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John Burgess.The Press Democrat
The NCRA Boondoggle: From Bankruptcy to Bankruptcy in 30 years
This original investigative journalism by Bernard Meyers was first published in April of 2020, but is being republished again now because the story is finally getting picked up by other Bay Area news sources.
What do you call a State agency with a lopsided 105-year lease of a California railroad right-of-way, consummated by way of a series of Brown Act violations and other improprieties, combined with two bankruptcies book-ending the expenditure of nearly $80 million of taxpayer funds, a California Supreme Court decision resulting in the loss of millions of taxpayer dollars, a federal loan application by a public agency that its own Board was forbidden to see, and egregious "no-bid" contracts that cost the public far more than the initial bid amounts?
The answer is the North Coast Railroad Authority.
Starting in 1914, freight railroad service along the northwestern California coast from Lombard in Napa County to Samoa in Humboldt County – 310 miles of gorgeous views and treacherous terrain – was run by Southern Pacific and others. However, in the 1960’s and 70s, operations became increasingly challenging due to falling freight traffic and the impacts of landslides and periodic flooding, including the epic Eel River flood of 1964, which caused enormous damage to the rail line.
As a result, rail operations fell into bankruptcy in the 1980s. This would turn out to be the just the beginning of a saga of taxpayer bailouts that continue to this day.
In 1989, the State of California formed the North Coast Railroad Authority (NCRA) to take the rail lines assets and operations out of the bankruptcy court, in the public’s interest, in order to preserve what was considered essential freight service and passenger rail service. However, within a decade, the difficulties of maintaining the line were apparent. Slides and rains made maintenance a major problem and revenues continued to fall as freight traffic continued to decline.
But the forces of nature were not the only reason for the line’s difficulties. Coupled with the inherent operational difficulties was a lack of sufficient oversight from Sacramento and what would become an incestuous relationship between the NCRA and a privately owned company called the Northwestern Pacific Railroad Co. (NWP), which NCRA hired in 2006 to carry out its duties.
Adding to the problem is that NCRA has always flown under the public’s radar, because it is a small, obscure, agency not funded directly by taxes and its operations span four counties, so no local jurisdiction has the impetus to oversee the agency’s actions.
Since its inception, NCRA has been a classic government boondoggle, a black hole for taxpayer funds. The result has been that over the years nearly $80 million taxpayer dollars have been expended to support NCRA, with little to show for it other than a “functional bankruptcy.”
In 1998, NCRA was ordered by the Federal Railroad Administration (FRA) to shut down the line until basic repairs were made.[1] And in 2002, a study of the line, done for the Humboldt Harbor District, determined that only under the most optimistic conditions could NCRA ever hope to make money, and that under normal conditions it would continue to lose money.[2] The study observed that the line was one of the most difficult lines in the U.S. to maintain and stated that in 1982 the SP estimated that the line cost 2 to 3 times their normalized maintenance costs of all other SP railroads in the U.S.
NCRA was also designated a “High Risk” agency by Caltrans, and retained that designation longer than any other California agency in history. In spite of this, NCRA obtained an allocation of $60,000,000 from the California Transportation Commission (CTC) in 2000, and was reimbursed $7,900,000 from FEMA for disaster relief.
NCRA’s desperate bailout plan
In 2006, NCRA contracted out the day-to-day business and operations of the rail line to the newly formed NWP, an entity controlled by John Williams and Doug Bosco. In this deal, NWP was granted a one hundred and five year lease – an extremely long term for such an arrangement.
Note that when the Sonoma Marin Area Regional Transportation agency (SMART) was created, it was granted ownership of the line up to Healdsburg, and the right to operate passenger service. NCRA had the right to operate freight on the same line and ownership from Healdsburg to Humboldt Bay. NCRA and SMART have cross-easements to run on the other’s tracks.
As I write this, the State of California, NWP and NCRA are in negotiations with Mr. Bosco to have NWP relinquish the remainder of its contract and operating rights to SMART and to pay NWP for its alleged expenditures and assets, in return for a payment of taxpayer monies to NWP in an amount I estimate to be in the vicinity of $10,000,000 and possibly more.
These negotiations are being conducted out of the public’s view, and will be concluded by June 30th. The $10+ million sum is far beyond any objective, third-party estimate of the value of the remaining years of operating rights currently held by NWP, for an aging rail line with high maintenance costs and diminishing freight traffic revenues. Likewise, there is reason to question the value of NWP’s assets and past expenditures.
