DOT Says It Will Withhold Final $929 Million from California High Speed Rail Project

February 20, 2019

Yesterday, the U.S. Department of Transportation said it will not pay the California High Speed Rail Authority (CHSRA) the final $929 million in federal appropriations that was legally committed to the state’s high-speed rail program by the Obama Administration.

Federal Railroad Administrator Ronald Batory send the head of CHSRA a letter yesterday afternoon saying that FRA intends to terminate its grant agreement with CHSRA for the $929 million in federal funds effective on March 5, 2019, and then promptly “de-obligate” the $929 million. Under the terms of the fiscal 2010 DOT appropriations act, this deobligation, if successful, would then free up the $929 million to go to another project in another state.

The California high-speed rail project flared back into the limelight last week when the new Governor of California, Gavin Newsom, announced in his first State of the State address that it was time to stop pretending that the state can pay for any more of the $77 billion project on its own and would instead stick to what its $13 billion or so in committed funding might actually be able to finish building – the 119-mile section currently under construction from Madera to Shafter, plus short extensions north of Madera to Merced and south of Shafter to Bakersfield – until outside money could come to the rescue.

Newsom also then included, as an applause line in his speech, “And by the way, I am not interested in sending $3.5 billion in federal funding that was allocated to this project back to Donald Trump.” Some combination of the announcement itself and the name-checking of President Trump caused Trump to then engage in a Twitter war with Newsom, where Trump said he would try to get the $3.5 billion back.

Batory’s letter specifically cites Newsom’s State-of-the-State address and says that not only is it a “significant retreat from the State’s initial vision and commitment” and then says that Newsom’s new plan “frustrates the purpose for which Federal funding was awarded (i.e. an initial investment in the larger high-speed rail system).”

And, indeed, the end of Batory’s letter indicates that not only does FRA now intend on withholding the $929 million in funding still on-hand in the U.S. Treasury that has been promised to the project, but that “FRA reserves its rights under all other grant or cooperative agreements with CHSRA and is exploring all available legal options, including termination of Cooperative Agreement No. FR-HSR-0009-10-1-06 and the recovery of the [$2.55 billion in ARRA stimulus] Federal funds expended under that cooperative agreement.

What’s the financial situation? The February 2009 ARRA stimulus act and the December 2009 DOT appropriations act for fiscal year 2010 together provided $10.5 billion (later reduced to $10.1 billion) for high-speed and intercity rail grants. Over one-third of that money wound up going to CHSRA, as follows (in millions of dollars):

FY 2009 ARRA Appropriations
Jan. 2010 ARRA allocation $2,250.0
Minus Transbay Terminal -$400.0
Remainder to CHSRA $1,850.0
Dec. 2010 ARRA allocation $616.2
May 2011 ARRA allocation $86.4
Total, ARRA funding to CHSRA $2,552.6
FY 2010 Appropriations
Dec. 2010 Allocation $715.0
May 2011 Allocation $213.6
Total, FY10 funding to CHSRA $928.6

The ARRA money had a very tight deadline – all the money had to be legally obligated to particularly projects by September 30, 2012 and had to be complete spent (in outlays) by the Treasury by September 30, 2017. This was accomplished – FRA under President Obama made the unusual decision to allow CHSRA to spend all of the ARRA dollars first and only then produce its own matching share years later. All of the ARRA money was transferred from the Treasury to CHSRA and spent by the end of 2018.

But the FY 2010 money had no deadline and won’t be transferred to CHSRA under the terms of the grant agreement until needed, which CHSRA does not anticipate until 2021 or so. According to the end-of-FY18 Combined Statement from the Treasury, $1.330 billion of the $2.100 billion in FY10 high-speed rail appropriation is still sitting, undisbursed, in the Treasury (see the bottom of page 15 here). 

How can FRA just “de-obligate” a grant agreement? The original grant agreement for the FY10 money has already been amended once, by joint agreement of the Obama Administration and CHSRA, on the suspicious-looking date of January 19, 2017. The January 2017 amendment gave a four-year extension for the required completion date of the first construction segment, from December 31, 2018 to December 31, 2022. But the amendment left a lot other things in place, including section 23:

23a. Upon written notice, the Grantee agrees that FRA may suspend or terminate all or part of the financial assistance provided herein if the Grantee has violated the terms of this Agreement, or if FRA determines that the purposes of the statute under which the Project is authorized would not be adequately served by continuation of Federal financial assistance for the Project. Any failure to make reasonable progress on the Project or other violation of this Agreement that significantly endangers substantial performance of the Project shall provide sufficient grounds for FRA to terminate this Agreement.

