California’s Train To Nowhere

California has plenty of problems, but a shortage of ways to get between its two largest metropolitan areas is not among them.

If you want a leisurely and spectacular drive, you can take Highway 1 – the Pacific Coast Highway – from Los Angeles to San Francisco. You’ll see Malibu’s celebrity beach houses, Santa Barbara and its surrounding wine country, William Randolph Hearst’s planned bungalow at San Simeon (which ultimately became the Hearst Castle, in what may be history’s greatest case of mission creep), the cliffs of Big Sur, the cedars of Carmel and the shoreline of Monterey Bay.

If you don’t have time for all that touristy stuff, you can choose U.S. 101, a good expressway just inland from much of the coast. It cuts through Silicon Valley en route to the Golden Gate.

To make really good time, I concur with Google Maps’ suggestion of Interstate 5, at an estimated drive time of just under six and half hours. Your passengers can snooze during most of the journey through the table-flat, agricultural Central Valley without missing any good scenery.

Or, of course, you could fly. You have your choice of five airports serving the Los Angeles area and three along the San Francisco Bay. Roundtrip flights between the two cities are currently running around $200, though I recently saw a Southwest “Wanna Get Away” fare of $100 from Irvine to Oakland. The plane trip takes less than an hour and a half.

Californians could probably use a nice drive in the country, though, to take their minds off their other worries. Last year the state passed an austerity budget that, among other things, cut 23 percent from funding for the University of California and California State University systems. Still, California faces a budget deficit of $9 billion. The state’s unemployment rate, as of February, remained in the double digits at 10.9 percent, compared to a national average of 8.3 percent. It is one of the states hardest hit by the foreclosure epidemic; many of its cities continue to struggle. One city, Vallejo, exited bankruptcy last year. Stockton and two smaller communities in Northern California teeter on the edge of entering it.

But, perhaps because they lack a magic bullet to solve the state’s real troubles, Gov. Jerry Brown and other state officials are setting their sights on bullet trains instead.

In November 2008, voters approved a plan to build a high-speed rail system linking Los Angeles and San Francisco. At the time, the price was estimated at $35 billion to $42 billion. When they OK’d the plan, voters also agreed to allow the state to issue $10 billion in general obligation bonds to get started.

Over the course of the next three years, no tracks were laid, but the estimated cost rose to $98.5 billion. Meanwhile, officials proposed “getting started” by building the first segment of rail between Fresno and Bakersfield, which are two smallish cities in the Central Valley. Drivers can get between those two places in less than two hours, so demand for high-speed train service on that route has to be approximately nil.

Even the most fervent advocates of high-speed rail have trouble justifying the California plan at nearly $100 billion, and California has no shortage of high-speed rail advocates. Yet they did not abandon their dream thanks to its higher price tag. They just cut the price tag.

The California High-Speed Rail Authority recently scaled back the estimated cost to $68.4 billion by revising the plan to use existing tracks near the urban centers. The trade-off is that this so-called “blended approach” would require running fewer trains at slower speeds. Spend a little less money – though still a huge sum for a nearly broke state – on “high speed” rail service, and get less speed and less service.

The point of this exercise utterly escapes me, but I am neither a Californian nor a high-speed rail buff. I just like to get where I need to go by whatever means makes the most sense.

Running fewer and slower trains is not the only compromise in the latest plan to hold down the project’s price tag. At least initially, the new plan would also mean that passengers traveling between Los Angeles and San Francisco would have to change trains en route, which is not typically a feature of “high speed” service. Critics have argued that, with these modifications, the project may no longer satisfy the requirements set out by the original voter-approved proposition. The proposed changes would also eliminate the already small chance that the train line would actually serve any real purpose.

Officials claim that the line will be funded through a mixture of public and private “investment.” Given the railway’s prospects, however, it is safe to assume that the private investments will total somewhere around zilch, and that the return on public investments will be in the same ballpark.

Meanwhile, in what superficially seems to be unconnected news, the governor has announced his support for a tax plan reached through a compromise with the California Federation of Teachers that would increase the highest state income tax rate from 10.3 percent to 13.3 percent. The increase would affect those earning $500,000 or more and would be paired with a small sales tax increase. The move reflects a change in strategy for Brown, who previously advocated increasing revenue primarily through a larger sales tax increase.

With the tax hike and the scheduled increase in Medicare taxes, top California earners – as well as many small business owners whose incomes include company profits that are reinvested in the business – would end up paying a state and federal marginal tax rate of well over 50 percent. A high-speed train to Nevada might make more sense than the route between L.A. and San Francisco if that happens. A lot of employers and other high-income taxpayers are going to try to get out of California as fast as they can.

High-speed rail won’t accomplish much except helping California arrive at its financial ruin a little faster. Slow down and enjoy the fantastic scenery, folks. At least that’s still free.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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