Report 2011-504 Recommendation 7 Responses

Report 2011-504: High-Speed Rail Authority Follow-Up: Although the Authority Addressed Some of Our Prior Concerns, Its Funding Situation Has Become Increasingly Risky and the Authority's Weak Oversight Persists (Release Date: January 2012)

Recommendation #7 To: High-Speed Rail Authority, California

To add clarification to the first recommendation we made in our prior report that stated, “To ensure that it can respond adequately to funding levels that may vary from its business plan, the Authority should develop and publish alternative funding scenarios that reflect the possibility of reduced or delayed funding from the planned sources. These scenarios should detail the implications of variations in the level or timing of funding on the program and its schedule,” the Authority should also present viable alternative funding scenarios for phase one in its entirety that do not assume an increase in the federal funding levels already identified in the 2012 draft business plan. If the Authority does not believe that such alternatives exist, it should publicly disclose this in its 2012 final business plan.

Agency Response*

See response to Recommendation 1. In addition:

The Authority has consistently been transparent in the 2012, 2014, and 2016 Business Plans, on the amount of new funding that would have to be committed in order to fully fund the Phase 1 system. In the 2016 Business Plan, the Authority laid out a number of strategies that it will employ to work towards fully funding a Phase 1 system. These include using positive cash flow generated from selling tickets and operating the system to leverage financing and private investment; securing additional public funds, including federal funds, which can help match project-generated funding; continuing to work with partners to identify and secure funding from a variety of existing sources; and continuing to work to identify opportunities to reduce costs and to deliver the program more cost-effectively through alternative delivery models such as public-private partnerships. As discussed above, these strategies have also been in the public domain and outside of the 2016 Business Plan.

In each of the Business Plans, the Authority has clearly explained what funding has been identified and is available and how much additional funding will be necessary to complete the system. This is consistent with programs of this magnitude that are developed in phases. Following that approach, the 2016 Business Plan identified all of the funding sources for the first phase of the program where the Authority plans to start service, the Silicon Valley to Central Valley Line. The Authority also spelled out that additional funding sources, from both the public and private sector, will be necessary to complete the Phase 1 system and will continue to work with funding partners to identify and obtain the necessary funds. The Authority's Business Plans have been entirely transparent on these issues and have thoroughly described the program's funding picture as it has evolved (and improved) over time.

  • Response Type†: Annual Follow Up
  • Completion Date: May 2016
  • Response Date: November 2016

California State Auditor's Assessment of Status: Resolved

We consider this recommendation resolved, with reservations. The Authority, as well as its peer review group, have acknowledged the challenge of obtaining adequate funding for this project on an ongoing basis. The Authority also outlines seven potential sources of funding moving forward in its business plan, five of which are not from federal sources. We caution the Authority to continue to expand on this analysis in future business plans and to ensure it discusses the availability—or lack of availability—of public funds, including federal funds. We note also that the Authority discusses where it estimates the status of the project to be as of 2020, the date the Legislature originally intended for the project to be complete, and estimates completion of phase one in 2025. We caution the Authority to continue to discuss how changing funding sources may continue to delay completion of the project.


Agency Response*

The Authority continues to work with stakeholders (cooperating agencies, the Legislature, federal government, and the private sector) to define alternative delivery scenarios on blended systems operations. These alternatives will have different levels of costs and differing funding needs. The Authority has known funding sources from Proposition 1A, $3.3 billion in committed federal funding, and cash flow projections which illustrate that private sector capital should be available when the IOS has been built. The first construction phase, the ICS, is fully funded.

The 2014 Business Plan identifies the High-Speed Rail project is also a candidate for Cap and Trade funds. The 2014-15 Budget contained $250 million of cap and trade funds to advance the program. With the passage of SB 862, on an ongoing basis, without the need for annual appropriation, 25% of the annual Cap and Trade proceeds will go to the continued development and construction of the high-speed system. This will be reflected in future business plans. The 2014 Business Plan clearly identifies known sources of funding and the funding needed to complete the full Phase 1 program over the next 20 plus years based on the facts known as of May 2014. To provide increased clarity from the 2012 Business Plan, the additional funding needed is labeled as "uncommitted" to ensure that it is clear that these funds were not currently identified as of May 2014.

Future Business Plans will continue to be updated with additional information on Cap and Trade funds which, depending on actual program performance, could fund significant portions and, possibly all, of the IOS. They will also further describe how capital that can be raised based on the project's net cash flow once operations begin that can be used to help build additional parts of the Phase 1 system. Also, as previously noted, the Authority will only proceed to construction on any segment when all necessary funding has been identified.

  • Response Type†: Annual Follow Up
  • Completion Date: May 2014
  • Response Date: September 2015

California State Auditor's Assessment of Status: Partially Implemented

Although the Authority's 2014 business plan contains more options than the prior plan, it does not contain sufficient alternative funding scenarios. Moreover, the 2014 business plan notes that future funding will likely need to encompass low-cost federal debt programs. Thus, the Authority continues to rely on future support from the federal government. Therefore, we will continue to report the Authority's implementation of this recommendation as partially implemented.

