Two months after the California High-Speed Rail Authority sued the Trump administration over its cancellation of $4 billion of federal grants, little has happened on the legal front. And, if experience is a guide, the Authority will not be seeing this money before January 20, 2029, if ever. It is extremely unlikely that courts will order the Federal Railroad Administration to restore the funding, nor is there much chance of an out-of-court settlement.
Thus far, the legal trajectory is following the same path as it did when the first Trump administration rescinded a $929 million high-speed rail grant in 2019. During the legal dispute that followed, California and the Department of Transportation entered into a stipulation agreement: the Federal Railroad Administration promised not to give the funds to any other project, and the State agreed not to pursue a preliminary injunction. After that, the only thing that happened before the Biden Administration was an unsuccessful settlement conference in March 2020.
In today’s scenario, the amount of money under dispute is four times as much, but the order of events is similar. The parties quickly entered into a stipulation agreement, and then … crickets. Nothing has been added to the docket since July 2022, and there is no sign that the next milestone, a federal response to California’s complaint, is coming any time soon.
If the two parties ultimately engage, the main argument will be over the stated reason from the Feds for cancelling the grant: that the Authority is unable to start revenue service between Bakersfield and Merced by the end of 2033 as it committed to do when the Biden Administration provided its most recent grant.
The Authority contends it still has eight years, which is plenty of time to build a railroad. But if the project continues at its historic pace, eight years will go by quickly with little to show for it.
Further, the Authority does not have the funding necessary to complete the job on time. Although the new cap-and-trade extension (now known as cap-and-invest) allocates an additional $15 billion to high-speed rail, it does so in $1 billion annual increments between 2031 and 2045.
By 2033, the Authority will have only received $3 billion in new money, far short of the $8.6 billion funding gap it (implicitly) reported in its most recent Project Update Report Supplement. And that projected shortfall includes the assumption that the Authority can get the $4 billion rescinded by the Trump Administration.
Barring a miracle, the only way the Authority can close its 2033 funding gap would be to issue bonds secured by the $12 billion in expected cashflows HSR is supposed to receive from cap-and-invest between 2034 and 2045.
This practice, known as securitization, is common in private markets and has precedents in state government finance. Perhaps the most famous case of state revenue securitization was the bonds that California and other states issued to bring forward revenue from the 1998 tobacco settlement agreement. Under this arrangement, tobacco companies must pay states annual fees based on their sales revenue. Between 2003 and 2017 California’s Golden State Tobacco Securitization Corporation issued $13.2 billion of bonds backed by future tobacco settlement payments.
While tobacco bonds illustrate the upside of securitizing future revenue, they also show the risks. Because cigarette sales declined faster than expected, some states faced the choice of bailing out their tobacco funds or risk defaulting.
Bonds backed by future cap-and-invest revenues face the risks of future pollution license auctions failing to generate sufficient revenues and of a future state legislature diverting revenue to other priorities. Investors and the rating agencies they rely upon may look for the state to guarantee cap-and-invest revenue bonds with other payment sources. This could require changes in state law that put California sales and income tax revenues at risk.
So, while it may be possible for the Authority to pull together enough money to finish Merced-to-Bakersfield by 2033, it will be an uphill battle. California’s case will probably not be strong enough to impress the federal courts, especially the Supreme Court with its majority of conservative justices.
Marc Joffe is a fellow at California Policy Center.