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The Tampa to Orlando High-Speed Rail Line: Protecting Taxpayers

Posted By Wendell Cox On February 22, 2011 @ 1:03 pm In Ongoing Priorities | Comments Disabled

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Last week, Florida Governor Rick Scott (R) rejected $2.4 billion in federal funding for a proposed high-speed rail line from Tampa to Orlando. The governor’s decision was based upon the likelihood of an up to $3 billion cost overrun, the likelihood of operating subsidies, and the requirement that the federal grant would have to be repaid if trains were not operating frequently enough, even if they were nearly empty.

Governor Scott joins other governors in this trend: Governor Chris Christie (R), who canceled a new Hudson River tunnel that was already in the process of escalating the liability of New Jersey taxpayers, and Governors Scott Walker of Wisconsin (R) and John Kasich of Ohio (R), who canceled so-called high-speed rail projects in their own states that would travel little faster than the fastest trains of the 1930s.

Since Governor Scott’s action, there has been a flurry of activity by political officials, such as Senator Bill Nelson of Florida (D) and Congressman John Mica of Florida (R), to circumvent the Governor’s decision. It seems likely that the surviving proposal will be to establish a new local government entity along the corridor that would oversee the project. Arrangements need to be in place by Friday, according to Secretary of Transportation Ray LaHood, or the funding goes to other states. This is indicative of the Obama Administration’s desperate efforts to force states to build high speed rail without regard to the costs.

Proponents are working overtime to convince the public that there is no taxpayer obligation and that a private consortium that would build and operate the system would pay for it. Anyone familiar with projects of this sort knows that no private consortium could sustain the potentially huge cost overruns and operating subsidies.

All parties agree that neither state nor local taxpayers must be liable for cost increases, operating subsidies or the potential return of money to the federal government. The reality, however, is that federal policy requires the state or local government receiving the federal funding to assume these liabilities. When the costs exceed the limited resources of the private consortium, only the taxpayers will be left.

Promises and statements from project promoters will not reimburse the taxpayers when the private consortium fails to pay. The inevitable statements of regret will do nothing to soften the blow.

Protecting the Taxpayers: It would be difficult, but not impossible, to establish guarantees that protect the taxpayers. Nothing less than the following would be required:

  1. Performance Bond: The private companies forming the consortium would need to post a performance bond to cover the potential capital cost increase ($3 billion) as well as potential operating subsidies. This would be an insurance policy to guarantee payment when the private consortium cannot pay. To proceed without this would be as foolhardy driving on a Los Angeles freeway without car insurance.
  2. Unlimited Corporate Guarantees: The private companies forming the consortium would need to provide corporate guarantees to cover cost overruns, operating subsidies and any eventual requirement to pay back the federal grant. This would be necessary to protect taxpayers if the performance bond (insurance policy) proves insufficient.

Promoters have confidently told the public that there will be no cost overruns and that operating subsidies will not be necessary—so there should be no objection to these requirements. Finally, similar taxpayer protections should be provided for all other federally funded high-speed rail projects, such as in California.

Special Treatment for Florida: There have been press reports that the proposed new corridor agency and its taxpayers would not be liable for the obligations described above. In fact, this would violate both federal policy and practice. Moreover, any such special treatment for Florida would doubtless bring a rash of requests from state and local governments that have had to pay for cost overruns in other such federally financed projects or recover money returned to Washington. Governor Christie might well be at the front of the line if this foolish project goes forward.


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