Executive Summary

 

The North Coast Railroad Authority (NCRA) was created by the California Legislature in 1989 to preserve and maintain a transportation corridor in the North Coast Region of California.

 

During its short history, for every step forward, the NCRA has taken a half step back.  Track work to put the line back in service has been held up due to lack of funding which was authorized but not released pending audits.  The audits await accounting efforts.  The accounting efforts await funding.  Engineering firms, project consultants, and construction contractors perform work anticipating payment. The only means of paying past debts, loans, and current debts incurred to restore the railroad to operation are Property Management receipts and Government funding.  Unfortunately, Government Funding awaits documentation and meeting pre-qualification audit requirements.  In order to meet those requirements, accounting work has to be done. We come full circle and almost stand still.

 

As we look forward with a New Business Plan the real question becomes should the North Coast Railroad Authority continue to exist?  We feel the answer is yes, but the reasons for this conclusion are very complex.

 

The Five-Year Business Plan for the North Coast Railroad Authority is organized according to financial considerations.  The four sections of the Plan include: I. Sources of Funding, II. Uses of Funds, III. Economic Development Opportunities, and IV. Management Discussion. 

 

The results of the study of where the NCRA is today, and research and forecasts into what the future holds, are shown in Table 1 “North Coast Railroad Authority Sources and Uses of Funds, an Economic Base Case”. This is a tabular summary recapping information from Sections I and II. 

 

Section III is the result of extensive research and analysis to gauge the opportunities and risks that may impact on this Base Case during the five-year period covered by the Plan.  Table 2 “North Coast Railroad Authority, Sensitivity Analyses Comparing the Results of Various Positive and Negative Factors on the Sources and Uses of Funds” shows the potential financial impacts of these opportunities and risks.

 

Section IV is a discussion of the NCRA’s mandate, a historic overview, board issues and initiatives, and planning for the future.  In effect, the State of California Legislature created an authority to own and operate a railroad.  That railroad should be treated as a resource and maintained and repaired as any other locally owned and operated public asset.  The NCRA is a tremendous asset for the people and economy of the North Coast of California.  The Board of Directors understands that the NCRA represents significant economic development opportunities for the citizens of the North Coast and is dedicated to the development of those opportunities.

 

The North Coast Railroad Authority’s previous draft of its plan was found to be deficient.

Questions were raised about whether its goals were achievable and whether risks were given adequate consideration.  It was noted that while the basic elements were there, in several instances the numbers did not tie from page to page.  In most cases these discrepancies were modest, however questions were raised. Are there other flaws? Is the overall plan going to work? Can accounting and record keeping problems of the past be overcome?  The current plan attempts to address all these issues and more.

 

Current Financial Condition

 

The key to understanding the NCRA’s current financial condition can be found by looking at Table 1 “North Coast Railroad Authority Sources and Uses of Funds, an Economic Base Case.”  Tables can be found in the section labeled Tables immediately following this Executive Summary.

 

For a moment, look only at years two through five of the Plan.  In each of these four years, a positive cash flow is forecast.  In each of these four years the railroad is operating, contract fees from operators are received, new property management strategies are in place and opportunities taken advantage of, and expenditures for track and structure rehabilitation work and storm damage/disaster work are performed utilizing government and private funding.

 

The current Fiscal Year 1998/1999 shows a negative balance of $7.6 million. Overall, the Five-Year Plan’s Economic Base Case shows a negative balance of $2.7 million.  The two largest contributions to these negative balances are work performed in prior periods and the Q Fund Trust account.

 

The key elements of prior period expenses include 1) Accounts Payable: General and Storm/Disaster Work and 2) Judgments and Claims. They total $7.0 million.  In addition, the expenditures for Storm Damage/Disaster Work in this year will exceed FEMA/OES funding by $1.2 million as a result of having to use current project funding to offset prior expenditures that have been challenged by FEMA/OES during their audits. These items alone total $8.2 million in expense and represent almost 60% of the total $13.8 million shown in Uses of Funds for Fiscal Year 1998/1999. It must be noted that, to date, $4.6 million in expenditures for Storm Damage/Disaster Work has not been funded and that the NCRA has recently filed appeals regarding the denial of $1.2 million of that funding.   

