California High-Speed Rail Bond Sale Rejected by Judge

The California High-Speed Rail Authority was barred from issuing more than $8 billion in bonds to help finance a high-speed rail line from San Francisco to Los Angeles after a judge said the agency failed to provide sufficient justification for approving the sales.

California state Judge Michael Kenny in Sacramento ruled yesterday that the authority’s finance committee didn’t adequately disclose its reasons for authorizing the bonds. The committee said it was “necessary and desirable” to approve the bond sales, a rationale that echoed the position of public officials on the rail authority while not complying with California’s bond law, Kenny said.

Voters “intended to empower the finance committee to serve as an independent decision-maker, protecting the interests of taxpayers by acting as the ultimate ‘keeper of the checkbook,’” Kenny said.

The decision will cause delays and increase costs for the $68 billion first-in-the-nation bullet rail system, while public support wanes, state officials said. The goal has been to lay tracks for trains running as fast as 220 miles an hour (354 kilometers an hour) after the U.S. Congress cut off funds for such projects in 2012. The state is buying land and rights of way needed for the project, which is slated to begin running three-hour trips between the California cities by 2029.

“This does not jeopardize the project. It will cause delay and it will cost more money,” Rod Diridon, chairman emeritus of the rail authority, said by phone.

‘Public Opinion’

The project’s prospects are dimming and “we’re losing public opinion,” Lieutenant Governor Gavin Newsom, a Democrat, said in an interview after the ruling.

State officials “need to make a strong case now” and decide whether high speed rail is even worth pursuing at all, Newsom said.

A date for the bond sales hadn’t been set. California and its local governments have issued $42.8 billion in bonds this year, according to data compiled by Bloomberg. California sold $2.6 billion of bonds in 2013 and has $74 billion now outstanding.

“We are ecstatic about this ruling” said Jon Coupal, president of the Howard Jarvis Taxpayers Association, which opposed the bond sales. “The high-speed rail project is derailed.”

Kenny declined to stop the project from moving forward, said Dan Richard, chairman of the rail authority’s board.

‘Transformative Projects’

“The judge did not invalidate the bonds as approved by the voters,” he said in an e-mail. “Like all transformative projects, we understand that there will be many challenges that will be addressed as we go forward in building the nation’s first high-speed rail system.”

California voters in 2008 approved a bond measure that authorized the state to sell $9.95 billion of bonds to help build the $68 billion rail line. The state plan anticipates that federal funds and private investors will pay for the rest. The proposal saves money by upgrading existing commuter and freight lines in some areas, rather than build new track.

California Governor Jerry Brown in 2012 signed a bill authorizing the state to begin spending the first $2.6 billion of the bonds for construction to begin. The appropriation unlocked $3.3 billion in promised U.S funds, out of $8 billion for high-speed rail from President Barack Obama’s 2009 economic stimulus package.

Bond Measure

The state has sold $705 million of debt from the bond measure. The bonds aren’t sold in a separate offering. Instead, they’re sold as part of the state’s generic general-obligation bond offerings that finance many different kinds of projects such as schools and roads.

The state in August signed a $1 billion contract with a joint venture of Tutor Perini Corp. (TPC), Zachary Construction Corp. and Parsons Corp. to design and built the first 30 miles. The rail authority is getting ready to seek bids for a second $2 billion contract.

In a ruling in a separate case challenging the project, Kenny said yesterday the rail authority had to rescind its funding plan and denied a request to set aside the approval of the construction contracts with Tutor-Perini-Parsons.

The case is High-Speed Rail Authority v. All Persons Interested in the Matter of the Validity of the Authorization and Issuance of General Obligation Bonds, 34-2013-00140689, Sacramento Superior Court.

To contact the reporters on this story: Karen Gullo in federal court in San Francisco at kgullo@bloomberg.net; Michael B. Marois in Sacramento at mmarois@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Stephen Merelman at smerelman@bloomberg.net

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