Reality of Crushing Public Debt from Bond Sales Eclipses the Fantasy Vision of California High-Speed Rail

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Originally presented to Californians as a $45 billion statewide high-speed rail system to transport people between major metropolitan areas, the “Safe, Reliable California High-Speed Passenger Train for the 21st Century” has been distorted by the state’s leftist ideologues and corporate and union special interests into the California High Speed Rail Scam.

My article California High-Speed Rail: One-Way Ticket to Debt in www.FlashReport.org on March 25, 2013 described my experience speaking at the March 18, 2013 meetings of the California High-Speed Rail Authority and the California High-Speed Passenger Train Finance Committee. I asked pivotal questions about how the State of California planned to sell the $9.95 billion in bonds authorized by 52.7% of California voters through Proposition 1A in the November 2008 election.

My questions were reported throughout the state in a March 18, 2013 Associated Press article Board Seeks $8.6 Billion in California High-Speed Rail Bonds:

Several speakers challenged the timing of the authorization during the board’s public comment period, asking why the board was acting on the bulk of the bonds approved by voters now when it could be years before the money is needed. Kevin Dayton, a public policy consultant from Roseville, questioned whether the board was rushing to beat the outcome of the lawsuits attempting to block the railroad.

“That’s the obvious question that comes up,” Dayton said. “I think it’s reasonable to assume they’re very worried about it.”

TV viewers also saw (and read) my comments in Nannette Miranda’s story Board Seeks $8.6 Billion in California High-Speed Rail Bonds for various local news programs of ABC affiliates throughout the state:

“What’s your current estimate of the total amount of debt that will be assessed including the interest on this?” high speed rail opponent Kevin Dayton asked the board.

During media interviews after the board meeting, California High-Speed Rail Authority chairman Dan Richard claimed the cost of interest payments for the entire project could eventually reach $700 million per year. He also claimed that interest on the first $2.61 billion in bond sales authorized by Senate Bill 1029 (2012) would cost $175 million per year over 30 years.

As stated in this article California Bullet Train Clears One Obstacle; Land, Legalities Remain, “It all depends on Wall Street, but for estimation purposes, the state is using a 6.5 percent interest rate for 35 years.” This was the rate cited by Chairman Richard during the media interviews. According to California Municipal Bond Advisor, yields for State of California 30-year general obligation bonds were 4.80% on September 20, 2012 and 5.03% on October 19, 2012.

My Questions Reveal One Surprise: Truckers Will Pay for the Bond Interest

California High-Speed Rail Authority chairman Dan Richard responded to my comments by declaring that my questions should be addressed to the California State Treasurer, Bill Lockyer. But later in the meeting, he said that the state would pay interest on the bonds NOT from the general fund, but from vehicle weight fees paid by truckers.

Fox News 11 in Los Angeles reported on this revelation with its March 28 story Money Shell Game? Potholes or High Speed Rail. I was interviewed for the story, and an excerpt from the interview appears in the segment. I am also quoted in the associated article:

Those are fees paid when trucks are too heavy. And that money is supposed to go to highway construction projects. This is typical of the entire way the rail authority operates. Things change. You don’t know what’s going on, there’s very little transparency and openness. Essentially, all they’re doing is taking the money, transferring it into another fund and pretending the general fund is not paying for it. In reality, California taxpayers are still paying the interest.

Assembly Bill 105 (2011) authorized vehicle weight fees to pay interest on bonds for transportation projects. The March 13, 2013 California Legislative Analyst’s Office Overview of Transportation Funding explains how vehicle weight fees will pay interest in 2013-14 on transportation-related bonds:

In addition to ongoing revenues from fuel taxes, the state has issued general obligation bonds in order to pay for transportation projects. The largest such bond measure was Proposition 1B (2006), which authorized the state to sell $20 billion in bonds to finance transportation projects. The Governor’s budget estimates that the debt-service costs on Proposition 1B and other outstanding transportation bonds will be about $1.1 billion in 2013-14.

Vehicle weight fees are used to pay the debt-service cost on transportation bonds rather than the General Fund. For 2013-14, the Governor’s budget uses all $946 million in weight fees to benefit the General Fund. Of this amount, $907 million is to pay debt service and $39 million is loaned to the General Fund and set aside for future debt service.

In addition, the Governor’s budget proposes to use miscellaneous revenues in the SHA to pay transportation debt service on an ongoing basis.

I asked this question in a tweet during the California High-Speed Rail Authority meeting on March 18 after the Authority chairman talked about paying interest from vehicle weight fees:

Does California Trucking Association @Caltrux know truck weight fees to pay interest Prop 1A bond sales for high-speed rail? $10 billion.

This response came on March 28 after the Fox News 11 story aired:

@DaytonPubPolicy we are well aware that the weight fees we pay to maintain roads now go to non-road projects. Trucks pay their share.

(They certainly do, and more – trucks are a favorite target of the Left in California.)

What Were the 2008 Cost Estimates for Interest Paid on the Bonds?

The official legislative analysis of Proposition 1A provided voters with an estimated cost of selling bonds with a 30-year maturity:

If the bonds are sold at an average interest rate of 5 percent, and assuming a repayment period of 30 years, the General Fund cost would be about $19.4 billion to pay off both principal ($9.95 billion) and interest ($9.5 billion). The average repayment for principal and interest would be about $647 million per year.

A July 7, 2008 Senate Appropriations Committee analysis estimated the cost of selling bonds with a 40-year maturity:

AB 3034 would extend the maximum allowable bond maturity term from 30 years to 40 years. Assuming the same interest and inflation rates, this bill could result in an increase in total General Fund costs of $3.78 billion if the term of the bonds is extended to 40 years (to a total cost of $23.2 billion). Annual debt service payments would be $580 million for 40 years.

According to Section 5.02(b)(vii) of the resolutions passed on March 18, the Treasurer is now authorized to borrow the $8.6 billion by selling bonds with a maturity period of 35 years

So does the Governor’s proposed 2013-14 budget adequately account for interest to be paid after the state borrows money for California High-Speed Rail through bond sales? It depends on how the California State Treasurer intends to structure and market them.

2 comments

  1. […] the March 18, 2013 meeting of the board of the California High-Speed Rail Authority, chairman Dan Richard told me to ask the State Treasurer about the details of the bond sales for the Californi… for the 21st Century. So I was ready with the first question for Bill Lockyer: when will the […]

  2. […] In other words, it was a farce. My article California High-Speed Rail: One-Way Ticket to Debt in www.FlashReport.org on March 25, 2013 described my experience speaking at the March 18, 2013 meetings of the California High-Speed Rail Authority and the California High-Speed Passenger Train Finance Committee. Also related to this meeting are my March 15, 2013 post Message to California High-Speed Rail Authority and California High-Speed Passenger Train Finance Committee: No 40-Year Bonds, No Capital Appreciation Bonds, What If You Lose Lawsuit? and my March 30, 2013 post Reality of Crushing Public Debt from Bond Sales Eclipses the Fantasy Vision of California High-Speed…. […]