUrazo. Anyone else needs to be recognized, just raise your hand.

Thank you. Thank you, Mr. Chair. Mr. Kelly, my hat is off to you. You have a very difficult job so I have some questions about the very difficult job. First of all, I read the fifth chapter of your report, forecasts, and estimates, and it talks about basically a discussion of operating profits. Yes, and I don't notice in there any discussion of fixed costs. You have operating expenses and ridership estimates that result in gross revenues and so you have an operating profit. But am I missing something?

I didn't see any reference in there relative to the amortization of fixed costs.

Is that the lifecycle cost, Section B?

I could, yes. When we're looking at the operation and maintenance cost that's maintaining the track and the systems, maintaining the train sets. I think in the train sets there's a major rehabilitation point within the 30-year maintenance period. So those costs are incorporated into the analysis in terms of the ongoing cost of maintaining the track and the vehicles.

And you'll see we do indicate what on page 96 and 97, profitability, meaning where is the cash flow coming in from riders buying tickets from any ancillary revenue exceeding the cost of operations and maintenance. And that indicates that the analysis done for the Phase I system, the chance of profitability was estimated at 98.4%. So we think there with a high confidence level saying that that operation will generate the cash flow needed to pay for the operation and maintenance cost.

Operationally, but not including amortization of the fixed cost going into the operation.

Sure, you're speaking of the capital cost to build the track, the systems, and that's pretty typical of high-speed rail. You might know that Brightline, for example, was a grant recipient for their project. So again, often, usually, I'm not sure if there's any exceptions even that these high-speed rail systems do need government funding to complete the construction. But then, as our analysis indicates, these type of systems are able to fund their operation and maintenance costs going forward.

You have a problem though, because Proposition 1A specified that the high-speed rail will operate without any subsidies and not including an amortization of the capital costs to get the project to operation would not be an accurate reflection of the total costs. And in the Committee's staff report.

Train sets.

In the Committee staff report, they indicate with regard to the first Valley line. I'll wait until you have your conversation.

In the Committee staff report, on page six, it points out Proposition 1A's requirement, that it operate without subsidy and that your plan for that operation is to sign an agreement with the San Joaquin Regional Rail Commission and that you feel that signing and structuring that agreement appropriately would avoid any violation.

However, the Committee staff report adds the sentence, however, SJRC may need additional subsidies from the state, which would be, at least for that segment, a clear violation of Proposition 1A. So how would you respond to that, number one? And number two, would you intend to lease the system to SJRRC without the obligation of paying the state back in an amortization fashion for the capital costs that it took to set the system up in the first place?

Well, first, we disagree that the operating subsidy would apply to the business plan or the business model for the initial segment in the Central Valley because we are not the direct operator of that system. And under that business plan, much like SJJPA does today, they essentially lease track space to operate passenger rail from the freights.

In this case, they would lease our equipment to operate their system over assets that we own and they would pay a rate that is intended to cover certainly the operation maintenance costs of that.

What about the capital costs?

The capital costs are at that point are sunk costs, and they have to have the obligation of operating and maintaining that.

In other words, you will not hold them accountable to pay you back on an amortization basis for the upfront capital costs.

Not for the operations of the initial system between Merced and Bakersfield.

I would suggest we're going to have a serious debate as to whether or not that's a violation of Proposition 1A. It states no subsidies to provide a system without the operator of the system having to cover the initial capital costs in any fashion will provide an inaccurate financial statement system.

Senator, I would just say that Amtrak today, most of the capital expenditures that they've received to build their capital system came from the State of California or the Federal Government. Their operating and maintenance costs are what is considered against an operating subsidy, not the repayment of that capital.

But those systems weren't predicated upon an authorization by the voters that said that there would be no subsidy.

An operating subsidy typically does not include the base capital costs.

I understand your point. I respectfully disagree.

Okay.

Now what you're saying is what's typical in the railroad business. I suspect that any of the voters that voted on Proposition 1A were not experts on what the convention is for acceptable financial statement practices in the railroad industry. I can tell you that in every other industry that I know of, that would not be the way of assessing the success of an operation. Capital costs would be allocated and amortized in a regular enterprise.

So we have a little bit of disagreement as to how we're going to assess the potential of a subsidy, and I would suggest we might have a little bit of a disagreement there.

Again would just say the industry standard for public transit and passenger rail system all over the country and probably around the world. It is an operating subsidy does not include the repayment of the base capital cost of building the system. It is an operating O&M cost versus revenue that come in through the fair box. And that's the definition, the operating subsidy that is accepted industry-wide. And we should not be the exception to that.

Not to belabor the point, but I would just say that I'm a certified public accountant. I don't practice anymore, but I know accounting, I know financial statements from an enterprise standpoint, an enterprise standpoint. And when I read Proposition 1A, I did not interpret that in the fashion that you just articulated it. So we have a little bit of a disagreement as to specific railroad and transit operations accounting versus the way the rest of the world does it. A question about cost updates.

In the Southern California section, there hasn't really been much of a cost update for the last few years. All of the other cost updates that you've done have consistently been about on unspent cost and then estimating what you still have to spend. The assessment has continually been about a 15% per year increase in estimated costs. If that holds true for an update of Southern California, it would be a very significant increase in the cost for that projected cost for that system. Can you comment on that?

Yes, I can. Our practice has been to update the segment costs after we complete the environmental document for each segment. And so you've seen some updates for other segments before, some of the Southern California segments, because the last two segments to get done are Palmdale to Burbank and LA to Anaheim. The other segments down there we have updated when we finish that environmental document. The reason we wait until the environmental document is done is you can have large cost shifts during the environmental process.

I'll give you a couple of examples. Already on Palmdale to Burbank during the environmental process, there is a space where the Army Corps of Engineers asked us to make sure we're going around a lake and not along the edge of the lake. And so when you make that adjustment that comes with it about a four or five hundred million shift in the cost of the project.

As we work through the environmental document, we work closely with communities on what the impacts of the project would be to the community, and we make adjustments to deal with those impacts. All of them come with costs similarly swinging the other way now.

We were looking at an environmental document to clear between Los Angeles and Anaheim a year and a half ago that involved us having to build additional structures in the Inland Empire to relieve the freight rails of some lost capacity where we were going to bring in more passenger rail on the coast side. As we've gone through that environmental process and refined that further, we're now moving to a separate analysis where we do not have to build those Inland Empire structures versus that cost estimate.

It's saving about two and a half billion. So again, you get big swings in the environmental process. We wait until we're done before we update those segments because of that reason. I will tell you now that as we look at the two Southern California segments, and I mentioned this in my presentation, we have a cost range in the PER of a high of about 128 billion for all of phase one, and a base of about 106 and a low of about 88.

When we finish the environmental document, we will stay within that range, but it'll move closer to the high because Burbank to Palmdale will be higher than it was before we updated, which was now years ago, and LA to Anaheim will also bump a little bit higher. So as we come back with the 25 project update report, we'll have completed all of the environmental work for Burbank to Palmdale, and we'll update that segment as well. But our cost estimates will stay within the overall range that we articulated in the 23 project update report.

Okay, thank you. One last question. On page 64 of your update, it talks about private sector financing, and it states it is the authority's intent and objective to secure private investment in the program in the future. Can you elaborate on that a bit?

Yeah. So I know from the beginning of this project, way back in 2008, the idea was to the state was putting out $9 billion in bond money, and then the requirement was to go find other funds. And in that time, we've now found 7 billion in federal funds. We've gotten some cap and trade dollars to match the original bond dollars. My view on the private sector side is we need to model it more like what high speed rail has done in Europe.

Capital costs for projects of this magnitude are generally always covered by the state, the government, the government side of the equation. However, you can use private sector partners where you are in a segment that is likely going to be profitable to do a concessionaire agreement, for example, and you can reduce the public cost of that segment because you bring in some dollars from that concessionaire agreement.

I think that's hard to do in the Central Valley, but I think it's much more likely to do as you get to the Bay Area and you get to the Southern California regions. And so our approach would be to work with private sector partners on some of those segments to see where a concessionaire may make sense and offset some of the public cost. That's the same model they use on high speed rail for extensions around Europe and other countries around the world.

And that's how we are looking at this. I have not felt since I've been here, my six years here, that you can really get into the private sector conversation until more of the risk of the project gets behind. And when so much of this was not environmentally cleared when I started, I think it's very difficult to bring that private sector partner along. So this year we are completing all the environmental work from San Francisco to LA.

I noted in the business plan, there's a CEO letter at the front of the business plan, and there are four things that I talked about we want to pursue in 2024.

One of them is, with the completion of that environmental work, is to do what the authority did many years ago, but now do it, because I think it's more relevant, is to do a public, what they call a request for expression of interest, which is to engage with private sector partners now on what segment elements are most likely for partnership with the federal, sorry, with private sector partners and what they look for from the public side to make that more appealing.

And so we want to get a better sense of that this year with the environmental work having been completed, and then figure out how best to deploy that going forward.

Thank you.

All right. We will move on to Senator Newman, followed by Senator Durazo.

Thank you, Mr. Chair. First, I'm one of those who has some concerns about the procurement, but I appreciate your answer there, and I know Senator Roswell will probably speak a little more to it, to your conversation with Senator Niello, just to give it context, notwithstanding the disagreement about our county, what's the current projection for the cost of a ticket on the Central Valley segment when it opens?

We're not close enough to operations for specified fares yet, but I will tell you that for modeling purposes, we're using roughly the Amtrak ticketing price that is now in the Central Valley or the San Joaquins system for that part of the segment. When you talk about phase one, we've generally had the fares be close to airline tickets between Northern California and Southern California along that line.

And at the risk of reopening this debate, are there any issues around that Prop 1A, prohibition on subsidies there on the cost per ticket, will that be subsidized at all, or is that simply what the market will bear?

Well, I mean, again, will it be subsidized for the Central valley part of this which is subsidized today on the San Joaquin system, we're very clear that the Merced to Bakersfield line will also take an operating subsidy. The difference between what you get in the Central Valley if you don't build what we're proposing versus what you do is our expectations, the build versus no build. The ridership in the Central Valley for all the regional rail there now will roughly double with the build.

The cost per mile per passenger will be cut in half and the revenue and the fare box will change dramatically in the upward way. And so that's what we are projecting, working with agency and San Joaquins on the full package. We did say in this business plan that the ridership model, because we're dealing with not just us, but also ace Amtrak, some bus systems and some other things.

The analysis on the full ridership and model for the Central Valley segment in this document, we stayed with the per reference, but it will shift as we go forward because each entity is going through that model and adjusting their services so that we can articulate the regional benefit when everybody has the same understanding of how current demographics will affect their systems. And what I mean by current demographics. There are two trends in California that have affected public transit and rail ridership.

