California's proposed high-speed-rail system is facing potentially crippling threats from looming federal deadlines and weak oversight by the agency charged with building the project, the state Legislative Analyst's Office concluded in a new report.

The scathing report, which the nonpartisan office released Tuesday morning, recommends stripping the California High-Speed Rail Authority of its decision-making powers and giving the California Department of Transportation (Caltrans) oversight over the increasingly controversial project. The Legislative Analyst's Office also concluded that the rail authority's business plan remains deeply flawed; that most of the revenues the agency is banking on to fund the new system are unlikely to materialize; that the project will cost far more than the rail authority's official estimate of $43 billion; and that the rail authority's decision to begin the line in Central Valley is a "big gamble" based on "faulty assumptions."

The report, titled "High-Speed Rail Is at a Critical Juncture," comes as another major blow to a project that voters approved in November 2008 but that has since been plagued by financial uncertainty and scathing criticism from communities along the proposed route. While previous audits had also highlighted flaws in the rail authority's business plan, ridership assumptions and day-to-day operations, the new report goes a step further and argues that the state Legislature should reject the rail authority's funding request for the next fiscal year and halt the project altogether unless federal deadlines are renegotiated and the governance structure for the project is revamped.

"We have concluded that the current governance structure for the project is no longer appropriate and is too weak to ensure that this mega-project is coordinated and managed effectively," the report states. "These changes in governance need to be made soon, in our view, because HSRA has already begun the process to move toward the award of multi-billion dollar construction contracts for the project."

Eric Thronson, the analyst who wrote the report, presents several alternatives to the existing governance structure, which consists of nine appointed board members, a handful of paid staff members and hundreds of consultants. The project, Thronson wrote, could be shifted to Caltrans, an agency with far more oversight and expertise in transportation projects, or moved to a newly created state department dedicated to high-speed rail. Thronson argued in the report that the existing structure gives the rail authority too much autonomy and not enough accountability to the Legislature or the governor.

"The considerable autonomy," Thronson wrote, "does not ensure that the board keeps the overall best interests of the state in mind as it makes critical decisions about the project."

Under the current system, he noted, board members aren't required to have "specific expertise" relating to management of a major construction project. He also pointed out that the agency's board members are not subject to direction by the executive branch or the legislative confirmation process.

"This relative lack of accountability to either the executive or legislative branches creates a risk that the board will pursue its primary mission -- construction of the statewide high-speed rail system – without sufficient regard to other state considerations, such as state fiscal concerns," he wrote.

Of the two proposed alternatives, the report leans in favor of shifting the project to Caltrans. The report recommends that the Legislature pass a bill in the current session making the switch.

The new report also backs up recent claims by rail watchdogs that the rail authority's estimated $43 billion price tag for the rail system is far too low. The segment between San Francisco and Los Angeles, Thronson wrote, is "likely to cost much more." He estimated the cost of the project to be about $67 billion, echoing a similar estimate that was issued in February by the Palo Alto-based group Californians Advocating Responsible Rail Design.

Palo Alto officials have also grown increasingly skeptical about the rail authority's official projection of the rail line's costs. The city had sent the rail authority a letter in March asking for an updated estimate but did not receive a response.

The rail authority currently has about $5.5 billion on hand in state and federal funds for construction of the rail line and is banking on future contributions from the federal government, private investors and local agencies to help pay for the system. These assumptions are overly optimistic, the new report argues.

The rail authority's 2009 business plan estimates that the project will obtain between $17 billion and $19 billion in federal funds. So far, it has received $3.6 billion, and the Republican majority in the U.S. House of Representatives has opposed making additional appropriations for high-speed rail.

"The HSRA indicates that without additional significant federal support beyond that provided to date, the project cannot be completed," the report states. "Given the federal government's current financial situation and the current focus in Washington on reducing federal spending, it is uncertain if any further funding for the high-speed rail program will become available."

Voters approved $9 billion in bonds for the new system in 2008 when they passed Proposition 1A. The new report estimates that if the state were to sell all the rail bonds, the total principal and interest costs for repaying the debt would be $18 billion to $20 billion.

Thronson also criticized the rail authority's decision in December to begin construction of the San Francisco-to-Los Angeles line in Central Valley -- a decision that was driven largely by input from the Federal Railroad Administration. Given the possibility that the entire rail line will never be fully completed, the Legislative Analyst's Office report urges further consideration of other segments as possible starting points, including San Francisco-to-San Jose, Los Angeles-to-Anaheim and San Jose-Merced.

A high-speed rail system at any of these three segments could provide "greater benefit to the state's overall transportation system even if the rest of the high-speed rail system were not completed," Thronson wrote.

"Largely as a result of these federal deadlines and requirements, HSRA decided in December 2010 to begin the construction of the statewide system within the Central Valley," the report states. "This decision by HSRA, however, represents a big gamble that additional monies will eventually become available from federal government or other sources to connect the Central Valley line to other major urban areas of California."

The Legislative Analyst's Office report recommends that the Legislature rejects the rail authority's 2011-12 budget request for $185 million for project development and appropriate only $7 million for the agency. The money would be used to identify the top two options for beginning construction based on criteria such as cost, "statewide benefit of a particular segment," estimated ridership and revenue potential.

Roelof van Ark, the CEO of the rail authority, issued a statement in response to the report saying the LAO's recommendations will be "thoroughly reviewed in the context of our mandate to operate under the provisions of Proposition 1A." He also said he believes the project has been "successful thus far because it has strived to operate more like a private business than a typical government bureaucracy."

"I hope to work with the Legislature to come up with solutions that benefit all Californians and allow us to move forward with the successful completion of the state's high-speed rail system -- and we hope that this report at least encourages healthy discussion towards that goal," van Ark said in the statement.