Inflation and delays could add billions more to bullet train project costs

The California bullet train project has cost state taxpayers an average $3.1 million a day over the last year — a construction spending rate higher than that for the Bay Bridge, Boston’s Big Dig or any U.S. transportation project in recent history

But still it’s not enough, planners say.

In order to hit its 2033 deadline and $77-billion budget, the California High Speed Rail Authority will have to increase daily spending by up to nine times over the next four years or risk putting the already-delayed system further behind.

Russell Fong, the authority’s chief financial officer, acknowledges the goals will be difficult to achieve.

“It is a very aggressive spending rate,” Fong said.

Still, officials said they are beginning to ramp up spending, and the estimates were officially adopted by the rail authority board in its 2018 business plan.

But outside infrastructure experts question whether the $27-million-a-day outlay necessary under the plan would even be possible.

“That burn rate is ludicrous,” said civil engineer James Moore, director of USC’s transportation engineering program. “It is so far outside standard experience that it doesn’t make sense to assume it will occur.”

The spending schedule hinges in part on whether the rail authority can manage to avoid engineering problems resulting from the state’s complex geology, in addition to the construction hiccups typical of any project as it links Los Angeles and the Bay Area.

And that’s not the only risk with the revised plan laid out earlier this year, which assumes rates of inflation that some experts say are highly optimistic.

The actual costs will depend on the price of a pound of steel, a cubic yard of concrete, an acre of farmland or an hour of an engineer’s time in 10 or 15 years. Those prices are subject to unpredictable factors such as import tariffs, labor shortages and litigation by angry property owners.

If the rail authority misses the 2033 target date, inflation probably will raise the project’s tab by as much as $2 billion a year. That’s because tens of billions of dollars of work could get pushed into future years when costs will be higher, and the state will have to keep employees, contractors and consultants on the payroll longer.

“One of the things that this program has experienced, which has not been good, is consistently projecting things to happen by certain dates and it does not happen,” rail authority board member Michael Rossi, a former banking executive, said at a recent audit committee meeting.

Bullet train planners are under growing pressure to make progress on the system, which when completed would whisk riders from the Bay Area to Southern California in 2 hours, 40 minutes.

Voters approved the project in 2008 amid much fanfare, with backers saying the bullet train would connect far-flung parts of California in transformational ways, helping guide generations of development and transit policy ahead.

Despite excitement for the bullet train in a state mired in traffic, the system has been beset with both funding and engineering setbacks that have delayed the project.

It was supposed to cost $33 billion and eventually reach from Sacramento to San Diego. Now, the route connects only San Francisco to Los Angeles, with the completion date pushed back 13 years.

To be sure, the vast majority of megaprojects around the world bust their budgets, though, for a variety of technical, legal, political and financial reasons. Boston’s 3.5-mile Big Dig, for example, was finished in 2007 — nine years behind schedule and at a cost of $14.6 billion, up from an initial estimate of $2.5 billion. The 11-mile East Side Access tunnel in New York City is 14 years behind schedule, and its tab has grown from $4.3 billion to $11.1 billion.

The bullet train project, with its record-breaking rate of spending last year, fell 31% short of the authority’s $4.5-million-a-day target. In its current fiscal year, the aim is to spend $1.8 billion, or $4.9 million a day. At its peak in fiscal 2023, spending should hit $10.7 billion — or $29 million every calendar day — according to planning documents.

By comparison, records show that NASA spent an average of $30 million a day during the 13-year Apollo moon program (adjusted to 2018 dollars) and had 35,000 government employees. The rail authority has been adding to its executive staff this year, but currently has 226 state employees and hundreds of consultants who also help manage the program.

William Ibbs, a UC Berkeley civil engineering professor who has consulted on high-speed rail projects around the world, also questioned whether California’s aggressive timeline is achievable.

“It is going to be a challenge to get all the resources they need to spend $10 billion in a year, given all the activity in California,” Ibbs said, referring not only to building a bullet train system that passes through three mountain ranges but also large-scale water tunnel and subway projects planned in the state.

In addition, the tunneling process can result in delays. It can take a year to issue a request for proposals from bidders, and another year to issue a contract. Ordering boring machines and staging them in the mountains can take a year or more.

The rail authority has built into its business plan a range of costs that go as high as $98 billion. It is part of an effort by Chief Executive Brian Kelly to acknowledge that uncertainties, such as future inflation rates, lay ahead.

According to Fong, the agency’s estimates for future inflation are based on the industry’s best practices and rely on a composite of figures from Moody’s, the California Department of Transportation, the Bureau of Labor Statistics and the Department of Energy. Each source is used for specific cost categories, such as steel, cement, train cars, skilled labor, professional labor and diesel fuel, which are assembled into a single inflation estimate, Fong said.

While such accounting is the standard across the industry, it also contributes to the majority of mega-projects around the world busting their budgets.

In its technical documents, the rail authority projects annual inflation of 2.25% until the middle of the next decade, and no more than 3% until the completion date in 2033.

Edward Zarenski, a veteran construction industry executive who consults widely on cost trends, said inflation for nonresidential construction has been increasing at 3.5% over the last 25 years and at 4.2% over the last four years. The rail authority estimates are “detrimentally light,” he said.

“If construction inflation is understated through 2025-26 by 10%, this budget will experience a shortfall in its forecast of about $7 billion dollars” in that period, he said.

The rail authority’s inflation estimates are similar to those used by many government agencies, said Marcene Taylor, president of the American Society of Professional Estimators and owner of a construction consulting firm. Nonetheless, she projects annual inflation rates of 4% to 5%, based in part on the high pace of construction activity across California and much of the nation.

“There isn’t the labor to do the available work,” Taylor said. “If you have a project now, you might not get any bidders.”

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