The first really on public transit is COVID. The fact of the matter that during COVID you had mass numbers of people not commuting to work. And even in post COVID, it's not near the number that it used to be. And so ridership on commuter transit services has remained relatively flat. It's come back a bit, but it's flat. Intercity passenger rail service has been a little bit better in terms of it coming back and airlines have done very well in terms of them coming back.

So that's one thing that you see is the COVID related commute patterns are having a downward impact on ridership. And that's not just us. That's across the board in California and America. The other thing that is specific to California that is having some suppression on ridership that has affected our numbers and again is affecting public transit ridership up and down the state is, California's population is very stagnant now. And for the first time in my public career, it's even projected to start tipping downward.

That has an impact on the estimates for public transit ridership, for job creation and for commute. And so we reflect that in our ridership numbers.

And so the business plan does reflect that plateau.

It does.

Okay, appreciate that, last question. Kind of a macro question, I think. If you recall, we had no oversight hearing about this time last year, and I tried then to secure your commitment to hold off and retire until the project was completed. And you were very smart not to answer that question.

But if you would, as you look back, Mr. Kelly, and looking forward, what recommendations or learnings would you leave with us as you sort of contemplate your departure on how best to bring this very important project to completion as smoothly as possible?

Well, I appreciate the question. I think I want to answer that by saying something I hope you all understand that I've learned and that we've had to learn the hard way on this project. And that is, I've spent five years now, six years, but really the first five years of this, cleaning up a very difficult beginning on the project.

And what I mean by that really is, and this is without criticism of anybody who came before me, but at the time the authority got federal money, it came with a very tight deadline to spend that money. And so the authority got into construction immediately to try to get the money spent and keep the federal money producing economic benefits in California. The problem was it went into construction at what we call at risk.

It got into construction without all the right of way in hand and without all the utilities moved. And then when you ran into right of way problems and you couldn't get the utilities moved and designs weren't advanced enough, you ran into delays, and delays bring cost. And that is the history of how this project got started. What I want you all to know, whether I'm here or somebody else is here, running the authority going forward, that's changed.

The authority, now, I talked to you about designing today our extensions to Merced and to Bakersfield. When I started here, less than 15% of the, sorry. When we got into construction, less than 15% of this stuff was even designed. But you started construction. We're not doing that anymore. We're getting to 100% design on these extensions. When you do that, you can identify all the right of way. You need all the utilities that need to be moved.

You do it in the right sequence, and you largely, I'm not going to say you eliminate, but you largely avoid many of the risks of cost and delay that this project was dealt with in the initial part. So one thing is understanding what happened on this that we've incorporated and we've learned that the hard way and that we're doing it the right way going forward. I think that's one important lesson learned.

The other one, which I know you're going to hear Lou Thompson from the peer review group say to you, which Lou has said consistently for 10 years, and he's right about this. And look, Lou and I over the last six years have bumped heads on certain elements of where we are in the project and where we're going. But one thing we do agree on, it is extremely difficult to manage a project where there's expectations for a delivery under a timeline, and it is not funded.

It is impossible to manage a project that way. And so what I would say to the Members is, if the policy of the State of California is to advance passenger rail, know diesel emitting slow rail into something that is clean, fast, has great mobility benefits, and is better for the future of the State of California, particularly in the area of climate change, we really do have to address the instability of funding.

I'm building a multi year megaproject, and I've got a funding source that expires in a few years. And that is not sustainable. We cannot deliver this project if that stays that way. And we are doing our best to go get federal money, which we've been successful at finally this year in doing. I believe we have a strong federal partner now who will be with us for a while on this, assuming certain things going forward. But I think that's the other important lesson.

If you want a deliverable by a date, we got to make sure the funding is stable.

Well put. Thank you. Appreciate that. Thank you, Mr. Chair.

All right, Senator Newman, Senator Durazo is next, followed by Senator Becker, if he's in the room, followed by Senator Seyarto.

Thank you. And I want to congratulate you on those $3.1 billion.

Thank you.

Through the Federal IJA for this high-speed rail. I think obviously, that's a reflection of how things are changed and things are in the best position to be able to win that kind of support. So having that partnership with the Federal Government, I think, is really important.

Thank you.

And thank you for taking us there. With regards to the commitment, I'm very confident that the voters, one, voted for this, because mobility, without a doubt, but it's also a climate issue and it's also creating good jobs, and everybody understands that. So questions come up for us is how do we live up to that commitment? In LA, We passed a sales tax increase in 2008 in the middle of the worst recession we've had, and that was because of that commitment, and we lived up to it.

But to really finish, we need to do a whole lot more. So a few questions, all related to each other with regards to the quality of the jobs and the inclusion of communities that historically have been excluded from the prosperity of our government's investments, whether it's the state or the federal.

But if you could go a little bit more, I know you started to talk about the train sets and the procurement, but if we could use the procurement process lessons about that, because the procurement process is for the most part working in LA Metro. And by the way, again, thank you also for working with LA Metro on these.

And I appreciate my colleagues who raised the issue of the Union Station, but since they identified that as one of their two priorities, appreciate that we're working on that. But with regards to the quality of the jobs, how will you implement the initiatives to maximize the benefits for California to California communities? Maybe examples of the agreements required by the high road training partnerships. As far as dollars that could be used. IJ dollars that can be used.

Are you currently operating any targeted or local hire initiatives using tools? I think you did mention using tools like community benefits agreements, project labor agreements, other workforce agreements, and I'm particularly focused on non-construction. We have a lot more tools and practice and familiarity with construction jobs. Thank God, we're not so good at non-construction jobs and the opportunities that the federal dollars are giving to us.

The other day, when our President outlined the funding, the commitment of the Federal Government to infrastructure, he was very clear about making sure that those dollars went to improve all of our communities through good jobs. So however you can, I sort of bundled them all together. You know where I want to go.

Yeah, I think, let me try it this way and happy to follow up in any way you want me to do so. I think the first thing is that it's been a clear sort of embedded in the DNA of the authority, if you will, that it is important to get the right economic benefit from these investments.

And for all the challenges of where the project started, or all the questioning about where it started, close to 60% of the dollars that we are spending, much of them are spent in what are defined as disadvantaged communities. And so on the construction side, again, many of the jobs that we've created, the 12,200 plus jobs in the valley, are people who reside in the valley and are benefits of that job, of that process. And that was not by mistake.

The authority entered a community benefits agreement on the construction side with 13 labor organizations to make sure that the best trained and folks who came through the apprenticeship process were doing the work on the construction side. And so we're very proud of that, this project now, as we go forward. And one of the reasons, candidly, I think it's a good time for me to transition to the next leader here, is this project is now starting to enter the operations and maintenance phase of the project.

As we talk about trains and track and systems and schedules and fares and stations, it gets more into the operating dialogue. And so in 2023, we entered an agreement with, I don't have the number in front of me right now. I want to say nine organizations that are traditional labor representative organizations for operating and maintenance, interstate and passenger railroad throughout America. That things like the Railroad Labor Act, the Railroad Retirement Act applied to the operation and maintenance work that we have coming up, coming forward.

And that means things like how a contractor deals with folks who want to make sure that they are represented. There's processes under the Labor Act for that to occur. And our agreement says that our contractors have to abide by those. The thing that's a little bit, you're right, maintenance is a little bit outside of that. Sorry. Manufacturing of the trains is a little bit outside of the scope of those two areas.

What we are doing is we are picking up something that LA Metro has done, that New York metro has done, Chicago Transit Authority has done. And that is, as we look at this, manufacturing the trains, we are implementing part of a voluntary program of the US employment plan, which is also designed to have the bidders tell you more about the labor markets that they intend to affect.

So there will be a series of questions in our RFP that will be scored in the RFP process and will be making sure that we have an understanding of the job market they'll be entering, the location of their production sites, the strategies to establish a supply chain, the description of the jobs, the types of jobs that will be created, and the investment the proposer intends to commit to workforce development and training programs.

Those will all be things that we'll be asking about in the RFP of the two qualified bidders, and we'll be scoring those answers. And so that's part of what we'll do in the RFP process for manufacturing. The only other thing I would say is in making sure you're developing a qualified workforce.

Part of the community benefit agreement that we entered into back in 2013 included work with the Economic Development Commission or Council of Fresno County and the labor groups down there to make sure that we were getting more and more people into a training program run by the trades. That also fed the labor need for our project. In more recent years, we opened a similar facility, working with the laborers in Selma, California. We help fund that with the EDC in Fresno.

And so every quarter or so, we graduate on the order of 25 to 50 students who go through that. And many of them are people who are at risk in terms of economically at risk folks. So those are things that are part of our operation and part of our enterprise. And that's how we're looking at this as we go forward with the RFP. Again, the RFP on the manufacturing side will be part of a very public process that our board has.

The RFP has to be approved by the board for us to put it out and then later to award. The winner will also go through a public process at our Commission.

And can you add a little bit in terms of local hire?

Yeah. Well, again, with respect to the manufacturing, again, we'll ask both of the bidders to describe where their production facilities will be and what their process will be to utilize disadvantaged community workers in that work. So that information will at least come in the door through the RFP process.

But the US employment plan allows for.

Us to ask those types of questions.

Yea the local hire,There was always an issue about federal dollars.

Yeah, I know that our community benefits agreement, we had a targeted goal on the construction side for hiring locally. And what I think I said earlier is that for the construction, the valley, about, on the order of 70% of the workers who are working on that, come from the counties in which the project is being built.

Great. Okay, well, just a further emphasis on. Hopefully we don't have to go through another training process on the issue of the quality of the jobs and the training and compliance with the commitments that are made by the companies that are awarded the contracts. Hopefully we don't have to go through that whole process again with your successor because that's not an easy thing and it's somewhat new in the area. We just have to apply it and feel that.

Be confident that we could actually expect good, high paying jobs, local hire and all the other pieces to it. From the dollars. These are tax dollars. We should be able to expect that. So appreciate that.

Yeah. And I would just say that obviously these things are very important to my board as well. So whoever the successor has to enter to that board.

And us.

Yes, absolutely.

Thank you, Senator Durazo, Senator Becker is next, followed by Senator Seyarto.

Thank you and thank you for your dedication and work to this project. I know my colleagues hit a lot of the issues. Thank you also for what you said about local hire and community benefit programs are really critical for us to see. I had a couple of questions relative to my district. I think, as you know, so there's 2500 units of much needed housing that are being held up right now as part of two lawsuits with high speed rail.