Millions of dollars of taxpayer monies are at stake. It’s time to shine some light on the NCRA story. And it is the intention of this series to do just that.
Background on the NCRA
Beginning in the 1990s and on into the early 2000s, NCRA failed to timely pay creditors and had problems with its accounting system. As noted above it was designated a “High Risk Agency” by Caltrans. This resulted in requiring proof from NCRA of expenditure before reimbursement would be approved. Fast forward to June 29, 2017, when the CTC observed that NCRA had not been able to pay its bills for years and NCRA’s own auditor’s reported that NCRA might not remain a going concern.
In response, CTC wisely asked NCRA for a viable business plan or, alternatively, for a plan to cease operations. That resulted in SB 1029 by Senator Mike McGuire and the State’s recognition of NCRA’s functional bankruptcy.
A great deal is at stake.As it stands today, unless there is a full review of NCRA’s activities, immediately, California may find itself repeating the same costly mistakes it has in the past with similarly situated agencies.
The NCRA Board of Directors and My Initial Efforts
The NCRA Board is composed of nine members, two each appointed by the four Counties through which it mainly runs, Marin, Sonoma, Mendocino and Humboldt (it briefly goes through Napa and Trinity). The ninth member is supposedly appointed from one of the cities along the right-of-way. All appointments are for two years, but the Counties may and often do reappoint their designees; the cities cannot. Between 2005 and 2017 key Directors from Sonoma, Mendocino and Humboldt served more than one term. The Board has since seen new blood and most of the current members were seated recently.
In 2007, I was one of two appointees (the other being Thomas MacDonald) to the NCRA Board by the Marin County Board of Supervisors and served until I my third term expired in 2013. In that capacity, I began to look into the NCRA saga.[3]
After joining the NCRA Board, I tried to educate myself about the history and challenges of the NCRA, its governing statutes, US short-line freight operations, and in particular, the 2006 lease entered into between NCRA and its contract carrier, NWP. That 60-page lease may now be found on the NCRA’s web site. Click here to read it in its entirety.
After thoroughly reviewing the lease,discussing it with Tom MacDonald and NCRA staff (including trips with Tom to Santa Rosa and Willits) I was taken aback by how much the lease favored NWP, to the apparent and extreme detriment of NCRA- and thus the taxpayers.
Initially, NWP considered the lease confidential and refused to disclose it to the public. Only after some effort on my part was it finally put on NCRA’s web site. I sought from NCRA staff similar leases between a state rail agency and a contract operator, but staff failed to provide me with any. I also asked NWP’s, John Williams, to provide me with any exemplars, as he was known for his consulting work with various US and foreign railroads, but he would not provide me with any.So, I undertook to identify states with similar lines and wrote to the transportation agencies for copies, as all such information is public record.
In response, I received a number of such leases and provided them to NCRA staff for dissemination to the other Board members. These leases indicated that the terms of the NRCA/NWP lease were extremely generous to and favored NWP, not the public’s interests.
By late 2010, after many fruitless efforts to have the NCRA Board enter into negotiations with NWP to amend the lease, I turned for guidance to the body that had appointed me to the NCRA Board, the Marin County Board of Supervisors. I provided the Supervisors with my letter of December 10, for consideration at the December 14, 2010 Board of Supervisors meeting.
That letter is set out here in full, as it sets the stage for what was to come (emphasis in original).
December 10, 2010
To: The Marin County Board of Supervisors
From: Bernard Meyers
I am one of 2 Marin County appointees to the NCRA Board. For nearly 3 years I have unsuccessfully tried to have NCRA consider renegotiating its Lease with its Operator, NWP. The Lease was entered into before Marin had representatives on the NCRA Board, but is not yet final. It is conditioned upon 4 items, at least 2 of which have not occurred. I would appreciate direction and any assistance you could provide. The Lease is on NCRA’s web site:
http://www.northcoastrailroad.org/plandocs.html
BACKGROUND
NCRA is governed by Gov. Code Sect 93000 et seq. It owns or has freight easements for the rail right-of-way from Lombard through Novato and up to Humboldt Bay. SMART has some ownership and cross-easements. The State bought the line out of bankruptcy. Several private operators, including the Southern Pacific, failed to successfully operate within the right-of-way. Trains stopped running about a decade ago when the FRA shut the line for safety reasons.
