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