I've heard that in the Assembly you said those would be resolved this year.

Yes. Both the Millbrae and Brisbane Litigation have been stayed and during that stay we are in settlement discussions. Certainly our intent is to settle those in 2024.

Yeah Okay. That's great to hear. I mean, it's certainly very important that they do so that housing can move forward. I appreciate that. And just a note that, and also thank you for your support of Electrified Caltrain that is going to launch on schedule this fall. So that's a massive achievement. And thank you for High School Rails contributions to that. I'll just note that you mentioned that some of the money had gone to one grade separation, which was an important one.

We have probably about another 30 grade separations, of which by 15 are critical and three to five are on the list of the highest, most dangerous ones in the state. So I know that's not solely your responsibility, but it's something that we're going to have to address.

Look, I think there are key corridors, the peninsula is one of them. There's some key corridors in Southern California in the LA area beyond the grade separations we've already funded, that I think are ripe for corridor-wide grade separation approach. It's going to take sort of a plan and a funding program aimed at that. But I think that corridor and the Caltrain is important for them and for us.

Ultimately for more of that.

Well, thank you. I mean, that's one of, I think, a few issues on the peninsula one can solve today, but certainly, electrified Caltrain in the meantime will be--and maybe ultimately will be--a great solution. So thank you.

Thank you.

Senator Seyarto.

Thank you so much. And I'm hoping we got most of our questions out of our system. This first round, we haven't even got to the second panel yet. One of the questions I have is the future. This segment was on probably the flattest area with the least geographical hurdles, and it has taken us this long to get here. And this kind of ties into your question or your answer about funding. How are we going to get the funding? We need to make sure we're funding this. The whole thing was supposed to be done in 2022, and it was supposed to be $38 billion.

So the people of California thought they did fund this through Cap-and-Trade. That was the whole idea with--some of the idea was Cap-and-Trade would help fill the gaps. And we had our bond that we're now using. We used the last part of that 2022-23 budget, I believe. And we've only done the easiest section of this. What are we looking at for a funding gap for the rest of this?

Well, the entirety of the system, as I think I estimated in this committee last year, from San Francisco all the way to Anaheim, will cost on the order of $125 billion to get it all done. Today, our--but we have $28 billion--is what we have in hand. The good news is I wouldn't recommend and I would advise that--I mean--it would be great if you could fund it all right now in one fell swoop. But I don't think that's realistic.

What we've been trying to do since I've been here and what I've been trying to articulate is: one, we got to get value out of where we've started construction. And so in the Central Valley, at least, it was, I think, the governor's view and certainly a view that I concurred with, which is that the 119 miles stretch by itself doesn't give you enough. And so getting into the cities of the Central Valley was key. And we've laid out a strategy to do that.

We've laid out what we need from our federal partner to do that. And we've had some success this year in getting there. To do all of what we want to do--and I do think there is a want, certainly in the current federal administration--there is a want to advance passenger rail from where it was yesterday to where it should be tomorrow. And that means moving from things like diesel-generated, slow trains to electrified systems that are fast.

To be candid, that's going to take a federal partner that is with you over decades. And that's not just for California. It's nationally. We built the interstate highway system with a trust fund commitment to building highways, and they got done. And it's going to take something of that magnitude going forward. I do think that the Biden Administration has talked about what they achieved in the bipartisan infrastructure law, and I think they're interested in a railroad trust fund going forward.

So that is a key conversation to ultimately how any state, including this state, gets all the work done. I do think what we need to do on the state side is prepare for that. And I guess what I'm cautioning against and just thinking, going forward, it's been tough to fund a project with the only source of funding being something that has an expiration date, because you're planning beyond that.

And I've got a statute that tells me to build this and I've got funding that allows me to build this. And so what I'm doing, the way we are proceeding in that environment, is we're doing it in building blocks. We're giving you the portions we think we can get done with the funding we have. And we're trying to get to a system that ultimately can get done. And so I think it's going to take two things. It's going to take a federal partner that is in that for the long term. And I think for us, we're trying to get the valley operational. We're trying to get more of the preconstruction work done on the ends so that we can refine exactly what those costs look like and then have conversations over how we do that going forward.

So in this particular segment, we're at like $28 billion in fed funding.

Yeah, depending on how Cap-and-Trade does, we have between $28-31 billion, and the cost is between $32-35. And we're hoping to close that gap with more federal funds.

Even if we extend the Cap-and-Trade to 2050, most of the things that we're working on right now are going to diminish that pot of money. So if we did have the wherewithal to do it past 2050, it's still going to go down. So you're still not going to get that pot of money. What I'm getting at here is this one project is sucking all of--most of the transportation dollar opportunities for everything else in our road system and our transportation system in California.

I come from a district that will not benefit from this whatsoever. But what we are not benefiting right now from is not having transportation dollars to finish the stinking roads out there or put in massive amounts of other infrastructure to accommodate the growth that's being told we have to be out there. And so it's hard for the public after they were told the whole thing was going to cost $38 billion--if you told them it was going to be $127 billion-

Actually, probably by the time we get there, it's going to be more like $200. This thing would have never been started because we wouldn't have never passed the bond. And that's where you talked about the other two legs, the federal and the state. Well, there's another part of that, and that's the public. There is not a person in the public domain that I talk to that thinks that this is awesome. They're done with the bullet train.

What they want is the rest of their infrastructure put in so their homes don't get washed away so they can drive from one city to another after a storm. All of those things are what they're worried about right now. And I'm concerned that this--we're continuing to do this. I want this one segment to get done. I'd like us to take a break so that we can get the rest of this stuff done. There's some more hurdles for you, and that's the public.

It's doing projects in California. It's not necessarily the efforts that you or other folks have put in. But all those jobs that we're talking about, they can all be put to work doing all the other stuff. But right now the air is being sucked out of the room, funding-wise, by this one project. How do we get the public on board with something that has this much of a downside to it, funding-wise?

Well, respectfully, Senator, I'd say a couple of things. One: I think the only way you get the public is by performing better. And I think the authority is performing better today than it was, and I think it will going forward because we're laying out the path of how to deliver this project going forward. I think there'll be a lot less chance of the large cost and delays that you saw because the chronology and the sequencing of the work going forward is right.

Secondly, on the sucking up of all transportation dollars: I was the secretary of transportation for the State of California when we passed the largest single transportation investment package in the history of the state, SB 1, and this project did not get a penny of those dollars. Not one penny. Okay. So $5 billion a year, $50 billion over 10 years, hundreds of billions over the decades that SB 1 will be in place, and this project doesn't see a dime of that.

And so we got Cap-and-Trade dollars, which we're thrilled to have. Without them, we would be done. But I do think there's another consideration here. I don't think it's sustainable going forward in the era of climate change to just build roads. I think we have to build transportation systems that meet three or four key objectives. They've got to improve mobility in a way that road expansion does not. They have to get people from point A to point B in a quicker amount of time.

It has to be clean. It has to not produce the emissions that traditional and technologies of the past did. It has to be accessible to Californians, something that they can use. And it has to create great economic benefit. And I'm just saying, in my 30 years of public service, working almost entirely in the transportation space, I've never seen one project that touches all of those buttons as much as this one does.

And I've been here in this committee and in other committees advocating for it and doing the work for it, because I think it's the right thing to do for the future of the state and the country. And, yes, it's a challenge. And just like when I worked on the Bay Bridge years ago, and you're stuck in the middle of a very tough project, it feels impossible until it's not.

And then you just grind. You do the work, you perform better, you deliver. And you're right. We got to get this middle section done. We got to get this middle section done. We are on a better path today on it than when I started, and I believe it will get done. And that I hope we have the wherewithal to do San Francisco to LA in 3 hours, because that's what this project can do, and I think that's really important.

Okay, last question.

Come on.

What methodology did you do to arrive at the ridership numbers that make this operationally sound as far as funding is concerned, when this one segment is done? Because it seems to lack the elements--and I talked about this last year--of what people jump on a rail for.

Well, when you model the projections for ridership, you use things like demographics, which include population, connecting services, all kinds of things that go into the ridership model. And I'm happy to-

Did they do any surveys?

Yes, they did do surveys with the public on this. And so that's all of what goes into this. There's a model that we are pivoting to in the project update report in here that captures not just what we are anticipating to do, but also all of the services and where they'll be in the 2030 to 2040 timeline under the State Rail Plan. And so we're modeling our work with everybody else and trying to articulate what a system and a ridership will be on connected services.

Because our initial system is connected, it's not all just us. So when we talk valley to valley, that's a trip that everybody's just on us. In the Central Valley, there's transfer points with ACE and San Joaquin's that are more relevant. And so we talk about it for all of those system elements. I can certainly have our ridership guys meet with you and go through this. And our ridership numbers have been peer reviewed in the past and they will be peer reviewed going forward. And so again, we're happy to subject those to any review that anybody would like.

And I lied. I do have one more question.

Sure.

The logistics of going through both the southern section and--you have mountains, et cetera.

Yes.

Does our $100 million funding gap, does that include the potential for having to tunnel through?

Yes, it requires that we tunnel through.

Right. But the funding gap number--that included in that funding gap.

It is.

Okay.

Yes.

Maybe--we just spent $38 billion.

We're not going to debate on the debt in the dais here, we're not going to do that.

Thank you.

Senator Dodd.

Yes. I appreciate, Mr. Kelly, the great work that you and your team have done since you've come aboard. We've heard the arguments in the past of where we've been. We've had these same kind of conversations every single time we have a hearing with you coming here and answering those questions. I love the Bay Bridge analogy. As you well know, I was chairman of MTC at the time, and we took a lot of static. That thing was going to be $1 billion project.

It ended up being $7 billion. You look at the big dig in Massachusetts. These are not great examples, but it's --sometimes just stuff happens. I still feel like I did back when when I supported the project. I wish we'd done a lot of things different. Don't get me wrong, I know you do as well.

But the bottom line is: my generation--some of you are my generation--has not left anything for future generations in the state, particularly with climate change staring us down. I still believe this is a project that needs to get done. It's going to cost a lot of money. We know that. But later on, we will have people looking back. Even the people that be surveyed in your district, I'll bet, will come back and say, "Hey, these guys had a lot of foresight.

Sure costs a hell of a lot of money, but they had a lot of foresight to get this done." We are still never going to cite, with CEQA requirements and everything, another major airport in this state, yet every single flight I take coming out of this state going anywhere is full all the time. Cap-and-Trade funds, those were not going to go for roads and streets and bridges. Let's just face it.