NCRA income in the last 5 years stems mainly from government support. Roughly one-third of the income has come from rail cars purchased with FEMA funds which cars are leased out. One-third of its income is from leases, etc. of the line's property, which property was purchased with taxpayer dollars. One-third comes from advance lease payments from NWP, based on an MOU of Oct. 11, 2006.
LEASE ORIGIN
A comparison of the terms of the NWP-NCRA Lease with comparable terms in other leases between a state and a private operator demonstrates that NCRA should diligently commence re-negotiations with NWP. Another compelling reason is the manner in which the Lease arose.
In January 2006 NCRA issued a request for proposals for an “operator” – a company to haul freight and provide passenger service on the line. It received 5 proposals. Three of the responders were interviewed on April 18. On May 10 the Board decided to commence negotiations with two - Sierra Railroad and NWP (although at that time, NWP had not been incorporated). The negotiating committee was to report back to the Board at the June 14 meeting. Instead, less than 3 weeks later, at a specially called meeting on May 30, the Board announced that the yet to be formed company - NWP - was chosen as the winner and that staff (headed by Ex. Dir. Stogner) would commence negotiations for a lease. NWP was incorporated in July 2006. NWP listed two of its four prospective owners as John H Williams (a former NCRA Ex. Dir.) and NWP's attorney, Douglas H Bosco (a former California legislator and former Congressman). Ex. Dir. Stogner had worked for then Congressman Bosco in Washington, DC for eight years as his Chief Assistant, and for five years as then Assemblyman Bosco's Chief of Staff.
At the September 13, 2006 NCRA meeting the Board approved “authorization to enter into agreement with NWP”. The minutes do not show that any of the agreement terms were announced to the public or that any were discussed. There was no comment offered by the public. The next day, a NCRA press release said only that NCRA “approved a 5 year contract" with NWP to operate trains "from Eureka to Novato". While the Lease states it “is made” on Sept. 13, 2006 it does not state when it was finalized or executed; it simply shows “Final 9-21-06” at the foot of each page. The Board does not seem to have publicly approved the final version. The general public does not appear to have seen any version of the Lease until years later. The Board did not publicly consider an EIR for the Lease; none has been certified. See: NCRA minutes at:
http://www.northcoastrailroad.org/meetings.html. See also: Business Plan For the NWP Co. prepared for the CTC and dated 10/24/06, and the 10/24/06 NCRA Plan.
We thus have a Lease whose terms were negotiated between NWP - represented by a former legislator - and NCRA - represented by that legislator's long-time former chief assistant. It does not matter whether both are honorable and their negotiations were in good faith. The Lease appears to be lop-sided. Its term can be unilaterally extended by NWP to 105 years, without any meaningful oversight by NCRA.
The fees that may be paid by NWP to NCRA are indeterminate, but are certainly far, far less than the public funds needed to rehabilitate the line. NCRA is charged with acquiring further public funds should the line be affected by an act of nature (flood, earthquake, etc.). NWP can receive rights to all of NCRA's properties not directly used for railroad purposes, for use as NWP sees fit.
There has been no analysis as to whether the Lease is fiscally prudent.
THE MAJOR PROBLEMS PRESENTED
A. The Lease Term
The term is up to 105 years without any meaningful oversight by NCRA (Section VI). Enough said.
B. Expenditures by NCRA and what is received in return for taxpayer dollars
1. The public’s expenditures:The Lease requires that NCRA obtain and expend public funds without limitation. Recently NCRA/NWP asserted that $68 million has been expended just for the Lombard to Windsor rehabilitation. Many tens of millions will be needed for the Windsor to Willits rehab. Hundreds of millions are estimated to rehab through the Eel River Canyon. Additional tens of millions are estimated to rehab in the Eureka area. If, over the term of the Lease, there are major storms, fires, and earthquakes, (there is little doubt that there will be – the only question is how frequently and how bad) responsibility is on NCRA and SMART to get further public funds to cover all such damages.
2. NWP’s payments:The Lease payments provision is complicated (see Section X, pp 20 - 24).
Essentially it says:
1. No payments will be made by NWP until the 1st year after NWP has a net profit of $5 million.
2. At that point, NWP is to pay 20% of its yearly net income into a kitty, but -
3. NWP stops making payments when the kitty reaches $20 million, except to top off the kitty if and when needed.
4. The kitty is to be jointly administered by NWP and NCRA. NWP’s agreement must be obtained for withdrawals.
5. There can be withdrawn up to $1 million/yr for NCRA expenses, including salaries. Any money NCRA gets from its property and rail car leases diminishes NCRA’s withdrawals. If NWP takes over all NCRA's leases and properties and gets the funds NCRA would otherwise have gotten, the withdrawal can be up to $1 million/yr from the kitty.
