The decision by Judge Michael Kenny presents a new setback for the rail authority, the agency charged with building the voter-approved project. The decision was prompted by a 2011 lawsuit from residents of Kings County, who argued that the rail authority's funding plan did not comply with Proposition 1A, the 2008 measure that authorized $9 billion in state funds for the line.
Attorneys for the plaintiffs included rail critic Michael Brady, an attorney from Redwood City, and Stuart Flashman, who represented Palo Alto, Atherton and Menlo Park in prior lawsuits against the rail authority.
Kenny's verdict comes at a time when the rail authority is preparing to build the "Initial Construction Segment" of the $68 billion line in the Central Valley, between Bakersfield and just north of Fresno. This segment would be the first phase of the rail line's "Initial Operating Segment," which in effect is the first stretch of the train system that would be usable.
In making his finding, Kenny argued that, while the rail authority had identified the funding sources for the construction segment, it failed to list the funding sources for the operating one, as mandated by law.
The ruling stopped short, however, of invalidating all rail-authority documents based on the funding plan. Rather, Kenny left open the question of remedy and directed both sides to confer and submit arguments, after which time he would decide the next steps. The plaintiffs, Aaron Fukuda, John Tos and County of Kings, argued that if the business plan were to be found invalid, everything that relied on the business plan should also be struck down.
"Essentially, defendants have built a house of cards upon the basis of a funding plan that violated the terms of the bond measure. If the funding plan is invalid, the entire house of cards must collapse along with it," the plaintiffs wrote.
While Kenny's decision may not stop the project, which has become increasingly unpopular on the Peninsula, it could set up a new legal speed bump for the beleaguered rail authority.
Last year, the rail authority won a razor-thin victory in Sacramento when the state Senate authorized the agency to tap into the first $2.6 billion in bond funding and to accept $3.3 billion in federal funding for the first segment of the project. The appropriation came by a single vote, with several Democrats joining every Republican in voting against the funding bill.
Kenny's ruling makes an argument that the rail authority's plan to fund its first operating segment (a 300-mile-long stretch from either north from Bakersfield to San Jose, or south from Merced to San Fernando) is flimsy at best. The rail authority's business plan lists numerous potential federal funding sources for the first operating segment, though it also makes clear that some of these sources are far from a sure thing.
The plan acknowledges that federal grants from the High-Speed Intercity Passenger Rail Program and Passenger Investment and Improvement Act of 2008 are uncertain and would require heavy lobbying by the state to "promote high-speed rail as a program of national interest." Other federal funding sources identified in the plan — including a trust fund dedicated to transportation and qualified tax-credit bonds — don't even exist.
"This language makes it absolutely clear that there is, in reality, no reasonably anticipated time of receipt for any of the potential new federal funds described in the funding plan and the 2012 draft business plan, and that there are no expected commitments, authorizations, agreements, allocations, or other means of actually receiving such funds," Kenny wrote.
The rail authority acknowledged in its 2012 business plan that it doesn't not have all the funding sources identified for future segments of the line and stated that it will identify them no later than 2015.
Kenny also cites the plan's statement that "the mix, timing and amount of federal funding for later sections of the High-Speed Rail is not known at this time." He points to this language in arguing that "the funding plan failed to comply with the statute because it simply did not identify funds available for the completion of the entire Initial Operating Segment."
After going over the history of the case, Kenny wrote: "Having exercised its independent judgment in this matter as authorized by law, the court concludes that the (rail) authority abused its discretion by approving a funding plan that did not comply with the requirements of law."
In a statement, attorneys for the plaintiffs said the ruling will require the rail agency to go back and correct its mistakes. Flashman wrote that Proposition 1A was by no means a "blank check" from the voters.
"There were numerous requirements that had to be met before the bond funds could be spent," Flashman said in the statement. "The authority will need to go back and do things right. If the Governor and the authority don't like these requirements, they'd need the the voters' approval to change them."
Brady concurred and said Proposition 1A "contains such strict safeguards that the authority may not be able to comply at all, in which event the High-Speed Rail project may never go forward."