If the Cap-and-Trade--if Jerry Brown hadn't done what he'd done with Cap-and-Trade, it would be going to other things, but it certainly wouldn't be going to other infrastructure projects necessarily. And the same thing with the federal funds that we're asking for right now. These are siloed federal funds that are going for high-speed rail in our country to support the mission that this president has brought forward on wanting to have more high-speed rail.

As for capital versus operating, I think with all due respect, Senator Niello, I appreciate--as a business guy, I appreciate the fact that businesses look at, "We can't look at those type of things without looking at amortized capital costs." But this is traditional in government funding for transportation projects.

If you could imagine transit operators that are buying all these brand new hydrogen buses, all these different new technologies we are, that they would have to pay back at a fair box recovery in order to get any type of federal or state monies. It just doesn't pencil. So I think those are apples and oranges. I think that what we know for sure is that we've got--so I don't think the Prop 1 thing is an issue for me--we've got a federal partner that seems to want to invest in this. We've got to take them down the road all the way. And I just think we need to move full speed ahead with our eyes wide open. And I hope you guys hire somebody with the same skill set as Mr. Kelly. Thank you.

Thank you, Senator. Senator Allen's next.

Well, I'm in this funny place where I'm kind of agreeing a lot with some things that both Senator Dodd and Senator Seyarto have had to say. First of all, let me start by just saying how grateful I think we all ought to be to Director Kelly for coming in with the competence and riding the ship--immensely important. And it's also nice to have someone stick around and actually see things through.

We had such an incredible turnover, and I really do hope that whatever plans that you have involve you delaying those new plans as long as you can. Because we really do need continuity at this organization. I think the track record from the past shows that desperately. Of course, I want to see this thing built and done. The question is, the costs are so massive, and they really do ultimately rely a lot on some big infusion of federal monies.

We know how complicated the situation is in Washington. It could get more complicated. So, you know, obviously, you can't prognosticate about the future of rail funding for the United States of America. But I will say, I couldn't help but kind of twitch a little bit when the Brightline folks came over and declared that they're going to build a high-speed rail line from Rancho Cucamonga to Las Vegas by 2028, when we're looking at Merced to Bakersfield by 2033. And this thing started in '08.

Guess I'd love some reflections on--I suppose you've, you've, you've given us some information about, about why, why that massive delta between those two projects. But I do want to ask, what are some things we can do to get some of these costs under control to really give us a fighting chance of getting this thing done? I'd love to see it get done, of course, but these costs are really harming our ability to think about that credibly.

And while it may not be sucking up a lot of SB 1 funds--it isn't at all--it is sucking up a massive amount of GGRF funds. And quite frankly, the value per ton of carbon is far less for this project, even with your ridership numbers, than for a lot of the other kinds of projects that are financed at the GGRF. So that's a fund I care a great deal about.

And I want to make sure we're doing our best to provide real, tangible climate benefits to Californians, everything from weathering to energy efficiency, et cetera. So those kinds of projects are getting underfunded, and partly because we've got so much money wrapped up in the continuous appropriation. So I would love some thoughts on how do we move forward with this project, with getting some of these costs better under control?

Well, I guess I would say. I think, as I said earlier, one of the things we learned is just, I would not repeat the exercise of going to the public for partial funding of a project. I think a $9 billion exercise for something at the time, in the same general election pamphlet, estimated the cost of the system at $45 billion. And then expecting specific delivery dates is unrealistic. And I think we should all learn from that.

What was all that? That was just if they'll build it, if we start-

The idea was get started with $9 billion and let's go find federal and private and local money to come and help match this. And I think a couple of challenges that I've learned over that is one: from a local--this is--a project like this that is statewide in nature, San Francisco all the way to LA, is always by its nature going to be a state priority.

And so I think looking for a ton of local money to help build this is challenging, at least at this stage. I think it will get better as you go forward because the local benefits will become clearer. But I think initially, suggesting local funds would come for a statewide project was not the most realistic thing. I think providing one-fifth of the project costs, and again, expecting strict delivery dates was unrealistic. And it's not me or anybody else, or you or anybody else.

Nobody can promise a delivery date when it's unfunded. I think the things that we own at the authority that started before I got here and things I learned on the job are--we owe an obligation to perform well, to perform better, to announce milestones that we can achieve and then achieve them. And I think for a long time there was more hope in some of the milestones than there were realistic expectations. And so you have to adjust that.

I've learned a lot about the CEQA process and I am of a split mind on it, to be candid with you. I think on the one end, the CEQA process is extremely valuable in having the right conversation with the communities that you're building in on how the project will work in the community and what you have to do for it. I think the litigious nature of that process is harmful.

And I think there's often litigation filed over things that have nothing to do with the environmental process or in the environment. And when I started here, I think we had seven outstanding lawsuits when I started on 119 miles of cleared property, and at one time it was 12. When I got here, there were seven. We took an effort to settle all of them. Today we've cleared 422 miles and we've only got three lawsuits.

We settled the Burbank one and we have two left that are in negotiations now. So it's gotten better, but that takes a long time. And so there's some things there that I think are tricky. And I think there's always more we can do to work more efficiently with different agencies, both federal and state, on moving faster, on permitting requirements as you go through construction. I think there's a lot you can do to streamline some of those processes.

So those are things that I think are important, too. Some of what's affected the project--again, what happens when you don't have full funding is you lose time. And when you lose time on a project of this magnitude, the dollar signs are huge. And so if I don't have full funding, you can't deliver something by a date certain because I don't have full funding, and then you push out those dates. It's billions of dollars every time you push out the dates.

And that's the reality of when you don't have full funding. It's impossible to meet a specific date. So I hear and have heard a lot about what was said 15 years ago on the bond bill and what the costs would be and that it would be done by 2020. But if you're really candid about that, the bond bill provided one-fifth of the funding and said we get done by a date certain, and the rest of it hasn't come.

And over time, those costs get more expensive because on a project of this magnitude, a year's delay and a percent of inflation that applies to that is mammoth in the billions of dollars. I think if I really break down our cost estimates for the future, most of it is tied to time and inflation and escalation tied to time. Not anything the authority is doing poorly or right from a management perspective. It's time and an unfunded project, and that will be the cost driver going forward.

Yeah. Well, I mean, it sounds as though there was a lot of problems associated-

There were. In the beginning.

This interaction between the speed with which we were being asked to start spending dollars.

Yes.

And that did lead to mistakes.

So I guess the other lesson I would say is--I think this is an important one--I want to recognize my federal partners here. They did learn an important lesson. When they funded this project back in 2008-9, they had very strict spending requirements. That money has to be spent by a date certain. That ended up being a perverse incentive for a lot of things. And around the country, many project sponsors did not meet those deadlines.

We were the benefit of some of that because some of those dollars that didn't get spent elsewhere, we absorbed either here on this project or in other projects in California. But it also affected us in a bad way in that the authority worked hard to spend money, which meant going into construction at risk and without having the chronology and the sequencing of the work in the right order. That came with delays and costs later. So making sure that the right incentives are tied to dollars for projects like this is also important.

Now, when you mentioned the concessionaires down in Southern, Northern California that could help to fund this, are you referring to the model that we've seen in places like Taiwan and China and France, where the rail authority has a certain amount of land around the stations? They know that as a result of the construction of the train, they're going to bring all this extra value to that land. And so you can then get some money associated with the development of that land to help finance the project. Or is this more-

Some of that is tied to, like, trains that are already in development around the station-

Are we doing that, like in Taiwan ... seem to have financed the project there.

Where we are building stations in the Central Valley, we're looking for opportunities for value capture. Those could be leases at stations for revenue-generating things like concessions, like food or-

So that's what you're talking about.

There's some of that. There's also other places where we may own some parcels where there might be opportunities for a joint development thing with the local government or with a private sector partner where you can have some revenue sharing off of that. We're not quite there on all of the specifics on that yet, but those are some issues around stations that are relevant to us that we want to look at, and that's what some other countries do.

The concessionaire that I was really referring to on the P3 side had to do with where you have a segment--and I experienced some of this on a recent trip last year in England and in France--where they built certain sections with high-speed rail, for either high-speed rail or improved public transit in England. They'll offer a private operator to operate that system, and that operator pays a fee to do it.

You can use some of those dollars they pay to do it to do capital expenditures somewhere else or expand the project, and then they get the revenues that come from the operations. And so for them, it's a system that works in terms of a money-making system for them and for the state, the concession that they've paid to operate that, you can use for other purposes.

And we could do something similar to that and still be in compliance with the letter of-

Yeah, you can in where it's a revenue-generating segment. And that's why I'm saying it's more relevant in the Bay Area and LA. What we want to do and what I'm proposing that the authority does this year is go out for what we call an RFEI, a request for expression of interest, which is engaging the private sector in this dialogue now.

Because as we talk about these things later--and where you might have these opportunities on a statewide system--there might be opportunities to bring in that kind of private capital. And so we want to talk about that. The other place is on the station development side, though, and those are conversations that as we get closer to developing those stations and working with local partners, you can work through some of those issues as well for revenue.

Now, this $100 billion delta that you were dialoguing about--the environmental reviews will be done. That money is literally just for the construction. So that's tunneling and labor.

Yeah, it's tunneling. It's capital. It's also train sets we got to buy. At the end of the day, I think we have 66 train sets for the whole State of California. In the Central Valley, we're starting with just six.

There's not kind of new--the sort of problems that you've been talking about: permit-

No, it is for all the preconstruction stuff. It is for right-of-way acquisition, utility moving, construction elements, buying trains. All of that is in the cost estimate.

Are there things the legislature can do that could help you drive down that cost?

I want to give some thought as to what it is that the legislature can do. I think there are things along the way. As I said, some of the litigation challenges in the process have been difficult. I wish that the CEQA process wasn't quite as litigious as it is. I don't know.

We've provided expedited review for all sorts of things--we've done it for stadiums, we haven't done it for this--at massive cost to the public. So that's an example. Right?

I mean, it is, although--but I'm coming to the end of my environmental review. So in terms of helping this particular project, I mean, I'll be done with these in 2025.

I'd love if you have insights on that.

I want to come back to you on it, because I do think some of it is on even some of that post process and some of the permitting stuff that we go through going forward-

-that matters. Some of the costs that we're seeing--like, again, inflation spiked dramatically during Covid and we're reflecting that. But those are things that you all can't control. So I think--there may be other things, when we get to some of the elements that you're talking about on station development and some things we can do to encourage the right kind of development around stations that can also benefit the authority. I think that's an area that we want to come back on.

Okay.

