Walker, Vos and Darling Train Fiasco – Everybody Pays…twice

The day before Election Day, Badger Democracy reported on the train maker Talgo filing a lawsuit against Governor Scott Walker, DOT Secretary Mark Gottlieb, and the state for “default of contract.”  In brief:

Train manufacturer Talgo filed a “Default of Contract” suit against Governor Scott Walker and Wisconsin DOT Secretary Mark Gottlieb in Dane County Circuit Court today. Court documents filed today show that the Washington-based train manufacturer notified the state on April 4, 2012 that the “trainsets” were ready for required service testing to be conducted by WisDOT.

The state has attempted to claim that Talgo is responsible for testing, but the contract makes clear that WisDOT bears that responsibility.

The trainsets in question were not ordered for the controversial rail expansion to Madison. These trains are for use on the highly traveled Milwaukee to Chicago “Hiawatha” line. Coming on the heels of the WEDC/HUD block grant fiasco, DOT Secretary Gottlieb quickly issued a statement on November 5 to Badger Democracy, in full damage control mode:

The Department of Transportation participated in a formal mediation process with Talgo just last week in a good faith effort to resolve disputes related to the delivery of completed trainsets. We are disappointed that process was not successful.

Talgo has failed to complete or test the trainsets and they do not meet even basic federal standards, such as those required under the Americans with Disabilities Act (ADA).
The department will defend against this action and continue to act in the best interests of Wisconsin taxpayers.” (emphasis added)
Badger Democracy forwarded Secretary Gottlieb’s response to Lester Pines, Attorney for Talgo. In an interview, Pines offered the following response:
1. As stated in the lawsuit filing, the State of Wisconsin failed to make a $4.5 million contract payment to Talgo, as a means to attempt to force Talgo into conducting “pre-revenue” testing of the trains. Per the contract, this “pre-revenue” testing is the state’s responsibility. Contract excerpt below:
All parties acknowledge and accept that 49 CFR 238.111 provides that the Operator (or railroad, as the case may be) not the Contractor is responsible for performing a pre-revenue service acceptance testing plan. Contractor will diligently work with Department and such Operator to ensure that the Operator’s pre-revenue service acceptance testing plan is efficiently implemented.
2. The state is alleging in the statement that the trainsets do not meet ADA accessibility requirements. This is not true. The trains have been warranted by Talgo to meet every FRA and ADA standard. One minor deficiency has been corrected by a simple part replacement.
3. The state has had an escape clause in the contract which it could have used at any time. It did not. The state could also have declared Talgo in breach of contract at any time for legitimate reasons. It did not.
4. The state of Wisconsin put up a $50 million capital bond issue to pay for the trains. If the state is found in breach of contract, Talgo gets their trains back, and the state no longer will own the capital for which the bond issue was made. The state would be required to repay the $50 million – out of General Program Revenue.
A Legislative Fiscal Bureau March 14, 2012 memo to Robin Vos and Alberta Darling’s Joint Committee on Finance (JCF) confirm many of Talgo’s assertions. The memo also  gave legislators plenty of advance notice on this issue, and made specific recommendations (emphasis added):

The state purchased two passenger car train sets in 2009 from Talgo, a Spanish train manufacturer.

A total of $68.9 million in passenger rail development bonds has been approved for the purchase of the rail cars ($48.5 million), as well as other costs related to construction management, purchase of maintenance equipment, and a temporary maintenance facility.

The train sets are now nearing completion, and are scheduled to be delivered to the state for initial testing in mid-March. Following testing, the cars would be ready for use on the Milwaukee to Chicago service, likely in late 2012.

Under that agreement, the state is responsible for providing a facility for the maintenance and for making payments to Talgo for
ongoing maintenance costs. [In anticipation of the completion of the Talgo cars, 2011 Act 32 provided $4,450,000 SEG in 2011-12 and $6,700,000 SEG in 2012-13 in the Department's passenger rail service appropriation for start-up maintenance costs.]

According to the LFB memo, maintenance costs were an issue of significance. Alternative solutions were offered, including a renegotiation of the maintenance agreement:

ALTERNATIVES

1. Approve the Department’s request for the approval of $2,500,000 in passenger rail development bonding for final design engineering for a permanent maintenance facility for the
State’s passenger rail cars.

2. Deny the request.

3. Deny the request and direct the Department to reimburse any expenditures for the maintenance facility preliminary engineering that were made with bonds from the Department’s SEG appropriation for passenger rail service, to the extent that unencumbered funds are available in that appropriation.

4. Deny the request for additional funding and direct the Department to attempt to renegotiate the maintenance agreement with Talgo to reduce ongoing maintenance costs and, if feasible, the cost of the permanent maintenance facility. Direct the Department, in any subsequent request for funding for maintenance-related services, to report to the Committee on
the status of these negotiations.

Walker, Vos, and Darling all knew exactly what this contract entailed. They wanted to kill any new rail development as payback to their transportation construction political cronies, so they did nothing – even though it would cost taxpayers millions above and beyond the cost of honoring the contract. Vos and Darling were very vocal about how they were “saving taxpayers money” in a May 2012 edition of the Conservative-Digest.

Unfortunately, they failed to tell the whole story about the Talgo contract, and the specific issues surrounding the inevitable trainset replacement costs. You can read the entire LFB memo linked above. The LFB estimates do not include extra costs associated with continuing to use Amtrak maintenance – so the Vos/Darling  article is conveniently leaving out key details. The last few lines of their joint article are the most important:

Luckily, the state has options. According to
the Legislative Fiscal Bureau, if no funds were
given for the Talgo maintenance facility, the
“agreement can be terminated by either party.”
So that’s where we are now.