 

In 1995, as part of the Joint Powers agreement between the Golden Gate Bridge, Highway and Transportation District (GGBHTD), the County of Marin, and the NCRA, the NCRA assumed repayment of a $12 million loan due in the year 2013 from the Federal Highway Administration, referred to as the Q Fund Loan. As part of that agreement, the NCRA received assignment of GGBHTD’s purchase rights in that portion of the Railroad referred to as the Willits Segment (Willits – Healdsburg) and $8.6 million in ISTEA funds were made available for obligation to the NCRA.  During the five years of this Business Plan, the NCRA will have to fund a $2.2 million trust account for repayment of the Q Fund Loan.   This amount represents 80% of the Five-Year Business Plan Base Case $2.7 million negative balance.

 

Still the question remains, why be optimistic about the NCRA’s future?  Let’s start with two reasons:

 

1.    In 1998 the NCRA Board sought a Private Operator to handle the day-to-day operations of the Railroad and found a firm with the necessary credentials to succeed.  That Operator, Rail-Ways, Inc. has experience not only in rail operations and engineering but also in railroad finance and accounting and sales and marketing.  Each of these areas is of critical importance to the future success of the Railroad. This public-private partnership is key to the future success of the Railroad. 

 

2.    In September 1998 the NCRA Board hired an accounting consultant to implement a new accounting system. Problems incurred with the accounting system installed in October 1996 resulted in the Board’s decision to replace that system.  Every attempt will be made to key historic records into the new system.  Once completed, the new system will provide NCRA with accurate accounting information and provide government agencies with the audit information necessary to track expenditures made for track rehabilitation and for storm damage/disaster repair by project.  Passing an audit is a prerequisite for obtaining virtually any type of government funding. NCRA  is currently considered a High Risk Subgrantee pending its ability to pass this audit.

 

Given these two events, the NCRA should be able to secure the release of funds available to repair and to rehabilitate the railroad and through the new public-private partnership with Rail-Ways, Inc. it will have the expertise to see that the necessary and appropriate work is performed.  The railroad property can then be reopened for both freight and passenger service.  Add to this receipts from new property management initiatives and the NCRA and its stakeholders have reason to believe the Railroad can turn the corner.

 

Significant items to be aware of as you review the Sources and Uses of Funds, an Economic Base Case, are as follows:  (Please note that the business plan location for each source and use is shown in parentheses following the funding topic.)

 

Sources of Funds  (Section I)

 

Rail-Ways, Inc.  (Section I A 1)

 

The lease payment fluctuates.  It increases as funds are spent on rehabilitation and additions.  It decreases due to depreciation on the investment and retirements.

Since there are no capital expenditures in the plan for fiscal year 2002/2003, the lease payment is less than in the prior year.

 

The Participation Fee grows as traffic grows.  It must be noted, however, that there is not a directly proportional relationship between Rail-Ways’s revenues and expenses. The growth depends on such variables as revenue per unit, length of haul, and type of service demanded.

 

California Redwood Coast Company (Section I A 2)

 

Passenger service income is forecast to grow substantially each year after start-up (Spring of 2000) during this five-year plan.  Slower growth to a normalized level is not anticipated to take place until after the time frame studied in this Plan.

 

Property Management  (Section I A 3)

 

Rents are expected to increase each year during the plan.  First year numbers include only receipts from NCRA property.  Subsequent years include receipts from NWPRA real estate activity that are over and above the receipts that NWPRA currently earns.  An aggressive property management effort is planned which will provide added funding for NCRA.

 

Property Sales only reflect those sales already realized or sales of property for projects that are solidly in the planning stage, not by NCRA, but by the purchaser.  NCRA does not plan on any “fire sales” of properties to generate funds.

 

Easement receipts fluctuate significantly as a result of granting certain rights for a one-time payment, versus granting other rights based on an annual fee arrangement.  They reflect the Property Manager’s and Board’s determination of how best to negotiate each agreement.  It is the belief of the Property Manager that these estimates will be substantially exceeded.

 

Scrap sales and quarry royalties are estimated to remain flat throughout the plan. 