Yeah, I'd love to have a dialogue with you on that. Because at the end of the day, Senator Seyarto's point is correct. It's such a massive delta and we just don't--where does that money come from, right? And so if there are things that we can do to chip away at that number, that gives us a fighting chance of actually realizing the vision that Senator Dodd articulated; actually leaving something that's tangible for second, next generation.

I appreciate that.

Thank you. Let me just make a couple of points. First of all, thank you very much. And on the questioning, the inquiries that Senator Durazo and I think some others made--I know we had a chance to talk before the hearing with regard to equity, community benefits, and how that applies ongoing aside from just the construction work itself. And thank you very much for all the work that's been done to create equity in the construction work, including what's going on right now while we're holding this hearing. And we can see that on the screens, we can see the workers out there working at high-paying jobs.

But if you can keep this committee apprised of some of those unknowns that you're still working on, how exactly you'll be able to weight the RFP process, for example, on the rolling stock, it sounds like you're not quite there yet in terms of knowing exactly how much you'll be able to lean in on that. And we don't get the updates regularly enough--I understand you're leaving, but if you can leave that as part of--a small part of your ongoing legacy to make sure that we get reports on how aggressively those standards can be applied, given the restrictions that you're going to be dealing with, including any federal limitations. It's just a request for-

Can I just set a little expectation on that?

Sure.

And then we'll do whatever we can do.

In the interest of time-

Yeah, I just want to say that-

I just want to try to do bullet points here at the end.

Sure.

Go ahead.

Okay. My board is scheduled to have a public hearing on April 11. We're intending to bring the RFP to the board on April 11. About a week in front of that, we put out all the board materials publicly that the board will contemplate. That will include a very comprehensive summary of the RFP, including how we will be applying the USEP, the employment plan, in the context of that summary, and then we will have a public hearing to take public comment on that on April 11. So that's what we're looking at going forward.

Great. That's excellent. Just a general comment. I don't expect a response, so you're welcome to make one. Your presentation has been excellent. I have no critique of the presentation whatsoever. What's different about it--especially relative to some of the presentations I heard over the years prior to your involvement--in my own county, a lot of high-speed rail oversight meetings were held right in our Board of Supervisors chambers over the years was the cost of delay.

And I know you have ranges in here, and I know you've said clearly we've factored in inflation and costs to these ranges, but you're also clearly and candidly indicating that we're managing a project--you're managing a project without even knowing if you're going to be able to hit benchmarks and timelines. We're still in that position because of the $100 billion delta.

It seems to me that it's worth the risk of backlash. The sense of urgency that you get by really defining what that $128 billion is going to cost for every day and every week and every year of delay on finding the resources that Senator Allen and others have been questioning you about, I think it's worth speaking very candidly about those costs. You talked about them being enormous, or some better word than that, a better descriptor. I've heard over the years speeches, lengthy articulation.

Rod Diridon, an advocate in our own area, just putting it out there and saying if there's an argument for going now and going fast: we're here, we're pretty deep in the water now. And now the cost can only be controlled by finding the money and doing the implementation, especially since you've got the design ready to go, you're ready to bid. You're welcome to comment on that. And then I just have one more point after that, and I want to get to the next panel.

If I hear you right, I think you're saying express in this clearly the cost of delay, and I think we want to take that back and figure out how to do that.

It's risky every time you say it. I mean, we're going to get folks that are concerned with, "See, you just put another big number out there." But the risk of not doing that is, I think, some complacency in terms of the urgency. And I think there are people here who do want--we've heard it--want to help find the money. Lastly, kind of a self-segue.

If you take the total miles of this project and you divide it--miles--into the $100 billion, it's not so hard to scale community facilities, districts up and down the line--they're not going to be transit-oriented development in the traditional sense because you don't have stations up and down the line. It's the nature of high-speed rail. But we can--and I think the legislature can create streamlining for permitting for high-density housing and other opportunities along the corridor.

And I hope this request for expressions of interest really calls for that, asks for that. We were having conversations. I was with people like former MTC Chair John Rubin, Supervisor Aaron Peskin in San Francisco about just taking the peninsula section and trying to figure out how to do some kind of aggregated RFP where there's an opportunity, a call for proposals to really kind of solve two problems at once.

Start addressing our high-density housing needs and our affordable housing needs by streamlining dense development along the corridor. Not because you're close to a station, but just because we need the money. You get the exactions. That $100 billion scales pretty well over several hundred miles. It starts to divide out. It starts to look very doable in terms of the kind of development exactions you could get out of project after project after project through Carrillo's facilities, districts, probably ... districts, whatever. We have those tools.

I don't think Senator Allen's point that I was alluding to--I don't think the legislature has come in with an SB 35 type of approach, or SB 423, to come in and say, if you're going to build along the corridor and create contributions to this line--I would call them exactions--then you're entitled to clear those environmental concerns overnight. We can streamline that process, and I think that's something we could really do. As to your point, there's no point in trying to streamline your environmental review anymore.

It's already done. But if we could do that along the corridor, I think all of a sudden you've got scale. I think $100 billion starts to look like actually a pretty doable number relative to the kind of development that you could get. You're talking about less than $1 million per mile on the line if I've done my math right--million bucks on it. And I'm not in a debate about how hard it is here.

I'm just saying I think it's hard until it isn't, and it isn't as soon as we create more scale and more private sector opportunity along the way. I'd like to be part of that ongoing discussion. So I hope with that, too, you can report back to us as a committee. I don't know what the assembly committee has requested but report back to us so we don't have to wait until next time around for an update from your successor to understand exactly what kind of interest we got from this expression of interest and whether or not you need to go out with another one based on what you learned from the first one.

I think one thing that we can do with your office is develop that expression of interest. I mean, it'd be good to get that kind of input on what should be in that before we go out with it. So I'd like to work with your office on that.

I think private sector and local government interests need to be involved in that. But thank you very much. And if there's nothing else, we'll go on to the next panel. We appreciate you being here.

Thank you, members.

Okay, so we're going to hear from Helen Kerstein from the Legislative Analyst Office, Lou Thompson, Chair of the Independent High-Speed Rail Peer Review Group, and Benjamin Belnap, High-Speed Rail Inspector General. Welcome to all of you. I understand we're going to start with the LAO's Office. Is that correct?

That's correct. Thank you so much, Mr. Chair and Senators. Really appreciate you inviting me to participate in your hearing today. To guide my comments, we've prepared a handout. I think the sergeant should be passing out those handouts. They're available on our office's website as well as on your Committee's website for those who may still be watching from home. It's a relatively long handout. A lot of this is background both on the project and on the business plan. I know you've gone over this in great detail.

You've had a very robust discussion this afternoon. So I'm going to try to go relatively quickly, and I'm going to start kind of midway through the document you have before you on page 16. Again, I'm going to try to go quickly because you've covered so much ground already in this discussion. You've stolen my thunder a little bit, which is wonderful. That's exactly how I like it.

We appreciate it. Thank you.

So first, I'm going to highlight some key issues for legislative consideration, then I'll go quickly into some recommendations that flow from those key issues. The first one is, despite the large federal infusion of funds--and you heard about that, the 3.3 billion dollars that the project received over the last couple of years--there's still a significant funding gap. You heard that probably around seven billion dollars, depending on exactly what part of the range you look at.

And while the Authority has a target of the 4.7 billion dollars of additional federal funds that you heard about, we think there's a lot of uncertainty regarding whether or not the state will be successful in securing those funds. And at this point, the authority hasn't put forward any kind of detailed plan that would allow us to assess the credibility of that target. So we think that's a challenge.

We also would note that there's no clear plan for addressing the remaining portion of that funding gap, which is also a challenge facing the project. The lack of this detailed funding plan is a problem because it's hard for this project--as you heard in detail--to move forward when there isn't a lot of certainty. And it does raise the risk that the Authority could move forward with some work that ultimately can't be fully completed.

You move forward with electrification, for example, but then you're not able to complete more than the first 119 miles. That probably wouldn't make a lot of sense. So it's a challenge if the project doesn't have the money it needs ultimately to finish whatever work it starts undertaking. If you turn to page 17, we also highlight that we think there's significant risk that the funding gap could grow.

As you know, this project has a history of past cost increases, and we think those certainly could continue in the future. Also, GGRF--well, we've had some really robust auctions recently, and that's good. There's a significant uncertainty regarding that funding source, particularly as we get to that 2030 expiration, so we think that there's some uncertainty whether the Authority's estimates will be accurate or not. We'd also note that the draft plan doesn't include details on the timing of when additional funds will be needed.

We understand they're planning to put that in the final plan, which will be helpful. We think that will be important information for the Legislature to have. If you turn to page 18, again, I know that the Committee discussed this in great detail, but there's no funding plan for beyond Merced to Bakersfield. So really, ultimately, a lot of the value of this project will be if and when it can move beyond the valley. And unfortunately, there's no funding plan for that.

Depending on what part of the range you look at, the exact dollar amount of that gap varies, but it's likely at least 80 billion. We heard probably about 100 billion, and certainly there's a lot of uncertainty in that number. So we think that's a challenge because it's hard to know what the path forward is if there's no clear plan for how to fund it. Turning to page 19, we highlight another issue that we think is really critical for this project, which is project oversight.

This is a big project. It's so big and it has had so many challenges, and we think there are a number of things that have been improved, but there's still a lot of risk associated with a project of this magnitude. And so we think it's important to have strong oversight. The Legislature made some really important steps in this area. A couple of years ago, the Legislature created the Office of the Inspector General. I know you'll hear from the first IG shortly.

That was a really important step to really strengthening this oversight. And we have a few areas we think could be particularly valuable for additional oversight in the near term, especially. One is these federal grant agreements. 3.3 billion dollars. Fantastic. It's wonderful. We're all excited. But as you heard from Mr. Kelly, some of the history of this project is that we entered it into federal grant agreements that had provisions that made it actually hard for the project to move forward in a way that made sense.

So we think it's going to be really important to look at the details of those funding agreements and make sure they're not constraining the state in ways that don't make sense and to make sure that they're really consistent with legislative intent. And then the second area we think is really crucial for that oversight, especially in the near term but both of these on an ongoing basis as well, is the very large contracts that the Authority is planning to enter into in the next year or so.

So you heard about the trainset procurement. That's one of them. That's big and important, and I know there's a lot of legislative interest there. Tracking systems is also so important. It's a very large series of contracts. There's going to be a lot of integration risk. It's going to be crucial for having this project work well.

And so we think it'll be really important for the Legislature to make sure that, again, those contracts are really structured in ways that are consistent with your vision as a Legislature and don't expose the state to unnecessary risk. If you turn to page 20, again, I'll try to just briefly go over these recommendations because they really flow from those key issues. The first recommendation is that we recommend the Legislature consider developing a funding plan for Merced to Bakersfield.

