The State of California recently paid approximately $2.4 million to the Federal Railroad Administration (FRA) which, in my opinion, was an improper gift of public funds for the benefit of a private company, the Northwest Pacific RR Co. (NWP). Let me explain my reasoning and what should be done about it.
The North Coast Railroad Authority (NCRA) was formed by the State in 1989 and so poorly managed its tracks that in 2001 the FRA ordered the line shut down until repairs were made to ensure safety. In 2003, NCRA hired a new Executive Director, Mitch Stogner. Mr. Stogner had been the Chief of Staff for Doug Bosco, between 1976 and 1991 when Mr. Bosco had been in the California Legislature and the US House of Representatives.
NWP was formed in 2006. The principals of NWP were John Williams, a prior NCRA Executive Director, and NWP’s lawyer, Doug Bosco. NWP promptly entered into a 104-year sweetheart deal with NCRA to be the exclusive freight hauler on the NCRA’s right-of-way between Lombard in southeast Sonoma County and Humboldt County. NWP asserted that the most importantly new customers it could secure were hauling Sonoma County’s solid waste out of the County and the shipment of aggregates from Island Mountain in Trinity County. NWP estimated that 4056 carloads of solid waste could be generated with a revenue of $2,023,000. If, however, aggregate from Island Mountain could be hauled, revenues would increase to $20,000,000.
In 2007, the NCRA began rehabilitating its line from Lombard to Windsor with $60 million of State funds. In early 2009, when the rehab work was near completion, NWP informed the NCRA that four “minor repairs” (estimated to cost less than $1 million) were needed before the line would pass FRA inspection. NCRA hired NWP to do the work. NWP and NCRA jointly applied for a loan from the FRA to cover the costs.
The loan application sought more than the $1 million needed for the minor repairs. It sought $3.18 million, justifying the request by jointly applying with the NCRA and using the NCRA’s boxcars as collateral.
The FRA hired a consultant to review the application. On July 3, 2009, the consultant reported to the FRA that NWP was planning to haul 18,720 cars/year on the “Possum Belly Express, presuming the rail movement of municipal solid waste from Sonoma County to a site in Williams CA becomes a reality.”
On July 6, 2009, NWP amended the application with a new "Business Plan" that included the PB Express and which NWP required Mr. Stogner to deliberately withhold from the NCRA Board of Directors under the guise of confidentiality. The asserted purpose of the NWP amendment was to reflect the extension of the line to Cloverdale and, importantly, the customers and increased revenues that would arise from the work paid for in part by the FRA loan. I recently obtained NWP’s furtive Plan (see attached document) through a Freedom of Information Act request to the FRA and now understand why NWP refused to share it. NWP’s new estimate was not based on reality; it was at best inflated and speculative.
NWP insisted that the NCRA Board could not see the estimate, even though the NCRA would be jointly responsible for the loan. When NCRA Board members requested the Plan, Mr. Stogner refused to provide it. NWP deceived both the NCRA Board and the FRA by providing vastly inflated estimates to the FRA of the potential customers and the amount of freight that would benefit from the rehab work.
NWP’s statement about the future customers it would serve was a crucial part of the application because shipper demand and hauler profitability are important criteria for determining whether scarce federal funds will be provided. Comparing NWP’s 2006 estimates to its 2009 estimates, shows that the largest potential customer by far was to be Sonoma County’s solid waste at 18,720 carloads/year out of a total of 24,828 carloads/year. Thus, the 2009 figure was over 14,000 carloads greater than the 4,056 carload NWP 2006 estimate for the same customer.
Similarly, NWP’s 2009 estimated solid waste revenues of $18.684 million were nine times greater than NWP’s 2006 estimate. Most important, however, was that when NWP’s 2009 estimate was made, Sonoma County was in the midst of considering reopening the County’s Mecham Road landfill and selling the County’s landfill operations to a private operator, which would mean zero revenues from solid waste hauling. In 2010, the landfill reopened.
To this day, NWP has not carried one carload of the County’s waste.
NWP never informed the NCRA Board of its illusory estimate. I know, because I was a Board member during that time. I recently obtained records from the NCRA, and I have found no indication that NWP ever informed the FRA of the loss of by far its supposed largest potential customer, even though NWP was required to do so by law.
The loan’s November 2011 closing documents required the signers to certify that they had carefully examined all of the statements in the application and that all of them were true as of the closing date. Even if, arguendo, NWP’s 2009 estimates might have been initially excused as mere fantasy, by November 2011 when the loan documents were executed by Messrs. Williams and Stogner under penalty of perjury, the estimates were knowingly false. By that date, the landfill was in operation and it was beyond peradventure that NWP would not haul Sonoma County’s solid waste.
NWP used some of the loan funds to repair the line but used far more to cover NWP’s own expenses and to pay itself a profit. At the time of the signing of the loan closing documents, no solid waste had been shipped and the line was open only to Windsor. Without tens of millions of dollars for additional repairs, the line could not possibly get to Cloverdale. Finally, NWP’s 2009 estimate of 6108 carloads/year of general freight was over triple its 2006 estimate (based on a longer line) and was never achieved.
NWP made all of the loan payments as it had agreed to do with the NCRA in exchange for not paying NCRA trackage fees. However, NWP requested that as a condition of relinquishing its rights, the State pay off the balance of the FRA loan and the State did so.
Did NWP explain to the State how it deliberately hid the false basis for the loan from the NCRA Board and the FRA? Did the State require NWP to affirm that the payments it sought were based on a lawful transaction?
Had NWP properly disclosed to the NCRA Board the 2009 estimates, NCRA’s Board, being familiar with accurate information would have pointed out the fallacy of the proposal. Instead, NWP chose to hide the truth from the FRA and the NCRA Board.
NWP should not now benefit by having California taxpayers pay the $2.4 million balance of the loan and relieve NWP of its loan obligations. I urge the State to seek reimbursement from NWP of the monies paid to the FRA and to rescind the enrichment of the perpetrator of an improperly obtained loan.
This paper reflects my findings. If anyone has any corrections or additional information, I invite them to please so inform me by posting in the comments section, below.
Bernard Meyers served on the Novato Planning Commission and was twice elected to the Novato City Council, serving as Mayor in 1995 and 2005. He has a BS and an MS in Physics, and a JD from UCB. Mr. Meyers served for 15 years as a Trial Attorney with the US Dept. of Justice and for over 15 years as in-house counsel and in private practice. He was appointed to NCRA Board in 2007 and served for three terms until 2013.