 

Government Funding  (Section I B)

 

Funding dollars under AB2782, Proposition 116, the California Transit Capital Improvement Program, The Department of Fish and Game and the Federal Highway Administration 130 Program reflect the amounts that should be available to NCRA provided that NCRA meets the necessary project match requirements and pre-qualification audit requirements.  The timing of receipt of these funds is dependent on meeting the special prerequisites imposed on agencies designated as “High Risk Subgrantees”

 

The ISTEA funding has been allocated to NCRA, but again is dependent on the prerequisites mentioned above.  It is anticipated that the receipt of ISTEA funds will start in fiscal year 1999/2000.  However, it must be noted that to re-open the Railroad, Rehabilitation Projects have begun in the current fiscal year. 

 

The FEMA/OES funding is an estimate.  Damage Survey Reports (DSRs) have been submitted.  As of the date of preparation of this report, the funding shown under this category reflects NCRA’s best judgment of what can be expected.  When final payment is received, it will reflect the FEMA/OES determination of what NCRA’s actual expenditures were.  It is expected, that with the new accounting and information procedures developed, the FEMA/OES determination of actual expenditures that are reimbursable will equal those NCRA believes to be reimbursable.  The timing of receipt of funds has been placed in the same years that expenditure is anticipated.

 

Uses of Funds  (Section II)

 

Operations (Section II A)

 

The expenditures for Operations that are shown in the current fiscal year are much higher than in subsequent years.  The current year includes carryover expenses from the prior year (salaries, fringe benefits, and payroll tax), as well as substantial additional expenses for professional services required to address accounting issues, implement the new accounting and information system, and obtain legal counsel on a variety of issues.  With the hiring of an Executive Director and the completion of all the accounting tasks, as well as settlement of outstanding legal issues, it is anticipated that on-going expenses will be roughly one-third of what is reflected in the current year.  To get the total picture of current year expenses related to NCRA’s operations, add the lines “Subtotal Operations” and “Existing Liabilities - Accounts Payable Professional Services”.

 

Existing Liabilities  (Section II B)

 

Accounts Payable, Judgments and Claims, State & Federal Crossing Funds  (Section II B 1)

 

As mentioned under the category Operations, Accounts Payable for Professional Services really should be considered part of the NCRA’s operating expenses.

 

Judgments and Claims include expenses for a variety of services performed for NCRA prior to the current fiscal year.  Several of the expenses shown under accounts payable as of December 31, 1998 should be categorized as Judgments and Claims and have been placed in this category rather than as Accounts Payable.  This shifting of funds owed has affected both the General and Storm/Disaster Work categories of Accounts Payable.  For purposes of this Business Plan, the current estimate for these Accounts Payable and Judgments and Claims expenses has been placed in the current fiscal year.  In fact, the NCRA does not have the funds to make these payments in the current fiscal year.

 

The current fiscal year’s expenses for Track Rehabilitation and for Storm Damage/Disaster Work are not included in the Accounts Payable categories General or Storm/Disaster Work.  They are shown separately under Uses of Funds line items: Track and Structure Rehabilitation and Storm Damage/Disaster Work. To the extent expenditures for these elements of work have already been performed, the NCRA has already incurred an expense due to a vendor/contractor.  It was decided, however, that it was more important to separately show these current year expenditures than to include them with amounts due from prior years. 

 

State and Federal Crossing Funds are due as shown.

 

Loans  (Section II B 2)

 

The City of Willits Loan was repaid in March 1999.  Since the receipts of funds used to pay off the loan are shown in Sources of Funding, the payment is shown in Uses of Funds, Table 1.

 

Payments on the Redwood Regional Economic Development Corp. Loan stopped in July 1997.  The amount due in the current fiscal year reflects the estimated amount due to date with payments in future years according to the loan agreement.

 

The Community Disaster Loan is due (principal and interest) in Fiscal Year 2000/2001.

 

Passenger Equipment  (Section II C 1)

 

It is anticipated ISTEA funds will be used to acquire a dome car and rehabilitate existing NCRA passenger equipment.

 

Track and Structure Rehabilitation  (Section II C 1)

 

The expenditures as shown are based on the forecast timing of work.  Beyond the current Fiscal Year, it is anticipated that the timing of expenditures will coincide with the receipt of funding from Property Management, ISTEA, Proposition 116, and TCI.  In the current fiscal year, work progresses to re-open the Railroad. 