So we heard about the challenges of not having identified funding. We think there's likely billions of dollars of additional funding that will probably have to come from the state. So the sooner you think about how you want to address that, the more time you'll have to weigh the really tough choices you probably will have before you about how you're going to want to achieve that funding gap should you continue to want to move forward with Merced to Bakersfield.

If you turn to page 21, we also recommend that the Legislature seek additional information from the Authority. So as you're crafting this funding plan, you may need additional information to help you do that. One thing we think is going to be important is understanding the credibility of that 4.7 billion dollar target. How real is that? How likely is it that the state will receive those funds so you can figure out what the delta is, right?

And then the other piece that we think is really critical is understanding the timing of when those funds are going to need to come because that's going to be important as you make your decisions about which funding approach to use and when you're going to need to actually approve that additional funding without affecting the timeline of the project because we heard, right, that every time we delay this project, there's a cost. There's a dollar value.

So really making sure that the Legislature has time to plan out when those additional funds would be necessary is critical. Then finally, the last recommendations we have relate to oversight. We think it's important to support a strong and independent OIG. We have a publication separately that I won't go into in the interest of time that provides some specific recommendations related to the OIG's office to make sure it has strong budgetary independence and adequate staffing, and it can attract and retain qualified staff.

And then again, we recommend focusing on those key oversight issues, especially in the near term related to those contracts and those upcoming grant agreements. And we think the OIG could potentially be really well-positioned to help you with that. So you've made an important action in creating the office, and now you can take advantage of that, potentially by directing the office to provide that oversight on your behalf. Happy to take questions at the conclusion of the panel.

Thank you.

I guess I will go next.

Mr. Thompson will go next? Thank you.

Okay. Chair Cortese, Vice Chair Niello, Members of the Committee, I appreciate the opportunity to speak to you today. As you know, the Peer Review Group, of which I'm the Chairman, was created by Proposition 1A and charged a report to you on matters of interest. That is, we work for you. Today we'll be talking about the 2024 draft business plan. Helen Kerstein's analysis is, as always, comprehensive and accurate. We and the LAO are in close agreement.

I can say the same about the work that your staff has done for this hearing, and we fully share the concerns stated by Ben Belnap in his statement. These papers parallel many of the comments in our letter of March the 8th, 2024. The Authority continues to learn from its experience, but project costs continue to rise and are subject to considerable risk.

On the upside, because most of the project remains in an early design stage or less and there is no experience to date with major elements of the project, schedules are stretching out, demand estimates have fallen, and financing is inadequate and unstable. But I don't want to belabor this because you already know it. The details are in our letter. Instead, I would like to focus on something we talked about last year, which is the dilemma that emerges from these facts. It's a simple dilemma.

The proposal to build a high-speed, fully electrified segment from Merced to Bakersfield makes no sense without a commitment to build the entire Phase One system. There would be a much better and more efficient way to deal with just Merced to Bakersfield. But building the Phase One system would have to be based on a commitment to secure funding far beyond the funding available from existing or reasonably predictable sources. This is not critical of the HSRA staff. I completely agree with--this is one thing I agree with Brian on.

A project has always been overpromised and underfunded. It got off to a tough start, partly due to inexperience and partly because the free federal money caused them to award contracts before they were properly prepared. This is clear. Managers have learned some hard lessons and the procurement strategies are changing accordingly, and that's good.

But from the 2024 draft business plan, we now know that Phase One will cost three times what was promised when Proposition 1A was passed. Added uncertainty arises because cost estimated for major elements of the projects, 50 miles of tunnels, track work, electrification, signaling, and rolling stock, are not yet based on actual bids, but only on engineering estimates.

Phase One will also take 15 to 20 years longer, will not realistically meet the trip times specified in Proposition 1A, and is now predicted to carry only about 70 percent of the passengers. The results raise questions about the viability and the priority of the project given the other financing needs of the state. In light of these challenges, we made a series of suggestions last year and making some this year.

One is the Legislature could 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 One. We continue to urge that this be done because there are and will be many other claims on the state's scarce resources. So you need to know, what is this priority?

Notify the Legislature and the Inspector General of the results of the upcoming track systems in rolling stock stations and Merced and Bakersfield contracts showing the contract value and expected completion time because these contracts will be important precursors of the next phase in experience in the project.

We believe that the memorandum of understanding that's being negotiated among the project and the state and the San Joaquin Joint Powers Authority needs a lot more attention and soon because many of those issues will need to be resolved and they are not yet in the table for signature and they could affect the outcome of the project.

We request development--you could request development by the LAO or another agency of an analysis with the options and tradeoffs available to the Legislature for how to fund the potential seven billion dollar gap for completion of Merced to Bakersfield and the potential 93 to 99 billion dollar gap between this section and the remainder of Phase One system. It is critical that any funding approach be fully funded and stable and predictable from year to year. This has not been done and is ever more important.

We can't emphasize too strongly that inaction by the Legislature and Governor to identify an adequate and stable source of funding for the project is increasing costs and hindering management's control of the project. Brian and I are in exact agreement on this point. You could also commission an independent study of the experience of the project and the lessons the state should learn from this because we are going to be doing this again and we should not make the same mistakes.

It's not that hard to do this and to put together a kind of a manual of what we should and shouldn't do as we undertake projects like this. We have an additional request. Over the past five business plans, the roles of the LAO and the Peer Review Group have converged. LAO's work has been excellent, and their conclusions closely parallel ours. The Senate and Assembly Transportation staff are unusually experienced and competent. The creation of the OIG adds another mostly concurring voice to the discussion.

The Peer Review Group has attempted to cooperate closely with all of these, and we believe their work is of great value. The question is what, if any, value the Group can continue to add to the work of these well staffed and professional agencies. We would appreciate any guidance the Legislature you have on what we might do in the future.

This was not a welcome message last year, and I'm sure it's not welcome this year either, but the results of the 2024 draft business plan and the financial implications it have make it ever more urgent that the state review its commitment to the full Phase One if it can find a way to pay for it or start the process of defining and considering the alternatives. Thank you. I will--happy to answer any questions you have.

Well, thank you, Mr. Thompson and thank you for your service. I know you've been steadfast. And Mr. Belnap, you're next. Thank you.

Good afternoon, Mr. Chair, Mr. Vice Chair, and Members. My name is Ben Belnap. I'm the Inspector General for the newly-formed Office of Inspector General of the High-Speed Rail. My background is auditing. I come by way of the California State Auditor's Office. I served there for over two decades. My team and I have reviewed the Authority's draft business plan, and although our review is ongoing, I will share some initial observations.

You will find these observations in greater detail in the testimony brief that I think was just provided to you. Because you have that in front of you--I'm considering a late hour--I'm going to truncate my testimony to four observations. First: the plan needs to be improved in the funding plan first. There needs to be a development of a more detailed funding plan from Merced to Bakersfield segment. Second: the Authority needs to formally establish a policy upon which it will update project costs.

Third: it needs to more clearly address each statutorily required reporting element, and then fourth: needs to increase transparency in certain parts of the plan. So on those first two points, the more detailed funding plan and the adoption of a cost update policy that stems from a review that my office conducted on the 2023 project update report. And the High-Speed Rail Authority has indicated that they will implement those recommendations concurrent with their adoption of the final business plan.

The other point of more clearly addressing each statutory required element, we found that many of the required elements that predate SB 198 are not clearly addressed in the plan, and we're working with the Authority on making sure it does so before it reaches its final status.

Could you give an example of just one?

Yeah. Absolutely.

You don't have to go over them all. I know we have the report here.

Yep. So one really good example is that there's a requirement that requires a level of confidence in the funding that is in the funding plan and that is absent and has been absent for multiple business plans. With the implementation of our recommendation, we believe that that will be resolved. Another example, in the back of the report, there's to be a discussion of all reasonably foreseeable risks. However, what's in there now narrowly focuses on ten selected risks.

So the narrative that describes those management controls is tailored to five selected risks, instead of the top five risks that the enterprise group selected. So one example that you're missing is a narrative describing the strategies the Authority intends to utilize to manage threats to its schedule, monitoring, and management, which it's its second highest risk. So that needs to be detailed, and I think Mr. Kelly mentioned that. So that's an example there.

Thank you.

Another area that goes beyond what the statute requires but really goes into the transparency and the level of progress that I think stakeholders need to see is in the area of the operating agreements, and Mr. Thompson just mentioned that. The current narrative there does not describe what happened in 2023 in terms of progress. It makes it look like there wasn't progress on those agreements, even though the project declaratory report indicated that was part of the timeline, that 2023, calendar year 2023, there would have been progress.

We think that the narrative should describe why that progress didn't occur and why stakeholders shouldn't be concerned by that. So those are some of the observations that we've already shared with the Authority, we'll continue to share up until publication of the final business plan. So with that, I'll close my testimony and open to questions.

Okay. Questions or comments from Members of the Committee? Mr. Vice Chair.

Thank you, Mr. Chair. Question, I guess, of all three: I raised the question of cost updates for the full system, including Southern California costs, and given the updates that have occurred so far--and I think, Mr. Thompson, your report said this, which was my calculation--that every time costs are updated, it's about a 15 percent per year from the previous update increase in costs, and so far the projected costs in the southern section have been updated but with very little changes. Mr. Kelly expressed confidence in the upper end number of 128 billion, I think, for the eventual cost. How much confidence do the three of you have in that number?

I think there's a lot of uncertainty. I think it's a big project, right. And big projects have uncertainty, and this particular project is probably subject to even more uncertainty. And as I think Mr. Thompson referenced, there are pieces of this project that there's no history on. We're very early stages. Yes, we're completing environmental, but we haven't done geotechnical work. We haven't done advanced design. There's a lot we may find out about what's needed for tunneling that we don't know right now.

We don't have experience, as I think Mr. Thompson has pointed out as well, on a variety of elements. There are components of this, tracks, systems. I mean, right now, we've basically been doing civil works, which is kind of traditional construction that we do for all sorts of roads, bridges. It's not really that specific to high speed rail, but we're going to be starting to get into the pieces that are specific, that are more complex and where I think there is significant risk.

So I think it's very hard to predict, especially because some of the-- and I think one other point is that some of those project segments haven't been updated in a number of years. And as we have already mentioned, that's in large part because they're still undertaking their environmental review. But one challenge to that is we heard costs escalate over time. We've seen actually significant construction cost escalation, particularly during sort of the pandemic years. So how credible are those? I think there's a lot of uncertainty.

Maybe we'll be within that range, but it certainly would not surprise me if we end up above that range significantly.

