State officials have canceled a $116 million maintenance contract with a Spanish-owned train manufacturer, escalating a political and legal dispute over two brand-new trains that already have cost the state $71.8 million.

In a letter terminating the contract, a state lawyer also claimed that the costs of testing the trains are rising and that federal officials have found the trains don't meet standards for accessibility to the disabled.

A spokeswoman for the manufacturer, Talgo Inc., denied the allegations and warned the cancellation could lead to legal action.

Talgo built the trains in Milwaukee to replace aging Amtrak-owned equipment on the Chicago-to-Milwaukee Hiawatha line. The state has agreed to pay $48.7 million for the two 14-car trains, plus $2.5 million for spare parts. A British consulting firm helped oversee manufacturing, for a $6.9 million fee.

A separate deal with Talgo called for the company to service its trains, at an average cost of $5.8 million a year over 20 years, and for the state to provide a maintenance base. The state has spent $11.7 million to turn Talgo's north side plant into a temporary base and $2 million on planning a permanent base.

But the Legislature's Joint Finance Committee refused to let the state Department of Transportation borrow another $2.5 million to continue planning, effectively killing the $55 million to $63 million permanent maintenance base. Without funding for that base, Transportation Secretary Mark Gottlieb says he can't use the trains and must mothball them.

As a result of the legislative action, the Transportation Department no longer can afford to make the payments required under the maintenance agreement and must terminate the deal, department attorney Kathleen Chung wrote in a letter to Talgo President Antonio Perez and his attorneys.

Talgo Vice President Nora Friend said the state can't back out that easily.

"The department is putting politics ahead of legality," Friend said. She said the state was "acting in bad faith . . . in order to advance an agenda to kill the train project, regardless of the damage it inflicts upon Talgo, the state and the taxpayers."

Talgo will initiate the contract's dispute resolution process, Friend says. That provision calls for mediation, but litigation could follow if mediation fails.

Milwaukee Mayor Tom Barrett said Gov. Scott Walker is showing "a complete disregard for rail." He suggested the Walker administration set up the situation to avoid purchasing the trains.

A Walker spokesman referred questions to the Transportation Department, where spokesman Brock Bergey said the state is still honoring the purchase contract.

'Technical difficulties'

Passenger rail was a key issue in the 2010 gubernatorial election, when Walker, a Republican, campaigned against a planned $810 million Hiawatha extension to Madison and Barrett, a Democrat, supported the federally funded line. Now Barrett is seeking the Democratic nomination to challenge Walker in the recall election.

But Walker's administration sided with the finance panel's minority Democrats in backing the maintenance base, which was voted down by his fellow Republicans.

Despite canceling the maintenance deal, the state will pay for testing the trains, Chung wrote. That testing is required under the purchase agreement, Bergey said.

Those tests also are federally required for the trains to operate on U.S. tracks, said Hal Gard, Oregon's interim rail administrator. Oregon is buying two other Talgo trains and sharing some testing costs, Gard said.

Wisconsin couldn't sell its trains to anyone else unless the tests were completed, Gard noted. He stressed that he did not know if Wisconsin had any plans to sell the trains. Wisconsin officials have said they did not believe they could find a buyer, and Gard said his state could not afford to buy more trains.

Chung said the state was concerned about rising costs for the testing and about "Talgo's continuing technical difficulties," including federal orders to correct accessibility flaws before testing can proceed further. Bergey declined to elaborate, and a Federal Railroad Administration spokesman said only that his agency was working with Talgo to ensure the trains meet all requirements.

Friend called Chung's letter an "inaccurate and intentionally misleading" account of Talgo's efforts to satisfy conflicting demands from various officials.

Train station renovation

In a related matter, the railroad administration has ruled the state must follow new rules in renovating the passenger concourse at the downtown Milwaukee train station - a decision that could boost that project's cost beyond its $15 million to $19 million budget.

The concourse is being overhauled primarily to meet federal standards for accessibility to the disabled.

As planned by former Gov. Jim Doyle's administration, the project would have cost $20 million, all of which would have been covered by the $810 million federal high-speed rail grant. But after Walker's election, that grant was withdrawn, leaving the state to pick up half the cost.

Walker's administration redesigned the project to trim the price tag. In the meantime, however, the railroad administration issued new rules calling for platforms to be level with train entrances - 15 inches above the tracks, instead of the 8-inch height in the state's current plans.

In a March 27 letter to Gottlieb, Federal Railroad Administrator Joseph Szabo said the rule applies to any project on which construction starts after Feb. 1, noting the state has not started work on the Milwaukee concourse.

State officials are still trying to resolve the issue with the rail agency, Bergey said.

But a railroad administration spokesman held out no hope of waiving the rules, saying, "The Americans with Disabilities Act is a wide-ranging civil rights law that prohibits discrimination based on disability. FRA cannot grant waivers to rules that would result in the denial of anyone's civil rights."