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SMART Just Got Hit by a Freight Train – PART I

“If you’re playing cards and you don’t know who the patsy at the table is, you’re the patsy” ~ Warren Buffett

On May 20, 2020, the SMART Board authorized the purchase of freight-related assets of the Northwestern Pacific Railroad Co. (NWP Co). NWP Co. is a privately held company whose owners include its general counsel, former Congressman Doug Bosco, now part owner of the Press Democrat.

NWP Co. has been providing freight services between Lombard in Napa County[1] to about Windsor, operating on track owned by SMART. It was overseen by the North Coast Railroad Authority (NCRA), which is a state-enabled special district that was established in 1989 to oversee and regulate private freight operations, even though freight was not operating on track owned by the NCRA.

In 2018, the NCRA’s oversight responsibility was dissolved by Senate Bill 1029 (McGuire) and inherited by SMART. The bill did not direct SMART to own the freight related assets.

After the SMART Board approved the purchase of NWP Co. assets, Marin County Supervisor and SMART Board member, Judy Arnold, was quoted as calling the Board’s decision a “watershed moment” for SMART. Similarly, Marin County Supervisor Damon Connolly, who is also a SMART Board member, stated, “I view this decision as a nod to the long run, and as a generational opportunity to continue building out the backbone of a regional public transportation system.”

As explained by SMART General Manager Farhad Mansourian, and recorded in the SMART Board minutes, the amount of $4 million from the State of California will be used for the acquisition of freight rights, equipment, and easements from NWP Co., including the Operating Agreement between the NCRA and NWP Co. It was also claimed that Senator McGuire was able to secure an additional $2 million of $10 million needed for maintenance that was identified by SMART staff, as the additional cost to SMART.

So, this purchase was a great opportunity for SMART, right?

One Board member refused to endorse the proposal: San Rafael Mayor Gary Phillips. He objected because he felt there was not enough information provided for the Board to make a decision. As recorded in the minutes of the meeting,

“Director Phillips voiced his concerns about not having enough financial analysis prior to this approval. He is not sure if this acquisition will yield enough revenue for SMART, which is needed. Also, he is not sure if SMART is equipped to fully take the responsibility of freight. He would like more financial information to review. He asked if there is additional financial information that can be reviewed now or prior to end of June.”

The Mayor’s concerns were ignored by the rest of the board. But, the Mayor’s instincts were correct. However, in order to understand why—and why the rest of the Board was wrong to rubberstamp the staff’s proposal—involves some understanding of the a number of interconnected and relevant pieces of information. These include,

Why is the History of Rail Operations on this Right-of-Way Important to Understand?

On May 20, 2020, SMART has decided to purchase freight assets, including the “Operating Agreement” between NCRA and NWP Co., in order to own and operate freight trains on part of a rail line that has a very long history, but has been an economic failure for decades, requiring constant government subsidies to facilitate operations.

The most recent example of this need for subsidy is the $40 million granted by the California Transportation Commission (the “CTC”), in late 2006, to rebuild the track between Lombard and Windsor, even though a few days prior to this award voters in Marin and Sonoma County had rejected Measure R, a quarter cent sales tax to fund SMART rail (later passed in November 2008). Recent statements by SMART Board directors that this is a “huge opportunity” for SMART is contradicted by this history and the underlying economics of freight rail in this corridor.

A map and a timeline are helpful in understanding why this is the case.

Map of Northwestern Pacific Rail Right-of-Way

Rail-Map.JPG

The Long History of the Rail Right-of-Way from Marin and Napa to Humboldt County

Late 1800s: Both the Southern Pacific Railroad and the Atchison, Topeka and Santa Fe Railway were interested in building rail lines north from San Francisco to Humboldt County to transport lumber—primarily redwood—south to the SF Bay Area.

1906: These two companies merged numerous other (smaller) rail companies into one. The southern end of this rail right-of-way is the very one that SMART trains travel on, today.

Before the 1930s: Passenger rail service boomed until the 1930s, including in Marin County.

After the 1930: Improved roads and highways made traveling by automobile and shipping by trucks more economical. The ebbs and flows of rail service (both freight and passenger) were also impacted negatively by the Great Depression.

World War II: Demand for freight service increased with the growth of the economy, propelled by the war.

1958: All mainline passenger service was discontinued south of Willits in Mendocino County. Limited passenger service was provided north of Willits until 1971, when passenger rail service was abandoned.

1964: There were huge rains and flooding in the Eel River Canyon, impacting the rail line and destroying 100 miles of the line. However, it was partially rebuilt and some service was restored in mid-1965. But it was far less reliable since the soils in the canyon had become unstable.

1981: The Eel River was designated as a “Wild and Scenic River.”

September 1983: Southern Pacific announced that it was abandoning freight rail service north of Willits, which is just south of the entrance to the Eel River Canyon. This led to a contentious court battle because Southern Pacific did not properly notify the Interstate Commerce Commission of its intent to abandon the line. The line was ordered reopened by the U.S. Circuit Court in March 1984.

1986: Congressman Doug Bosco introduced and succeeded in passing House Resolution 2, which provided funds to the Golden Gate Bridge, Highway and Transportation District, in conjunction with Marin and Sonoma Counties, to purchase southern portions of the Southern Pacific right-of-way for $24 million, with the vision of continuing freight and passenger service.

1989: Portions of the right-of-way began to enter state public ownership when the NCRA was established by the California Legislature under the “North Coast Railroad Authority Act.” Around the same time, the Golden Gate Bridge, Highway, and Transportation District, in conjunction with Marin and Sonoma Counties, began purchasing southern portions of the railroad from the Southern Pacific Railroad.