  • Auditee did not substantiate its claim of full implementation

Agency Response*

The Authority continues to work with stakeholders (cooperating agencies, the Legislature, federal government, and the private sector) to define alternative delivery scenarios on blended systems operations. These alternatives will have different levels of costs and differing funding needs. The Authority has known funding sources from Proposition 1A, $3.3 billion in committed federal funding, and cash flow projections which illustrate that private sector capital should be available when the IOS has been built. The first construction phase, the ICS, is fully funded.

The 2014 Business Plan identifies the High-Speed Rail project is also a candidate for Cap and Trade funds. The 2014-15 Budget contained $250 million of Cap and Trade funds to advance the program. With the passage of SB 862, on an ongoing basis, without the need for annual appropriation, 25% of the annual Cap and Trade proceeds will go to the continued development and construction of the high-speed rail system. This will be reflected in future business plans. The 2014 business plan clearly identifies known sources of funding and the funding needed to complete the full Phase 1 program over the next 20 plus years based on the facts known as of May 2014. To provide increased clarity from 2012 Business Plan, the additional funding needed is labeled as "uncommitted" to ensure that it is clear that these funds were not currently identified as of May 2014.

Future Business Plans will continue to be updated with additional information on Cap and Trade funds which, depending on actual program performance, could fund significant portions and, possibly all, of the IOS. They will also further describe how capital that can be raised based on the project's net cash flow once operations begin that can be used to help build additional parts of the Phase 1 system. Also, as previously noted, the Authority will only proceed to construction on any segment when all necessary funding has been identified.

  • Response Type†: Annual Follow Up
  • Completion Date: May 2014
  • Response Date: October 2014

California State Auditor's Assessment of Status: Partially Implemented

The Authority's 2014 business plan, although it contains more options than the prior plan, does not contain sufficient alternative funding scenarios. Moreover, the 2014 business plan notes that future funding will likely need to encompass low-cost federal debt programs. Thus, the Authority continues to rely on future support from the federal government.

  • Auditee did not substantiate its claim of full implementation

Agency Response*

As reported in our one-year response dated January 24, 2013, to the California State Auditor, the Authority continues to work with stakeholders (cooperating agencies, the Legislature, federal government, and the private sector) to define alternative delivery scenarios on blended systems operations. These alternatives will have different levels of costs and differing funding needs. The Authority's business plan includes a section related to the impacts of potential delay in funding or other factors on the project. The Authority has known funding sources from Proposition 1A, $3.3 billion in committed federal funding, and cash flow projections which illustrate that private sector capital should be available when the IOS has been built. The first construction phase, the ICS, is fully funded. The revised business plan clearly identifies known sources and the funding gap that remains to be filled over the next 20 plus years as the full system is built out.

In the spring of 2012, during finalization of the 2012 revised business plan, the Department of Finance and the Administration identified cap-and-trade revenues as a potential funding source for the high-speed rail project. Such funds, if used, would be applied to the completion of the IOS after the construction of the first construction segment, which is fully funded and was approved for appropriation in July 2012. The Authority will work with the Department of Finance to define a specific plan for use of cap-and-trade funds, which will be presented in detail in the next business plan to be issued in draft in early 2014.

  • Response Type†: Annual Follow Up
  • Estimated Completion Date: Early 2014
  • Response Date: October 2013

California State Auditor's Assessment of Status: Not Fully Implemented


Agency Response*

The Authority stated that it continues to work with stakeholders to define alternative delivery scenarios on blended system operations. Additionally, the Authority asserted that in the spring of 2012, the Department of Finance and the Administration identified cap-and- trade revenues as a potential funding source for the program. Further, the Authority stated that it will work with the Department of Finance to define a specific plan for the use of cap-and-trade funds, which it claims will be presented in detail in the next business plan to be issued in draft in the fall of 2013.

  • Response Type†: 1-Year
  • Response Date: January 2013

California State Auditor's Assessment of Status: Partially Implemented

Although the Authority's business plan includes three alternative funding scenarios, all three assume a similar or increased level of federal funding compared to the Authority's primary plan, which the federal government has not indicated will occur.

  • Auditee did not address all aspects of the recommendation

Agency Response*

The Authority stated that it continues to work with stakeholders to define alternative delivery scenarios on blended system operations. Additionally, the Authority asserted that in the spring of 2012, the Department of Finance and the Administration identified cap-and-trade revenues as a potential funding source for the program. Further, the Authority stated that it will work with the Department of Finance to define a specific plan for the use of cap-and-trade funds, which it claims will be presented in detail in the next business plan to be issued in draft in the fall of 2013. However, although the Authority's business plan includes three alternative funding scenarios, all three assume a similar or increased level of federal funding compared to the Authority's primary plan—which the federal government has not indicated will occur. (See 2013-406, p. 243)

  • Response Type†: 6-Month
  • Response Date: August 2012

California State Auditor's Assessment of Status: Partially Implemented


All Recommendations in 2011-504

†Response Type refers to the interval in which the auditee is providing the State Auditor with their status in implementing recommendations made in an audit report. Auditees must submit a response regarding their progress in implementing recommendations from our reports at three intervals from the release of the report: 60 days, six months, and one year or subsequent to one year.

*Agency responses received after June 2013 are posted verbatim.


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