SMART poised to take control of North Bay freight hauling, expanding beyond passenger service

A multimillion-dollar deal is in place to have SMART take over North Bay freight rail by buying out the region’s lone hauler, a move that would hand SMART unified control of the local track system and make it one of a small group of agencies nationwide that controls both passenger and commercial shipping service.

Under the proposed deal, Northwestern Pacific Railroad Co. would sell its track rights and equipment for $4 million, and the state would kick in almost $4 million more to repay debt owed to the company by a financially troubled state agency that oversees North Coast commercial rail operations.

Funding for SMART’s purchase would come from a 2018 bill authored by state Sen. Mike McGuire, D-Healdsburg. The law spurred negotiations for the takeover while also initiating the dissolution of the North Coast Railroad Authority, the Ukiah-based freight rail overseer that has racked up as much as $12 million in debt over its 31-year existence.

If approved by the Sonoma-Marin Area Rail Transit board Wednesday and authorized by Gov. Gavin Newsom by the June 1 deadline, the deal would make SMART one of the small number of U.S. passenger systems — perhaps fewer than two dozen — that also own or operate freight service. It would also unify ownership of the rail line from Larkspur to north of Cloverdale under SMART, which controls all but the northernmost 21 miles, from downtown Healdsburg to the county line.

“It’s a major policy decision,” said Farhad Mansourian, SMART’s general manager. “It’s a milestone for SMART to make, which will give us additional responsibility, but will also provide an additional opportunity. And it provides for full control of our right of way and our destiny becomes entirely on our own board.”

The proposed expansion into freight rail comes at an especially precarious financial time for SMART, which lost its bid in March for early renewal of its quarter-cent sales tax and is now seeking ways to slash at least $6 million, or about 15%, from its annual budget. Cuts in passenger service appear likely even as SMART braces for other short- and long-term hits to its revenue, with a precipitous drop in fare box receipts amid the pandemic shutdown — ridership is down 90% — and a projected 20% decline through June in sales tax returns that cover most operational costs.

The SMART board endorsed McGuire’s 2018 bill, and since its approval board members at meetings have discussed off-hand the expansion into freight, but the matter has only been brought up for a full, agendized discussion behind closed doors.

The move comes with a host of unanswered questions that raise the prospect for SMART of renewed scrutiny given its struggles to build out the 70-mile line promised to voters in 2008 and sustain passenger service that began in August 2017.

“The agency hasn’t indicated a great deal of competence over a passenger rail system,” said Mike Arnold, a Novato economist and frequent SMART critic who helped organize opposition to the recent sales tax measure. “This whole freight thing could unwind on them and really hurt them, because it will come at the cost of passenger service if it does. If they don’t perform due diligence, then they’re not doing their job.”

SMART officials say expanding into freight rail could diversify the agency’s business and boost revenues with a separate income stream tied to shipping bulk goods. If the deal is approved, NWP Co. would maintain freight operations in the interim while SMART plots a course for commercial hauling. The agency would hire a consultant to help decide whether to operate freight service on its own or outsource it through a lease agreement.

Whether freight revenues would used to subsidize passenger service, be wholly reinvested in the hauling business or some mix of both would be up to the SMART board, according to agency officials.

“I just look at it as who is better positioned to provide public oversight for this,” said Novato Councilman Eric Lucan, chairman of the SMART board. “It is SMART’s line. Yes, there’s more oversight that would be coming SMART’s way, but at the same time it simplifies things because it brings it all under one roof.”

Already, SMART faces capital costs of up to $364 million to extend passenger service to Cloverdale, the planned northern terminus. By late next year, it is set to arrive in Windsor, at a cost of $65 million. SMART says an additional $10 million in deferred railway maintenance is needed to operate freight throughout the system, and McGuire said he is committed to covering that amount through other state funds if the deal moves forward.

“SMART is part of the North Bay’s future. We have to work together to ensure its success,” McGuire said. “Having one entity run all the train and maintenance operations on the line is going to improve coordination, improve safety and slim down overhead and maintenance costs.”

He said the deal had been vetted by state auditors and was in the “best interest of the taxpayers and the state.”

The move could help advance the state’s vision of one day seeing passenger trains along an existing east-west line adjacent Highway 37, according to SMART officials. SMART already owns the majority of that 41-mile of track from Novato to Suisun City, but the North Coast Railroad Authority has an easement that allows NWP Co. to use it for freight, and eliminating conflicts would streamline extension of commuter service and connection to the national railroad network in Sacramento, officials said.

“I think the state is looking at this as the next logical step for getting to that,” Mansourian said. “It consolidates everything and opens up this whole new opportunity. Then it’s not just the little SMART train up and down the (Highway) 101 corridor, but on the freight side, yes, you’re connecting to the national railroad too, and you can go anywhere.”

Since 2006, NWP Co. has held an exclusive, 99-year agreement to operate freight on the line, which was nearly abandoned before the state stepped in and formed the North Coast Railroad Authority in 1989 to restore regular commercial hauling. The company has carried agricultural feed, lumber and petroleum products and other materials since it returned freight rail to the North Bay in 2011.

NWP Co. runs up to three trains per week, owns four locomotives and a few rail cars, and has a workforce of five employees. Annual revenue is about $2 million, with yearly profits in the hundreds of thousands of dollars, said Doug Bosco, a Santa Rosa attorney and former North Coast congressman who is the company’s managing partner.

Until recently, company representatives had publicly voiced resistance to a sale, contending that the business was worth more than the $4 million set aside by McGuire’s bill for a purchase.

“We just realized that probably the handwriting was on the wall and there would have to be some major change in how this all was operated,” said Bosco, who also is an investor in Sonoma Media Investments, which owns The Press Democrat. “The alternative for us was to be administered by SMART and there’s a lot of inefficiencies in that, and I guess we just felt $4 million was reasonable, so we decided to do it.”

An approved deal would see the state repay NWP Co. for loans of roughly $4 million made to the NCRA to sustain its operations. The state agency has never had a dedicated source of public funding and relied heavily on borrowing to cover operations and some capital costs.

The agency also never received a single payment from NWP Co. Under its contract, the freight hauler wasn’t obligated to make a lease payment to the rail authority until it reached $5 million in annual revenue, which has not happened in its nine years of operations, Bosco said.

He nevertheless said the freight sector offered growth opportunities for a future operator, including potential shipping business with area wineries.

McGuire, a sharp critic of NCRA’s management, said it was a top priority to shut the agency down — “for the good of the taxpayers, the state budget, and for transportation.”

“It makes me angry that this agency festered for years and should have been killed off years ago,” he said. “We need to finally put NCRA out of its misery.”

The freight sale would also advance McGuire’s efforts to establish an ambitious 320-mile recreation pathway from the San Francisco Bay to the Humboldt Bay known as the Great Redwood Trail. Once the deal goes through, NCRA would be disbanded through another bill that would also form a successor agency to oversee creation of the trail along the abandoned railway leading from the Mendocino County line to Eureka.

The trail will take decades to complete and likely cost hundreds of millions of dollars. But supporters tout it as an economic driver, luring potentially thousands of annual visitors.

“This is a twofer for our region,” McGuire said. “It’s going to be good for the future of Great Redwood Trail and also good for the future of SMART.”

You can reach Staff Writer Kevin Fixler at 707-521-5336 or kevin.fixler@pressdemocrat.com. On Twitter @kfixler.