6. Kitty money is to be used for repairs, litigation and the like.
7. At end of the Lease, any money remaining in the kitty is given to NWP.If NCRA terminates the Lease, kitty funds are to be used to cover NWP’s expenses. Section XII (D).
8. In case of any major problems (Force Majeure Section VIII (B)(2)), NCRA and SMART are to seek public funds for repairs. In NWP’s view, the Treasury, via FEMA and California’s OES, will “insure” the public’s line against catastrophic damage, and thus “minimize” this business risk.
9. If NCRA decides to sell any of its property, NWP has a right of first refusal (Section XVIII).
10. NWP can take any of NCRA’s rock deposits (Island Mountain, river gravel) for use on the line, without any payments to NCRA (Section V(E)(3)).
C. Similar Leases: For nearly three years NCRA staff declined to provide information on how similarly situated lines operated. On my own I found similar leases with major differences:
1. Term:Generally, leases are for terms of between 5 and 20 years, with provision for limited renewal. For example, Ohio provides a term of 5 years and possible renewals if various conditions are met, such as shipper satisfaction, safety, car loadings, financials, and track maintenance.
2. Payments:Other lines have provisions for percentages of operator revenues to the line owner as well for revenues if the operator leases out public property.
3. Other operator leases also have:
A. No conflict of interest requirements.
B. Energy efficiency and environmental practice provisions, hazardous substances and waste provisions, etc., etc.
CONCLUSION
A new lease should, inter alia, be for a reasonable term (with possible renewals), take into account NWP’s need to cover its capital investments, its costs of operation (including maintenance costs), and its profits/losses. It should also guard the taxpayers’ past and future investments in the line. It must consider the highly probable need to perform major restoration after one or more force majeure events, and the timely provision of sufficient funds to provide for the proper functioning of NCRA.
However, if the Lease is left as is, for the next century there could be a major drain on the public fisc and mainly private gain. Perhaps this is the inevitable outcome when an obscure public agency is given the opportunity to draw public funds without proper checks and balances. Unlike public agencies that must directly tax or charge constituents to obtain the funds they spend, NCRA can draw on the public weal, supposedly for public benefit. Its insular status, with circumscribed outside oversight has, in this case, yielded an aberrant result.
Hundreds of millions of taxpayer dollars stand to be paid apparently for private gain and limited public benefit. The role of fiscal prudence has been swept aside in an effort to bring freight rail to the 4-county area. While the restoration of freight service may be desirable, it should not be carried out in a fiscally imprudent manner. If the public perceives this public-private partnership as mismanaged, or worse, it could have a severe effect on future such partnerships, transportation funding, and government projects generally.
Your other Marin appointee, Tom MacDonald, concurs with my views. Any assistance you care to provide would be greatly appreciated. You may wish to provide a public hearing on the matter, inviting your appointed representatives, as well as NCRA and NWP representatives who should respond in writing at least one week prior to the hearing. Thereafter, formulate and provide your views to some or all of the following:
Your appointed representatives;
The NCRA Board;
The Boards of Supervisors of the 3 other Counties on the NCRA Board;
The Governor;
The State and Federal legislators representing Marin County and/or the areas through which the line traverses;
State and/or federal agencies that interact with NCRA, including USDOT, CTC, and Caltrans.
Thank you for your attention to this matter.
CC: NCRA Board of Directors; NWP”
The NCRA was invited to respond. It begged off supposedly because it was negotiating with NWP. What happened thereafter is described in my next installment in this series. It involves how NCRA continuously violated the Brown Act.
[1] FRA Emergency Order No. 21
[2] “Long Term Financial and Economic Feasibility of the NWP”; Parsons Brinkerhoff, Jan 2003, page S-13
[3] I had served on the Novato Planning Commission and was twice elected to the Novato City Council, serving as Mayor in 1995 and 2005. I have a BS and an MS in Physics, and a JD from UCB. I served for 15 years as a Trial Attorney with the US Dept. of Justice and for over 15 years as in-house council and in private practice.