1992: The State of California purchased the rail line from Willits northward.

1998: The NCRA was ordered by the Federal Railroad Administration to shut down rail operations on the line until basic repairs were made. Service did not restart again until late 2009. A press release by the NCRA (October 2009) provided some highlights.

2002: Assembly Bill 2224 (Joe Nation) was approved and created the Sonoma Marin Area Rail Transit (SMART) District. The bill established that passenger rail was to operate in harmony with existing freight service operating on the same rail line. The bill designated:

2006: The NCRA selected NWP Co. as its freight operator and signed a 95-year lease agreement that was later extended. It currently expires in 2098. That lease (the “Operating Agreement”), dubbed a “sweetheart agreement” by some, and never generated a single payment to the NCRA from NWP Co. because one of the clauses in the agreement contained a $5 million profit threshold, which, if not reached, would not require the NWP Co. to make a lease payment to the NCRA.

“NCRA’s August 15, 2007, approval of a secured loan agreement with NWP Co. was in violation of the statute which created NCRA and outside of the authority granted to the NCRA under that statute. As such, said approval was ultra vires (acting or done beyond one’s legal authority), and the agreement is void and should be set aside.” [Emphasis and definition added]

2006 (Nov): The California Transportation Commission released about $40 million in state funds to repair 62 miles of track from Lombard to Windsor.

2010 (July): In a memo to the Marin County Board of Supervisors, NCRA Directors from Marin County (Tom MacDonald and Bernard Meyers) reported the following:

“The NCRA continues to be severely under‐funded as it has been throughout its 20-year history. The agency struggles to meet its monthly operating expenses and has inadequate resources to pay off its backlog of debt. There is no clear‐cut plan for how the NCRA can extract itself from its accumulated debt, even after the rail line resumes operations.”

2011 (July): The first freight train delivered grain to Petaluma.

2017 (June): At a CTC meeting, commissioners directed the NCRA to prepare a “shut-down” order.

2017 (July): The California Supreme Court ruled in the lawsuit filed by the environmental organizations, FOER and CATS, against the NCRA and NWP Co., essentially ending a multi-year legal battle. Later, the US Supreme Court denied a request from the NCRA and NWP Co. to review the ruling by the California Supreme Court.

2018 (March): State Senator Mike McGuire introduced “The Great Redwood Trail Act” (SB 1029) to simultaneously resolve what to do with the NCRA and create a vision for a world-class trail to run through the Eel River Canyon.

2018 (Sept): Governor Brown signed SB 1029 into law.

“We couldn’t be more thrilled about the Governor’s action, which will launch one of the most significant positive transformations we’ve seen in a generation here on the North Coast — taking a crumbling rail line, managed by a functionally bankrupt public agency, and turning it into a world-wide wonder of a trail and economic driver for Northern California…It’s time for us to move beyond the old debates and begin the process of turning this 300-mile rail line into a world class trail and destination that generations will enjoy.

“The new law also gives SMART the ability and funding to negotiate for the take-over of the complex, long-term freight contract that NCRA sold to Northwestern Pacific Company over a decade ago. This could provide SMART with full control of the rail line from Marin to Willits in Mendocino County. This would help SMART as they would now manage both passenger and freight operations, which would aid SMART’s long-term scheduling and expansion needs. The State Secretary of Transportation and the Director of the Department of Finance would have to approve any takeover plan of freight operations between Willits and Marin.”

If the SMART Board had stepped up and performed any due diligence on the purchase of NWP Co.’s assets, including the Operating Agreement, many of the complex issues associated with this history and the potential financial risks to taxpayer-financed SMART, would have been identified and made public. However, these issues were not raised and the SMART Board members appeared unaware or uninterested in understanding this history.

The General Manager’s summary of NCRA’s history glossed over the liabilities now inherited by SMART.

The truth is, SMART Board just rolled the dice.

PART II COMING SOON


[1] SMART’s ownership ends at the “Brazos Junction” just west of Hwy 21 in Napa County.


ATTACHMENT A – The FOER & CATs v. NCRA & NWP Co: Case History

Note: this represents the key legal steps in the legal history. Additional filings occurred within this time period, which are not included in this chronology.

2011 (March): The NCRA Board adopted a Final EIR for the rail line that excluded any assessment of rail operations in the Eel River Canyon.

2011 (July): FOER and CATS filed a lawsuit against the NCRA and NWP Co. for failure to review full environmental impacts associated with restarting freight rail service on the rail right-of-way through the Eel River Canyon. CEQA mandates that state and local agencies study and disclose environmental impacts of proposed projects and adopt measures to mitigate those impacts.

2011 (August): The NCRA decertified its prior approval of the Final EIR and filed a notice of “removal” with the court, claiming it was not required to complete one.

2013 (May): Marin County Superior Court ruled that said freight rail traffic is interstate commerce under the domain of federal regulators and is not subject to CEQA.

2014 (September): A three-judge panel of California’s 1st District appellate court ruled that North Coast freight rail operators do not need to conduct a more rigorous study of the railroad’s environmental impacts.

2017 (July): The California State Supreme Court reversed the district and appellate courts, ruling in favor of FOER and CATS that CEQA, in fact, applies to state-owned rail projects.

2018 (April): The US Supreme Court denied the petition of the NCRA and NWP Co. to review the CA Supreme Court’s ruling.


Arnold is a PhD economist, currently lecturing at the Fromm Institute (USF) and in the Osher Life Long Learning Institute (OLLI) at Dominican University and Sonoma State University.