Once a contract or agreement no longer exists, a federal agency can deobligate obligated funds. GAO, in the Red Book, says that “Cancellation of project or contract” can be grounds for deobligation.

Batory cited section 23 of the grant agreement in his letter: “FRA has determined that CHSRA has materially failed to comply with the terms of the Agreement and has failed to make reasonable progress on the Project (as defined in the Agreement), significantly endangering substantial performance. Considering this determination, FRA intends to exercise its right to terminate the Agreement, consistent with Section 23 of the Agreement.”

What specific failures to comply with the grant agreement did FRA allege? Batory’s letter cites five specific reasons they intend to cancel the grant agreement:

  1. CHSRA is behind schedule in spending its own money. Batory’s letter says “For example, CHSRA committed to a $141.8 million State contribution to advance final design and construction activities in December 2018, but reported only $47.9 million of actual expenditures in that month.” This may be true – the project is, by any measure, behind schedule – but it does not seem that USDOT is this quick to cancel project agreements and take away funds for other projects that fall behind on their spending schedules.
  2. FRA does not think CHSRA will be able to complete the Central Valley Segment by the end of 2022 as currently required by Amendment #1 to the original agreement. FRA is probably correct on this – the California State Auditor agrees that there is a high risk that CHSRA “could miss the new deadline unless Central Valley construction progresses twice as fast as it has to date” – but that doesn’t mean FRA has to cancel the agreement. The Obama Administration gave CHSRA a four-year extension rather than tearing up the agreement. Besides, it is unclear if FRA can make that determination now instead of after the deadline is missed.
  3. CHSRA’s failure to submit required critical grant deliverables adequate to demonstrate CHSRA is effectively managing delivery of the Project. Such deliverables include Funding Contribution Plans.” Basically, FRA does not like the timeliness or depth of detail of some of CHSRA’s required paperwork filings.
  4. CHSRA has failed to take the appropriate corrective actions to ensure delivery of the Project.” The letter alleges that CHSRA has not been responsive to FRA suggestions for improvement after their quarterly status meetings.
  5. Newsom’s State of the State address. Batory wrote that “As described in the Agreement and in the various CHSRA applications for Federal financial assistance, the Project is a component part of the larger high-speed rail system that would, ultimately, connect San Francisco in the north and Los Angeles in the south. During his recent State-of-the-State address, Governor Newsom presented a new proposal that represents a significant retreat from the State’s initial vision and commitment and frustrates the purpose for which Federal funding was awarded (i.e. an initial investment in the larger high-speed rail system).”

Can FRA really do that? This will doubtless go to court, but since the money has not yet changed hands, the state would be trying to sue the federal government to get money that the state alleges it is owed. This is a easier proposition for FRA to defend than what Batory indicates at the end of his letter, which is that the federal government might sue California to get the $2.55 billion from ARRA back. Money that the federal government under Obama gave CHSRA and specifically let it spend, with approvals from FRA all the way down the line to the last dollar will be a lot more difficult for the federal government to “claw back” from California under Trump.

If deobligation is successful, where can the money go? Per the Red Book, “Deobligated funds may be reobligated within the period of availability of the appropriation. For example, annual appropriations may be reobligated in the fiscal year for which the funds were appropriated, while multiyear or no-year appropriated funds may be reobligated in the same or subsequent fiscal years.” The FY10 DOT appropriations act, Public Law 111-117, appropriated $2.500 billion in “no-year” money (available until expended) that could be used for any of three purposes: “to make grants for high-speed rail projects as authorized under section 26106 of title 49, United States Code, capital investment grants to support inter-city passenger rail service as authorized under section 24406 of title 49, United States Code, and congestion grants as authorized under section 24105 of title 49, United States Code.” (One would think that those stat citations have to be viewed as the way the laws read back when the appropriation was made in late 2009, but we’re not quite sure.)

(Section 2225 of Public Law 112-10 rescinded $400 million of that $2.5 billion, leaving a net $2.1 billion, of which CHSRA got $929 million, or 44 percent.

Presumably, FRA could put out out a Notice of Funding Opportunity and allow other entities to apply for grants using the $929 million.

(Ed. Note: In reviewing all of the TW and ETW articles covering this project for the last decade (and there are many of them), the one that jumped out was the one from May 2011 discussing the May 10, 2011 report of the California Legislative Analyst’s Office entitled “High-Speed Rail Is At A Critical Juncture.” That report, by the California legislature’s equivalent of CBO and CRS rolled into one, recommended four courses of action: (1) postpone the start of construction; (2) get more flexible grant agreements from FRA; (3) don’t build the Central Valley first, lest it somehow become the only segment build; and (4) take responsibility for the project away from CHSRA and give it to Caltrans.)

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