Sure, I'll go next. Thank you for that question. I agree, Ms. Kerstein, that there is uncertainty. But one thing to note is that uncertainty is taken into account when you calculate contingency on a project. So one thing that I think Office of Inspector General needs to do is a deep dive into those particular calculations before I say that I'm not comfortable with them. So a deep dive into how did consultants in this case, calculate those contingency levels? What uncertainty did they bring into account?

I think if we ultimately are going to, and I agree with Ms. Kerstein because she has a public policy perspective. I come from an auditing, so we have two different disciplines here that work together. But I think my criticism would need to be in the calculations and not necessarily the broader context. And that's a review we have not had time to do.

Understand.

I guess I come from the gray hair perspective, and having done this and seen what happens when--

At least you have hair.

I do, sadly.

And seen what happens when you take on and make estimates of stuff you haven't done before, either because the technology is new or because you're going into areas in which you haven't worked before. And I therefore think that there is a lot of uncertainty here. And I don't know how big it is. I wish I did, but I can't tell you that it's small.

The second thing, though, I do want to say is that a primary impact on the uncertainty is the chasing your tail aspect of the funding. There is no ability to plan, there is no ability to schedule, there's no ability to lay out exactly when you're going to do it and how you're going to get it done. And instability like that, even if in total the funding is more or less okay, instability like that makes costing and management really difficult.

So if we're serious about this, if we really want to do it, we have to judge what our alternatives are and how we're going to do it. And that's why I have so strongly recommended that one way or the other, you ask the LAO or another agency to lay out for you, what are our options if we want to do this? 93 billion or $99 billion.

Where does it come from and how can we achieve it in a way that doesn't cause the authority to be unsure year to year, what kind of funding they're going to have, but yet gives them a responsible funding plan so that they can manage.

So I agree with Mr. Kelly's assessment of the original authorizing proposition, and much of what we're dealing with stems from that, the imprecision of that. If you go back and reread the title and summary, not the detailed analysis, but the title and summary of that Proposition, it basically said we were going to get a complete high speed rail system for $10 billion. I think that was intentional.

Now, in the analysis, it said, which I had a discussion with Mr. Kelly and his CFO about this, that there would be no subsidies, that the operation would cover all costs. And I understand what they're saying, that in the context of the railroad industry, when a public entity builds a system and then passes it on to an operator, they're not held accountable for their capital costs.

I don't know that in practical sense, that always turns out, because sometimes the entity that builds it also operates it like RT locally here, in which case they probably have to cover their capital costs, which is why they usually end up with an operating loss. So given my contention that when voters approved this, those that went to the LAO's detailed analysis and saw, oh, we'll never have a subsidy, we get the whole thing for $10 billion.

Well, if they read the whole analysis, they might not be misled by that, but no subsidy. How are we going to be able to reconcile what I think is the reasonable perception that the operation of the system has to cover all costs, including an appropriate amortization of the capital costs, versus the fact that that's not what we're going to do? How do you suggest we reconcile that to once voters understand what's really going on?

First part of the answer is that we raised this issue a number of years ago and asked that you define what those terms meant because the law is not clear. The second point is that I listened to the earlier discussion. There are, in fact, a few passenger railways that do pay back their capital. The Japanese system, in some regards, pays back its capital. A couple of the lines in France that perform the best also actually are financially profitable in that sense. That's the limit.

Every other system, it's not clear whether what the Chinese system is doing, although I would add that they built 20,000 miles of line in the time that we started this project. So if you want to know how you speed it up, there's part of your answer.

They probably don't have CEQA.

We would not want to duplicate that experience, I'm sure. I think it's unrealistic to think that the capital cost can be recovered. That is not what experience elsewhere suggests. I do think it's realistic to demand that the operating cost be covered, and I believe, my personal belief is that there is a shot at doing that when the full system is built. There is no pretense of doing that Merced to Bakersfield.

The argument is that it will in total lower the subsidy that the state is paying to Ace and San Joaquin Power Authority, and that the authority itself will be fully compensated for its costs of the equipment and the track so that the authority itself will not be receiving a subsidy, as you would define it. Their costs are being covered. That depends very heavily on two things.

One, it depends on the demand forecast for that part of the system being reached, and it depends on a clear position by the state that whatever the costs are over, the revenue that it will back up because the authority can't and San Joaquin Joint Powers Authority can't either. So it should be clear that the state is at risk here if the demand forecasts are not met, whether they will be met or not is a matter of opinion.

So I definitely echo Mr. Thompson's comments. So this is also an issue that our office has brought up in the past. One of the issues we specifically raised is whether the proposed sort of approach that the authority has is consistent with sort of the intent of the Proposition regarding an operating subsidy. I'm not an attorney and I'm not going to try to opine on legally whether or not it's compliant with Prop 1A.

But certainly I think there's a question that is a reasonable one to raise about what voters might have understood an operating subsidy to be. My understanding is that the authority's argument largely relies on the fact that they're using this third party operator, the San Joaquin's Joint Powers Authority, and so the authority itself won't have an operating loss because they'll be charging rent.

I get that.

But there is also some language in the measure that talks about that operated by the authority or pursuant to its authority. Again, I'm not an attorney, but I think these are the kinds of questions that are important ones. And I think there's both what's consistent with the law, but there's also sort of what's consistent with the intent and the Legislature's comfort level with that. And there's probably just, again, there's uncertainty. There's uncertainty about ridership. There's uncertainty about how much revenue that's going to generate.

Ultimately, we may not know the extent to which an operating subsidy is required until operations actually begin, and then we'll all see what the numbers come in at. So, I don't have, I guess, too much more to add. I'll turn it over to Mr. Belnap if he has anything else.

Yeah, Senator, it sounds like there needs to be a legal analysis and possibly statutory clarification on what does that subsidy mean and what does it apply to the whole phase one, Valley to Valley, Merced to Bakersfield, because Merced to Bakersfield is going to require a subsidy that hopefully is equal to or less than what the state is already providing for Ace and San Jones.

So, it's been posed in the past and asked for a better definition of what we mean. That hasn't happened, I don't believe. And so what's going to happen once we get done, or at least partially done, and if we work in capital cost amortization and we see that the revenues don't cover that, the answer is, well, sorry, we got a system, we'll just board you. What are we going to do about it?

There's no relief for the misunderstanding of the original Prop 1A. That 's just a statement. Those are the end of my questions.

I have just one question.

Okay, Senator. Senator Seyarto.

So let's move forward to what you were talking about. You got to have a pot of money every year that's dedicated to making this happen. But as you know, any projects, whether it's a long term infrastructure catch up project or this project, you're not going to spend it all in one year. You don't need the $100 billion this year. What would it take for the Legislature to--

Say they prioritize this, because I think there's a lot of support through the Legislature, maybe not from me, but from others, that they want this to go forward. What kind of commitment and how many years of that commitment would we have to make to be able to make this project move forward at a pace that it needs to move forward at? And how do we arrive at that number so we can tell people this is going to cost $2 billion a year for the next 40 years?

This is why we argue so strongly that you should ask that this question be studied and reported to you. The answer I can give you is the interstate highway program, which is the best possible example to think about, where they set up a stable, continuing source of funding, the gas tax. It turns out they had to increase it about halfway through the program.

They had a 30 or 40 year program, but they adjusted the program to the budget, not the other way around, and it was enough for them to operate in a planned and responsible way. They trained a cadre of people, they developed their standards, they implemented over a long period of time, and they got it done. Not as fast as you might have wanted, but they got it done.

And if you want it to be done here, I think that this, as I said, chasing your tail financially is not going to get it. And don't depend on the Federal Government right now to come up with the chunks of money whenever you need it. That's not going to work. Now, whether there will be a federal equivalent of the Interstate highway program called the High Speed Railway Program, 9010 program, I don't know. But you need something like that.

But even then, there's got to be a state share. One way or the other, there will have to be a state share every year, predictably and stably, so that the program can be managed properly. Otherwise, you're going to continue to have it slide out in time, bounce around contracts, not work the way they should. That is just a fact of life that you need to contend with.

And from a budget perspective, for us, that's something that we need to know because that's something you have to put aside is how much money we have put aside to accomplish this goal for the next few years and that gets spent first or that gets allocated first before we go and spend all of our money on other stuff.

Because this is very difficult in budget years when we're staring down the barrel of a $73 billion shortfall and trying to figure out where all that money is coming from and to have a $3.7 billion ask or a $5 billion ask for whatever it is that's short this year to be able to accomplish these things.

It would be a lot easier if we knew what the number was every year, just allocated it, and then going forward they could give us updates on how much longer we're going to be paying this $2 billion because it's $2 billion that we wouldn't be spending on other stuff, but at least we'd be making some kind of progress to try and get this done.

I'm not a big fan and this is why, because for me, it's a financial boondoggle and we can't get an end game in our head of what that looks like at the end. But at least that's a suggestion on how going forward we might want to offer to the legislation, legislators to look at it in a different way as far as the budgeting is concerned. Because you're right, you can't go forward.

You can't plan if you don't know if the funding is going to be there or not. Thank you.

May I add something?

Yes, you may.

Phase one is not going to happen until Merced to Bakersfield happens. Now, what you've asked for globally, for how much and how long to get to phase one, I think if you just take that and said, well, how about Merced to Bakersfield? That's exactly the recommendation we made is have the authority clearly specify when do they need funding to complete Merced to Bakersfield, not ethereal, to the month. When do we need the funding and how much? And that's two things.

One is you're figuring out when are these unfunded components, when do they have to be started? And the other is figuring out the prospects of federal funds. And to the extent that you're not going to get those federal funds, then it's probably going to come from state funds. And that's the calculation that you need as stakeholders and that we're suggesting these do occur for Merced to Bakersfield segment.

I would just say, you got to, in fairness, keep the third category. And also you got federal funds, state funds, and then you also have whatever comes out of the expression of interest process that's just beginning now, because there is potential there. I just want to make sure the record is clear on that. Otherwise, I think the narrative becomes it's taxpayer money 100% that we have to concede that at this point, as opposed to developers rights and those kinds of things.

There is no doubt that there is potential for private money. The problem is that in the prior request for expression of interest that the authority sent out, the answer was very clearly, build a system and show us that it works, and then we'll elaborate, we'll decide how much it's worth to invest. But you cannot get much money until you have something to demonstrate.

Yeah, I think I'm talking about. I appreciate your comment. I'm talking about less something of a partnership interest in the going concern, and less about concessions per se, and more about the development interests that are up and down that corridor that can generate by way of nexus and local government exactions and high speed rail exactions.

