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May 24, 2012

State Can't Afford "Free" Rail Money

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What do $16 billion and $68.4 billion have in common, other than the fact that each of these figures dwarfs JPMorgan Chase's recent loss? The former is how deep in the red the California state budget sits currently. The latter is the latest in a series of roller-coasting cost estimates for the state's controversial high-speed rail (HSR) project, which is funded in part by the federal government.

Gov. Jerry Brown has been hard-pressed to come up with a prescription to close California's sizeable budget deficit. While pension reform and old-fashioned frugality may be what the doctor ordered, Gov. Brown also wants to persuade Californians to stomach "temporary" tax increases to narrow the budget gap.

If these tax hikes go into effect, California taxpayers at all income levels will see their pocketbooks shrink. Unfortunately, if the HSR project pans out, painful tax increases to pay for it could become the norm.

The federal-state transit courtship ritual is by now a well-rehearsed dance. Washington's alluring checkbook tempts states enough that they commit matching funds to projects they otherwise would not even dream of pursuing.

Take high-speed rail and other passenger rail projects – they are expensive to build and maintain, and states are faced with many other pressing infrastructure needs but limited resources to pay for them. So, "free" money from Washington seems too good to be true. Then come project delays and construction cost overruns. Federal grants also have strings attached, such as union wage requirements, which send costs skyward. Soon, the price tag of an HSR project is substantially more than what states signed up for.

Once the HSR line is built, another pesky fact materializes: Actual rail ridership rates do not necessarily equal capacity estimates. Poor ridership translates into large funding gaps, and befuddled states then have trouble covering operating expenses, let alone capital costs. Taxpayers are on the hook subsidizing the rail line long after the federal money train has left the station.

For example, passenger rail lines in Japan and the United Kingdom required significant government subsidies, which prompted these countries to begin privatizing the rail systems. In the United States, new governors of Wisconsin and Ohio rejected federal funds for HSR projects once it became clear that HSR's upfront costs and long-term financial liabilities far outweighed any potential benefits.

A glaring flaw in the prevailing approach to transportation is that it is increasingly Washington-centered; bureaucrats make decisions about projects hundreds of miles away, in which they have little or no vested interest. This trend is based on the belief that Washington knows best, and, therefore, every cent of every transportation dollar must flow through Washington.

By this logic, President Obama's so-called livability proposals, such as building street cars and forcing high-density living arrangements, can be cast as a wise use of transportation dollars. In reality, such transportation technology is 19th century nostalgia wrapped in 21st century packaging. This approach also generates misleading incentives for states to commit limited resources to costly projects like HSR, which do not deliver on promises to mitigate road congestion and improve air quality. Instead, they threaten to stain state budget ledgers with unsightly amounts of red ink.

Rather than hoarding transportation funds and keeping decision-making in Washington, Congress should give states more control over how to spend the transportation dollars their motorists pay in federal gas taxes. Doing so will pave the way for turning over responsibility for transportation to the states, who know their transportation priorities much better than Washington. With full devolution, states would no longer see funds diverted to transit and enhancement projects they may not find useful. Instead, they would be able to identify and meet their unique infrastructure needs efficiently and cost-effectively.

When in a hole, sometimes it is hard to put the shovel down and quit digging. Gov. Brown's recent statement, "I am a buoyant optimist. ... We're going to build high-speed rail," is a case in point.

If the governor's words ring true, the unfortunate California taxpayers will have to pay for a transit boondoggle they can ill- afford. The only consolation will be that California serves as a lesson for other states – in what not to do in budgeting and transportation.

First appeared in The Orange County Register

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