Wisconsin taxpayers were taken for a ride by
Doyle and the Democrats. We’re proud to say
that the ride is coming to an end.

Not quite Governor Walker, Representative Vos, and Senator Darling. When Talgo wins this lawsuit, Wisconsin taxpayers will be the ones paying back the $50 million in revenue to replace the bond issue – as you will have lost the capital purchased by those bonds.

And the trains – they will still have to be replaced in just a few short years anyway. In essence, we will end up paying for them twice. Though, after defaulting on the Talgo contract, will anyone do business with Wisconsin? Maybe we’ll be able to ride Chinese trains from Milwaukee to Chicago.

Lost loans at WEDC, federal block grant money distributed without authority, contract breaches, lost capital from bond issue, former aides convicted…

This is acting “…in the best interests of the taxpayers of Wisconsin…?”

Walker Administration “Default of Contract” cost to taxpayers nearly $50 million

Train manufacturer Talgo filed a “Default of Contract” suit against Governor Scott Walker and Wisconsin DOT Secretary Mark Gottlieb in Dane County Circuit Court today. Court documents filed today show that the Washington-based train manufacturer notified the state on April 4, 2012 that the “trainsets” were ready for required service testing to be conducted by WisDOT.

The state has attempted to claim that Talgo is responsible for testing, but the contract makes clear that WisDOT bears that responsibility (emphasis added):

All parties acknowledge and accept that 49 CFR 238.111 provides that the Operator (or railroad, as the case may be) not the Contractor is responsible for performing a pre-revenue service acceptance testing plan. Contractor will diligently work with Department and such Operator to ensure that the Operator’s pre-revenue service acceptance testing plan is efficiently implemented.

Wisconsin was sent an invoice for $4.599 million dollars on April 23, 2012 which has remained unpaid. On July 25, 2012 Talgo served a “notice of default” on Mark Gottlieb, DOT Secretary. The notice gave the state 30 days to cure default (emphasis added):

In short, Wisconsin is in default of its testing obligations under Section 14.02 of the Purchase
Contract, which has caused significant and costly delays on the project. Talgo is also very concerned with WisDOT’s stated intent to place the train sets into storage rather than in revenue service, which also constitutes a material breach and default under the Purchase Contract, as the Purchase Contract clearly requires WisDOT to place the train sets into revenue service (see, for example, Article 9 of the Purchase Contract).

Meanwhile, Wisconsin is also in default of its payment obligation regarding Invoice number 2012- 1.6, dated April 23, 2012. In addition, WisDOT has also wrongfully terminated the December 30,2009 Maintenance Agreement between WisDOT and Talgo - constituting an Event of Default under both that agreement and the Purchase Contract – which Talgo will address by separate letter.

Wisconsin did not reply within the required 30 days to cure default. The Maintenance Agreement referenced in the default letter between Wisconsin and Talgo was terminated by the trainmaker on November 1 as another breach of contract (emphasis added). Gottlieb was hand-delivered notice of Purchase Contract termination on November 1. If the state is found in breach of contract, Wisconsin (and its citizens by default) would lose all rights under the contract, and be on the hook for nearly $50 million plus court costs(emphasis added):

It has been more than one hundred days since Talgo served its Notice of Default upon Wisconsin.
Wisconsin has still not cured its default.

Accordingly, pursuant to the terms of the Purchase Contract, Talgo is hereby immediately
terminating the Purchase Contract. Wisconsin remains obligated to pay all its “previously accrued liabilities” under the Purchase Contract. You have received invoices for the balance of the Purchase Contract prior to your receipt of this Notice of Termination.

Talgo CEO  Antonio Perez hits the nail on the head with his statement today (emphasis added):

“We invested in the State of Wisconsin by building a manufacturing facility in
Milwaukee and creating manufacturing jobs. We built the trains and
otherwise performed our obligations under our agreements with the State of
Wisconsin. In return, rather than being “open for business” the State used
every conceivable excuse, whether fair or not and whether lawful or not, to
ensure that Talgo did not receive what it bargained for, including by refusing
to pay for the trains that Talgo completed. I don’t see how any company
would in the future choose to do business with the State of Wisconsin when
the State has shown that it cannot be trusted to honor contracts that it
signed.”

“Talgo has become the innocent victim of a political agenda. Before
Governor Walker was inaugurated, he wrote an open letter to President
Obama saying, “Governor Doyle and Secretary La Hood say we can’t stop
the train. I say, just watch us.” The Governor chose to “stop the train” by
breaching its contract with Talgo.”

WEDC and Walker’s budgeting tricks are just the tip of the iceberg. Ideology and cronyism over responsible governance have become the hallmarks of the Walker Administration. Not only did Walker’s actions regarding Talgo COST jobs, they will now COST taxpayers millions of dollars payable long after he is out of office.

The Office of DOT Secretary Mark Gottlieb emailed the following comment to Badger Democracy:

The Department of Transportation participated in a formal mediation process with Talgo just last week in a good faith effort to resolve disputes related to the delivery of completed trainsets. We are disappointed that process was not successful.
 
Talgo has failed to complete or test the trainsets and they do not meet even basic federal standards, such as those required under the Americans with Disabilities Act (ADA).
 
The department will defend against this action and continue to act in the best interests of Wisconsin taxpayers.”

The Walker Administration has yet to respond to request for comment.

 

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