The U.S. Department of Transportation put the California High Speed Rail Authority (CHSRA) on 30-day notice this week that USDOT will be canceling $4.0 billion in awarded and promised grants to CHSRA unless CHSRA can refute accusations of noncompliance with federal grant agreements within that time.

Over the years, the federal government has awarded $7 billion in funding towards the California project. $2.8 billion of it was spent over eight years ago, but the remainder is still pending.

On June 4, USDOT released a letter sent by Acting Federal Railroad Administrator Drew Feeley to CHSRA CEO Ian Choudri. The full document contains a 5-page letter, a 25-page compliance report by FRA staff, and several hundred pages of supporting documents, including the full text of grant agreements.

The compliance report makes nine specific allegations of noncompliance:

1. CHSRA has executed numerous change orders and will likely have many more change orders in the near future to account for contractor expenses as a result of project delays.
2. CHSRA has already missed its deadline for finalizing its rolling stock procurement.
3. CHSRA has at least a $7 billion funding gap to complete the EOS, with no credible plan to secure additional funds.
4. CHSRA does not have a viable path to complete the EOS by 2033 per its commitment in the FY10 Agreement and the FSP Agreement.
5. CHSRA relies on volatile non-federal funding sources, which present significant project risk.
6. CHSRA lacks time and money to electrify the EOS by 2033.
7. CHSRA’s budget contingency is inadequate to cover anticipated contractor delay claims.
8. CHSRA has overrepresented its ridership projections for the EOS substantially.
9. CHSRA lacks the capacity to deliver the EOS by 2033.

In the conclusion, the report states that those nine strikes mean that there is no viable path forward for a delivery of a working HSR EOS (Early Operating System) by December 31, 2033, as specified in the Federal-State Partnership grant agreement, and “As such, CHSRA’s inability to deliver the EOS by 2033…constitutes a Project Material Change under the FSP Agreement. These findings support a conclusion that CHSRA is in default under the FSP Agreement…” That would claw back $3.1 billion in awarded funding.

Moreover, because they can’t deliver the EOS, FRA concludes that there is no viable path to complete the full CHSR system, and they will likely use that, along with the rest, as justification for canceling the $929 million in still-unspent FY 2010 funding that was first awarded 13 years ago.

(For those of you getting déjà vu at this point in the proceedings, yes, the Trump Administration tried to cancel that obligated $929 million grant agreement back in May 2019. California promptly filed a lawsuit in federal court asking to keep the money. That lawsuit moved so slowly that when World’s #1 Rail Fan Joe Biden won the 2020 election, his Justice Department wasted no time before initiating talks to settle the lawsuit. A settlement agreement was signed in June 2021 which said “…the FRA and the Authority shall execute the Amended FY10 Agreement…the Amended FY10 Agreement, including the reobligation of $928,620,000.00, shall take effect upon full execution by both FRA and the Authority.” So DOT took back the money and had to return it two years later.)

Construction projects, particularly large ones, go into technical violation of grant agreements all the time, particularly where deadlines are concerned. But so long as the federal agency that gave the grant believes in the project, they can (and do) work with project sponsors to amend the grant agreement so that the project can continue to move forward. This makes it easy for an Administration that does not believe in a project to pull funds, if the terms of the grant agreement are violated.

Are the nine allegations in the compliance report valid, and if so, do they really amount to material violations of the grant agreement?

Some are obviously true – there is clearly a $7 billion funding gap, and (at present) clearly no plan for a path forward, which are gigantic problems that could eventually justify termination – but it is unclear if that puts the project in violation of its agreements in the here and now. (To use a sports metaphor: the golf shot ain’t over until the ball comes to a stop. We can all see that the ball is not moving in the direction of the hole, and is in fact moving in the wrong direction and accelerating, but it hasn’t actually missed the hole until it stops moving.) A court might rule that they aren’t in material violation until they actually miss the 2033 deadline.

And CHSRA has certainly made change order after change order, and appears to have missed a deadline on signing an electrification contract. The question there is how many low-level violations it takes to constitute a material breach of contract.

One interesting bit in the compliance report is item 8, relating to ridership forecasts. CHSRA filled out its application for the FSP grant in 2022, and at the time, it was still using pre-COVID ridership forecasts, and assumptions for future population growth from before the 2020 Census. The report notes that in 2023, CHSRA started using post-COVID ridership assumptions that were sharply down from those in their FSP grant application.

There is also this stunner of a paragraph: “CHSRA’s Phase 1 projection of 28.4 million annual riders by 2040 far exceeds Amtrak’s Northeast Corridor (12.1 million in 2023), despite serving a less dense region. With only 4.8 million Bay Area-Los Angeles air passengers in 2023.”

The bottom line is the same as it was two years ago: California has a dedicated revenue stream that should, in most years, return $750 million per year or more towards completion of the project. But unless the legislature (a) extends the cap-and-trade program past its current law expiration date of 2030 and (b) also passes a law allowing CHSRA to issue bonds to be repaid by those cap-and-trade revenues, they won’t be able to finish anything soon.

(Ed. Note: The key to prevent things like this from happening in the future is for other federal grant programs to emulate the Federal Transit Administration’s Capital Investment Grant program for new subway, light rail, and bus rapid transit systems. For new rail systems and extensions, the program is prohibited from spending any federal dollars on capital construction on anything less than an entire operable segment that can be proven useful even if the rest of the system is never built. And each minimum operable segment (MOS) has to have its environmental clearances and its funding plan nailed down before the federal government starts giving it construction money. Had Congress required that FRA run its grant programs like FTA runs CIG, this whole ridiculous situation could never have happened.)