If the Legislature decides to go that route and allow that opportunity to generate money from development opportunities up and down a corridor that goes all the way, basically all the way up and down the state, all of a sudden you're talking about millions of dollars per mile in development opportunities. I think the reach that we're looking at right now is just almost a blank slate in that regard.

Development, fundamentally hasn't even really occurred along that corridor, and we see tremendous opportunities on the peninsula up to San Francisco for those kind of development opportunities. The question is, can the Legislature, will the Legislature create an actual nexus between what local governments entitle along that corridor and what they can exact for purposes of high speed rail and other opportunities, like community benefits, for example, which is we have practice doing that at the local government level, for example, with redevelopment agencies.

So I think it's something that we've created all the tools for in the state. I mentioned it to the prior panel. We have CRIAs, we have facilities, district laws. We can create special districts wherever we want. Developers can do that, local governments can do that. I think what we haven't done is lay out the strategy for that in an expression of interest document.

I think Mr. Kelly seemed to indicate, yeah, maybe we need to add that the next time around so that we start sparking some interest along the corridor in terms of what kind of development opportunities there may be. It's much better for us to subsidize affordable housing opportunities. When we have a housing crisis in the state, have those developers continue to subsidize this project along the corridor than it is for us to try to subsidize the project. That's my two cents on that.

Senator Allen, I don't know if you wanted the floor, but I thought you did. And I know I've been talking more than I usually do as a chair because of the nature of the subject, and we have public comments still to go. I know I have to absolutely have to be on my feet out on the sidewalk by 515 to get somewhere.

No, I know we all have to go. I had some very fruitful sidebar just now. My one question is for you, Mr. Thompson. I mean, knowing everything that, you know, you've been tasked with advising the Legislature on this project, I totally hear you. Right, your point is, if you're going to do it, you've got to come up with a plan for all this money. But you read the news about what's going on at the federal level.

You also understand what's happening with our budget at the state. Obviously, if there was an endless source of money, this wouldn't be a problem. But we've got a ton of other priorities and needs, both short term and long term, for our state. Where are you now philosophically on kind of next steps. I totally hear what you're saying. You're basically saying, well, if you want to do this right, get the money. But you understand how hard that is, right?

Given the amount that we're talking about here, what advice would you give to us, given everything you know?

I would say that if you can't come up with the money and it's not the highest priority, then maybe you can't do it. I don't know how to square that circle.

Yeah.

It's an important project. But as our first recommendation was that you make sure that this is still your priority, given that it's costing more and taking longer.

Well, when you say it's still our priority, I mean, it's never been a priority enough to have received the kind of funding that it really needed. We've always been kind of..

Well does that answer the question? I don't know. There's no way to solve this problem without deciding that it is a priority high enough to get the job done. I contrasted this with China, where they built 20,000 miles in the time that we started this project, because they wanted to do it. They put the money behind it. They had the authority to get it done and they did it.

What were the cost differentials between their permit?

I don't know. And I've seen the numbers and I don't believe them. So you never know about that. But we have started a project without the money. As Brian said, the total cost of the project at that time was about $30 billion, I think. And the thought was the state would come up with a third, the feds would come up with a third, and the private sector somehow would come up with a third. Those were not realistic. It was not going to work.

And as we stand now, it's still not going to work because the price has gone up faster than the sources of the money. So if we want to fix it, then I can't think of a simple solution other than fix it.

So, Mr. Thompson and Senator Allen,

there is a recommendation in your report that I think answers his question. If we're willing to do that. And that is we suggest the Legislature might want to Commission an independent review of the economic and financial justification, economic and financial justification for the project, including the ability to operate without subsidy, however, we define that, before recommitting to the full phase one system. That almost sounds like a timeout, but I don't know how else to answer that question.

All right, thank you, Senator Allen, anything else? I know you had the floor

I appreciate your very candid answer.

All right, well, it seems that that concludes the questions and the Q&A with this panel and for this panel, and I really appreciate you. I know a couple of you noted that, probably all of you, that you abbreviated your presentations in the interest of time. And I know the people who are here to speak in public comment appreciate that as well. And we do have, again, for those that are tracking what we're doing today, full, thorough paper presentations from all of these witnesses.

So thank you again for being here. We look forward to working with you some more on this. What's the format for public comment? So we're going to go ahead now and move on to public comment. Those wishing to testify will need to limit their comments to two minutes each, and that's a maximum, not a minimum. After conclusion of public testimony, we will adjourn this meeting. So this is the wrap up. We're still taking public testimony from.

This is my first time in this session chairing a meeting, and I know we've changed our rules a little bit about where witnesses will be. So if you want to speak under public comment, please come up to the microphone here in front of the wall. Sergeants will help identify where to be. Thank you.

I'm going to try to talk really fast, but I have a lot to say. Good afternoon, Senator Cortese and honorable Members of the Senate Transportation Committee. My name is Erin Lehane and I'm here on behalf of the International Brotherhood of Boilermakers. The Boilermakers have been around for over 140 years, building the transportation and energy infrastructure that has moved the masses, protected the nation and powered our economy. We remain in strong support of California's transformative High Speed Rail project.

We thank Mr. Kelly for his almost three decades. Where is he? Of public service to the State of California. It's probably escaped now. This project has already put thousands of building trades members to work and it will put thousands of more to work as we bring this train into the station, so to speak. We're grateful for the continued support of this Legislature and the Federal Government has played in moving this important project forward. And I thank you in advance for your continued support.

I also want to thank the Senate for its continued unwavering commitment to high road labor standards, including your very hard work on SB 150, which is very much appreciated. As the High Speed Rail project moves towards procurement, we ask that you urge support of the workforce that will be expected to build the rolling stock that will travel at very high speeds through our communities and across the rail lines that our brothers and sisters are laying right now.

One of the shortlisted vendors, Siemens, has a facility in Sacramento where train cars are built currently for regional transit throughout the state that is locked in an overly hostile battle over worker representation. We've been working with the IBW. We approached Siemens well over a year and a half ago after hearing from workers who had very valid workplace concerns and wanted the benefit of a union. Workers told us many things that concerned us, including they weren't making enough in wages to support their family.

Many were seeking at work in the gig economy and even seeking public assistance just to feed their families. Some expressed concerns over safety, over training, how workplace concerns were handled and not handled. We were honored earlier to have several workers from the Siemens facilities here today. We assume Siemens, like it does in Germany, recognize the great partnerships unions could provide, a true partnership of progress. But this is not what happened.

Workers who have expressed their support of organizing have told us they have been faced bullying and intimidations at Siemens Sacramento. They filed unfair labor practice after being transferred and denied overtime. One Siemens supervisor told one of the gentlemen that filed the ULP that they would close up and move if forced to partner with a labor union. This is certainly not the California way of doing things. High speed rail is a uniquely California project.

It will connect the Bay Area with the Central Valley, with LA, and it should reflect California values. As things stands today, Siemens might be located in California, but it is not a California company that's embracing California values. We ask that you continue to support the California High Speed Rail and that you also consider supporting workers like you have always done, and in accordance with SB 150, ensure that the upcoming procurement process does the same. Thank you very much. I tried to be brief.

Thank you.

Thank you.

Mr. Chairman and Members, Matt Cremins, on behalf of the California Nevada Conference of Operating Engineers. Here today in strong support of the business plan and strong support of our hundreds of Members and apprentices who are actively working on the project. Thank you.

Thank you.

Mr. Chair and Members, Andres Ramirez, on behalf of the Transbay Joint Powers Authority, which owns and operates the Salesforce Transit center in downtown San Francisco, and whose portal project will be the northern terminus not only for electrified Caltrain, but for high speed rail.

Just want to express our strong support for the high Speed Rail Authority's draft business plan in 2024, commend the leadership of high speed rail, and also just want to briefly uplift and emphasize the importance of the cap and trade program and cap and trade's early reauthorization, not only for the portal project and for high speed rail, but other statewide projects, mega projects of statewide significance. So we look forward to continued conversations on that topic. Thank you.

Thank you, Mr. Chair, Members of the Committee, Jeremy Smith here on behalf of the State Building and Construction Trades Council, we're here today in support of the business plan. We appreciate CEO Kelly's 30 years of public service. Before that, he worked in this building well across the way for the California State Senate. We're glad he's at the High Speed Rail Authority. He will be missed.

We just wanted to urge all of you to stay the course, so to speak, and recognize the importance of continued investment in high speed rail. With a revitalized partnership between the state and the Biden Administration, California is closer than ever towards realizing a world class high speed rail system. I wanted to touch on a few numbers before I finished. The project has created 12,183 total jobs, 8493 journey level workers, and 1621 apprentices, with over 70% of these workers coming from eight counties in the Central Valley.

It is working. I think we heard today and yesterday there are ways that it could work better. There are concerns about future funding, but it is working. It is getting built and is putting people to work. It will only get more expensive the longer we wait to fund it fully. I did want to touch on the International Brotherhood Boilermakers, the speaker from that union, and their concerns with organizing at Siemens. It's what you've all read about in other industries.

A multinational, multi billion company spending untold thousands and millions of dollars to thwart an organizing campaign. And we hope the High Speed Rail Authority can keep that in mind and remember that as they think about the procurement of train sets over the next several months. So again, we support the business plan, ask you to stand with our members, and support the governor's continued investment in high speed rail. Thank you.

Thank you.

Good afternoon. Voleck Taing with the American Council of Engineering Companies. We remain supportive to the authority's business plan and support the authority's goal moving forward this year. We also look forward to the continued partnership with the authority. Thank you.

Good afternoon, Chairman, Senators. Timothy Jeffries, international Brotherhood of Boilermakers. You heard the comments about Siemens and about the work, and I just want to say thank you. The project should definitely go. I heard a comment earlier from a diocese that no one was excited. So the Boilermakers and my colleagues spoke about, Ms. Erin Lahane spoke about, were excited. They were excited for the updated information, some information they hadn't heard in a while as far as high speed is concerned.

So those that did take their time off their job to come in, they are excited about the updated news about the high speed rail. And I appreciate your support for the High Speed Rail Authority. Thank you.

Well, thank you. We appreciate all the testimony, and it looks like that concludes our public testimony at this point. Any additional comments or questions from the desk from Members of the Committee? All right. Seeing none, let me thank, again, the panelists from both panels.

Again, everyone who came here to testify, everyone who came here didn't testify, came here to participate, and those who been monitoring this hearing through the electronic system. And I want to thank our Committee staff for doing an awful lot of work to get this set up, and our sergeants for helping us maintain orders. So thank you all. We will now adjourn this meeting. Thank you.

Thank you, Mr. Chair.