 

Environmental Remediation  (Section II C 2)

 

The Environmental Remediation expenditures in the first and second fiscal year are as anticipated.  From Fiscal Years 2000/2001 and beyond, the amount shown reflects an estimate of NCRA’s required match share.  The receipts of Grant Funding and the Expenditure of these Grant Funds are not shown since they will offset one another.  What is important to note is that NCRA recognizes that environmental remediation work will have to be performed and that NCRA will apply for the available funding to perform that work.

 

Storm Damage/Disaster Work  (Section II C 3)

 

The FEMA/OES expenditures are an estimate.  Damage Survey Reports (DSRs) have been submitted.  As of the date of preparation of this report, the expenditures shown under this category reflect NCRA’s best judgment of what can be expected. The timing of expenditure is based on estimates of funds that will be expended if approval of the DSRs is received.  The current fiscal year’s expenditure is based on estimates of expenditures this year to date, plus those anticipated during the remaining three months.

 

Reserves

 

None are shown.  There are no funds available to be set aside for reserves.  Beyond the current fiscal year, net contribution will be used to pay down past liabilities. 

 

Economic Development Opportunities and Risks (Section III)

 

Throughout the Business Plan there are discussions of the opportunities and risks that the NCRA faces.  The attached Table 2, “North Coast Railroad Authority, Sensitivity Analyses Comparing the Results of Various Positive and Negative Factors on the Sources and Uses of Funds,” (immediately following this Executive Summary) provides a number of possible outcomes for NCRA given the various opportunities and risks discussed in the Plan.

 

The most important point to note from this table is that there are more opportunities than risks. 

 

Again, start by looking at years two through five for each of the analyses shown.  There is only one scenario where the results of these four years of operation are not positive.  It is the scenario where Private Funding falls short of its objectives (Section III D of the Plan) and where all expenses during these four years increase by ten per cent.  Ten per cent is an arbitrary factor.  Some of the expenses represent loan repayments, they will not increase. Others may increase more.  What happens in this scenario is that the NCRA is still unable to pay off its debt incurred in years prior to the start of the Business Plan and, over these four years, has added another $2.9 million to that debt.  In each of the other downside sensitivity analyses, the overall impact is an improvement from the NCRA’s position at the end of the current fiscal year.

 

The impacts of the opportunities studied in these sensitivity analyses include:

Private Funding exceeding its objectives (Section III D), STIP funds are received (Section III E 2 d), existing federal loans are converted to grants (Section III E 3), existing appeals regarding funding by FEMA are successful (Section I B 7), disputed claims of vendors are decided in NCRA’s favor (Section II B 1), and the Pass Through of Federal Income Tax Benefits generates funding for NCRA (Section III E 4). A number of analyses were performed looking at the opportunities individually or bundling combinations of possible outcomes.  Taken individually, some of these opportunities represent a cash benefit to NCRA of less than $0.6 million, but if you combine two or three of these opportunities the five-year cumulative Net Sources and Uses of Funds increase from the negative $2.7 million in the base case to a positive net of $1.5 million, or $2.0 million, or  $6.8 million to even $11.8 million when all opportunities are met with success.  Each of the Sections referenced in this paragraph provides commentary on how the amounts shown were determined.  Some, such as Property Management and Pass Through of Federal Income Tax Benefits, have the potential of significantly exceeding the estimates used here.

 

The sensitivity analyses performed do not include “what if” scenarios for such events as severe storm damage every other year.  Once existing storm damage/disaster repairs and rehabilitation projects are completed, the railroad will be in a better position to withstand some of the potential damage caused by future events.  What if future events cause expenditures of  $2 million to $4 million per year, should that cause the North Coast of California to be deprived of the opportunities afforded by rail service?  This study has not quantified the benefits to the citizenry of California’s North Coast.  An operating railroad for the North Coast will provide competitive transportation rates, growth for the Port of Humboldt Bay, and expansion for the tourism industry.  The trickle down economic impact has the potential of providing millions of dollars annually not for the railroad but for the shippers, citizens, and communities it serves.