Did $98.5 billion high-speed rail project just hit a wall in California?

Drawing a battle line over a high-speed rail project in California – and adding a yellow caution light nationally – a trusted and independent review panel has recommended that California not move forward on its proposed $98.5 billion bullet train, saying it poses “an immense financial risk.”

The watchdog body, created by state law to guard the public interest (known as the California High-Speed Rail Peer Review Group), released its findings Tuesday and is recommending to the Legislature – which opened its 2012 session Wednesday – that it not approve bond proceeds for the project.

California voters approved a $10 billion bond in 2008 in support of plans to build a high-speed rail corridor to link northern and southern California, with trains reaching 220 m.p.h. The system would link to other rail lines that fanned out across the state.

Will Kempton, the former director of the California Department of Transportation, or Caltrans, and current head of the Orange County Transportation Authority, chaired the independent review panel.

“We cannot overemphasize the fact that moving ahead on the (high-speed rail) without credible sources of adequate funding, without a definitive business model, without a strategy to maximize the independent utility and value to the state, and without the appropriate management resources, represents an immense financial risk on the part of the state of California,” Mr. Kempton wrote.

Officials at the California High-Speed Rail Authority have been swift with a curt response to the panel’s review, calling it a “narrow, inaccurate and superficial assessment” in a letter to lawmakers.

“What is most unfortunate about this report is not its analytical deficiency, but that it would create a cloud over the program that threatens not only federal support but also the confidence of the private sector necessary for them to invest their dollars,” said Thomas Umberg, chairman of the rail authority board.

The dispute in California could be instructive for other rail projects nationwide. In February, Vice President Joe Biden announced a plan to put $53 billion in federal funds into a national, high-speed rail network, which could be built in regional sections. California was to be the first state to receive matching funds. 

The negative recommendation is bad news for Gov. Jerry Brown, who has stated he will ask legislators in coming months to issue the initial cluster of $9 billion in voter-approved bonds. He also must confront supporters of the project who say it will create jobs, aid the environment, and jumpstart the state’s ailing economy.

In a year-end group interview with reporters, Governor Brown said last week that he favors moving ahead.

“I believe California is a leader. It's a leader in energy. It's a leader in medical research. It's a leader in venture capital, and I'd also like to see it be the leader in high-speed rail,” Brown said, according to the San Francisco Chronicle. “Spain, China, Japan, France, Germany – all these countries can afford it,” he continued. “California, I believe, can.”

The governor’s spokesman, Gil Duran, was dismissive of the panel’s recommendation. “The peer review report will be evaluated by the Legislature,” he said in a statement Tuesday, “but it does not appear to add any arguments that are new or compelling enough to suggest a change in course.”

But that thinking will now run into opposition in the Legislature.

“It’s never a good idea to start a project, especially of this magnitude, with this many uncertainties reaffirmed by the review panel,” said Republican Assemblyman Jim Nielsen, in a statement. “California clearly cannot afford this project. This report should be the nail in the coffin for the High Speed Rail in California.”

Some seasoned observers agree the handwriting is on the wall.

“The panel is like a Gamblers Anonymous sponsor keeping a habitual bettor from blowing the rent at the racetrack. In a narrow sense, the lesson is that California policymakers should immediately scuttle this insane project,” says Jack Pitney, professor of government at Claremont McKenna College, in an email.

“In a broader sense, the lesson is that policymakers have to be more realistic about the long-term costs of public works projects. They can no longer count on future generations to pay for their mistakes. The future has already arrived. The baby boomers have started to enter retirement and the problems of Social Security and public sector pensions are already casting a shadow over budgets at all levels.”

National analysts see the report as a hurdle, as well.

“The review panel’s report creates a big impediment for Governor Brown as he tries to secure bonding for his very expensive bullet train initiative,” says Steven Schier, a political scientist at Carleton College in Northfield, Minn. “The state's large budget problems, coupled with this report, slow momentum for the project. The governor now has his work cut out for himself with this one.”

But some independent analysts counter that the review panel’s report might amount to the kind of scrutiny that no important public project could survive, and that the bullet train project carries important symbolism.

“If the transcontinental railroad or interstate highway system had been subject to this level of scrutiny, they never would have been built,” says Robert Stern, former president of the Center for Governmental Studies. “A high-speed train system built in California shows that the Golden State is once again leading the nation in new technology and innovation.”