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Jan 12

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Choo-choo’s, Trains, and Keeping up with the Joneses

My two young boys, ages 3 and 1, have quickly developed the sort of childish jealousies that parents hope children will learn to restrain as they mature.  When our one-year-old received a small toy “choo choo” (his words) as a gift, the older one protested that he too should have a toy train because his brother has one.  His fairness rationale might have worked, absent his parents’ desire to not reward the emotional breakdown that followed his brief attempt at a rational, though simplistic, plea. While my 3-year-old’s rationale was expected, I was mildly surprised to see the same line of reasoning employed in favor of a much more expensive train, this time from someone of higher station and vastly greater experience.  Governor Jerry Brown had to make a case for threatening deep cuts to education, state parks, and numerous other state services, while pushing ahead with California’s proposed high speed rail. His rationale was simple:“Spain, China, Japan, France, Germany — all these countries can afford [to have high-speed rail systems]. California, I believe, can,” said the Governor.This “keeping up with the Joneses” style of thinking puts people and states deep into financial trouble.  “Well times are tough, but if the Joneses can afford to buy a new car,” the reasoning goes, “surely we can.”  The argument, as effective as it is unfortunate, elicits jealousy and pride to distract otherwise reasoning minds from hard, cold dollars and cents.The truth is that — no matter what Spain, China, Japan, France, and Germany can or cannot afford — this is not the right time for California to move full steam ahead on plans for a high speed rail.  This is clearly evident in both (i) the Governor’s recent budget proposal, and (ii) a newly issued report from an independent commission hired by California to assess the rail’s feasibility.

First, California’s budget proposal projects a $9.1 billion shortfall absent spending cuts and $6.9 billion worth of new sales taxes and income taxes.  Besides certain cuts to spending plans, the budget threatens deeper cuts to schools and local public safety funding unless voters approve these new taxes.  The budget does not place this same contingency on plans to move forward with the high speed rail, instead labeling this as one of the budget’s “bold investments in our future”.

Second, an independent commission just released a report on the feasibility — financial and otherwise — of California’s plans for a high speed rail.  The commission concluded that the rail “represents an immense financial risk on the part of the State of California.”  The context of the quote follows:

We cannot overemphasize the fact that moving ahead on the HSR project without a credible source 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.”

In particular, the report cites (i) a lack of long-term funding sources and (ii) too much time before the project has sufficient private sector interest.  One potential route to address the lack of funding, according to the report, is more taxes.  It cited that the state could levvy

a dedicated fuel tax or some other form of added user charge that would not aggravate the existing State budget deficit. …[Otherwise,] the project as it is currently planned is not financially ‘feasible’”.

Besides a lack of money, the report cites several other factors that should cause concern.  These include an incomplete business model, inadequate management resources, unverifiable ridership forecasts, and continually increasing capital cost projections.

In defending proposed spending cuts, the Governor used the sort of language that people all across California have used in recent years as they reign in their spending in the face of economic challenge.  According to the LA Times, he remarked,

We have to hold the line on spending and make the tough cuts…We can’t spend what we don’t have. It’s not nice, we don’t like it, but….I mean, we’re in a box…. We have more needs, desires and demands than the money available.  So we have to now reduce needs, reduce demands and reduce desires…. We’ve got to bite the bullet.”

He’s right.  Although he should have been referring to trains.

About the author

Eric Madsen

Mr. Madsen is a Chartered Financial Analyst (CFA) charterholder and a Manager at Fulcrum Inquiry, a finance and economics consulting firm that performs economic damages analysis involving commercial litigation, financial investigations, business valuations, and forensic accounting. He also holds an MBA from the UCLA Anderson School of Management and a B.S. in Economics. He conducts expert analysis in finance and economics. Mr. Madsen may be contacted at 213.787.4122 or at emadsen@fulcrum.com.

Permanent link to this article: http://betweenthenumbers.net/2012/01/choo-choo%e2%80%99s-trains-and-keeping-up-with-the-joneses-2/

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