These are just some of the benefits of high-speed rail. But simply building a system does not guarantee that all the potential gains will be realized. Maximizing both ridership and gains to employment and income depends upon the ability of the market to invest in commercial development, housing and other productive facilities near the rail system. As noted above, such investments can have major impacts on both large economic agglomerations such as Silicon Valley as well as more isolated and economically strapped places like Fresno and other Central Valley communities.

But to realize the full economic benefits of high-speed rail requires an appropriate land use response. This means good planning for station area development as well as accessibility planning to connect travelers from high-speed rail stations to nearby employment and other destinations. If such investment does not occur, or if local opposition critically impedes it, the impact of high-speed rail will be significantly reduced.

To achieve the appropriate land use response to high-speed rail requires first the articulation of a statewide interest in high-speed rail as an important tool to shape development. But given that planning is a local function in California, there is a need to reconcile this conflict, particularly for an infrastructure investment with much broader economic benefits. SPUR’s 2011 Beyond the Tracks report proposed such a framework that combines local planning with statewide planning guidelines and oversight.

Yet this station area planning is only relevant if high-speed rail is actually built. Given this reality, the more immediate question is how to pay for the system.

The construction of the tracks and purchase of the right of way accounts for 2/3 of the entire cost of the high-speed rail system. The vehicles and stations themselves are a relatively small portion of the costs, as is the overall project management

Construction cost by geographic segment (in constant 2011 dollars) Connecting the high desert town of Palmdale into Los Angeles and from Merced in the Central Valley over the Pacheco Pass into San Jose account for over half the cost of the rail system. The long stretch from Merced to Bakersfield in the Central Valley accounts for less than 1/5 of the total cost.

How much will it cost to build California’s high-speed rail system?

The capital cost for a high-speed rail system from San Francisco through the Central Valley to Anaheim is estimated at $68.7 billion in year-of-expenditure dollars, using the baseline 2011 dollars and varying assumptions about inflation. Two-thirds of the construction cost is for building the tracks and acquiring the rights of way. Constructing stations, purchasing train cars and building the electrification systems comprise another 20 percent of costs, with the remainder being the administrative costs of program implementation. Each category includes contingencies of between 15 and 25 percent for unanticipated costs. In addition, the project includes a six-year schedule extension, which accounts for unforeseen delays in project funding. Speeding up construction or other changes could result in significantly lower costs.

Figure 3 (at top left), breaks out the categories included in the cost estimate.

Each segment has different costs, with the most expensive being San Jose to Merced, at $13.5 billion. Palmdale to Los Angeles will cost $12.3 billion, while Merced to Bakersfield will be $10.1 billion and San Francisco to San Jose’s Diridon Station will cost $5.6 billion, including the tunnel into S.F.’s Transbay Transit Center. The costs for different segments will vary with length and with features of the terrain and degree of urbanization. In urban areas, more expensive aerial structures or tunnels may be required.

Figure 4 (at bottom left), summarizes the capital cost for Phase 1 by segment, in base-year 2011 dollars. These are the individual alignment costs only and do not include systemwide costs like vehicle purchases and heavy maintenance facilities (nor does it include future rail extensions).

In 2008, when California voters approved a $9.95 billion bond to support high-speed rail, the entire project cost was $33 billion. In the 2009 business plan, the cost increased to $43 billion, and then increased again in the draft 2012 business plan to $98.5 billion. The final 2012 business plan reduces the cost to $68.7 billion. It focuses on beginning construction in the Central Valley while simultaneously making investments in the “bookends” — the urban areas in the Los Angeles Basin and the Bay Area — to improve regional rail service and take a blended system approach to the construction and operations by putting initial high-speed service on existing (and upgraded) commuter rail facilities. This approach saves both time and resources, as it has fewer environmental impacts.

How are we going to pay for it?

Funding sources include the federal, state and local governments as well as private sources, particularly a potential operator of the train system. Of these, only the state and secured federal grants are in hand. Proposition 1A authorized the state to issue $9.95 billion of general obligation bonds, $8.2 billion of which is estimated to be available for high-speed rail infrastructure construction after environmental, planning and support costs. The program has also received an allocation of $3.6 billion from the federal government.

In addition, the business plan assumes just under $5 billion from a combination of local, state and private sources.

The plan also assumes a $13 billion investment from a private operator who will invest once the trains begin operation around 2022. If the assumptions in the business plan are correct, the private operator will not require any additional operating subsidy and could provide more than $230 million from net cash flow for further investment in finishing the construction of the system. The remaining $38 billion is assumed to come from the federal government in the form of grants, loans and other financing support.

We hope the federal government does indeed invest in California’s high-speed rail system at this level, but

we also believe that California can pay for this on our own in the event the federal investment is lower.

California is wealthy enough and economically large enough to pay for high-speed rail. There are many different ways to pay for the system in theory. The official business plan presents one way, and this paper presents other alternatives in order to make our point. In short: We need to do this, and we can afford to do this.

If the federal government totally backs away from further investment in high-speed rail, there is one silver lining: We in California can still build high-speed rail by relying on a combination of road tolls, vehicle license fees, gas taxes, regional general obligation bonds, value capture mechanisms and revenues from the state’s cap-and-trade auctions. These local sources yield more than $2.7 billion annually. Over the 20-year construction of the high-speed rail system, these sources could replace the entirety of the expected $38.3 billion federal investment. In addition, they could also replace the current unspecified $5 billion from additional local, state and private sources.

While we are noting that most of the revenue from these identified sources can flow to the high-speed rail project, this is not an argument that these revenue sources should only apply to high-speed rail. For example, we think gas taxes should be much higher or replaced entirely with a vehicle-miles-traveled fee, but are only assuming an increase of 6 cents per gallon to help support the rail project. In addition, the vehicle license fee (VLF) should return to its historic levels of 2 percent of value. This article, however, assumes far lower and more conservative levels. Some may disagree with the specific fees we assume or the share dedicated toward high-speed rail. For each stream of revenue, reasonable minds can disagree. This article is meant to be a thought piece to demonstrate that with the proper mix of revenues, California can pay for high-speed rail.

Our assumptions are as follows:

An increase in the gas tax of 6 cents per gallon for 20 years

Road tolls of $4 per vehicle on six highways that parallel high-speed rail as it enters the Bay Area and Southern California

An $8.50 increase in the annual vehicle license fee (VLF) for 20 years

A regional general obligation bond for green power for Caltrain and BART that also includes $1 billion for electrification and grade separation

$13 billion from the annual state cap-and-trade auction revenues until 2020

Various value capture tools (impact fee, tax increment, Mello Roos district) at five high-speed rail stations

Figure 5 compares the funding sources in the latest business plan with those in the SPUR plan (in year-ofexpenditure dollars). Below we explain each funding source in greater detail.

Figure 5 How to pay for California's high-speed rail system California can afford high-speed rail without future federal support. The sources of funding for high-speed rail identified here can generate over $43 billion towards the state's $68 billion high-speed rail project. The most significant sources of revenue are a dedicated six cent per gallon gas tax, a 15 percent share of the state's cap and trade auctions and the creation of $4 tolls on a few of California's highways.