High-speed rail's recent pivot toward the Bay Area may have energized the project's Silicon Valley supporters, but it is also raising new concerns from local and state watchdogs about the project's viability.

The rail system, which now has a price tag of $64 billion, would be launched with construction of a stretch between Bakersfield and San Francisco under a business plan that the California High-Speed Rail Authority released last month. This is a dramatic change from the rail authority's prior plan, which called for constructing the entire first segment in Central Valley.

The decision was driven by financial constraints, officials acknowledged at a Monday hearing in front of an oversight committee of the state Assembly. Dan Richard, chair of the rail authority's board of directors, said that financing has limited the agency's range of actions for the program. These restrictions include the rail authority's commitments to the federal government (for the allocated federal funds) and the requirements of Proposition 1A, the voter-approved measure that authorized a $9.95 billion for high-speed rail and related transportation improvements.

"Our charge wasn't to deliver to you a politically correct business plan; it was to deliver a correct business plan," Richard told the Assembly committee.

Jeff Morales, CEO of the rail authority, said the goal of the plan is to get a system segment in place as quickly as possible so as to encourage private investment in future system expansions. Rail officials asserted at Monday's meeting that the document offers, for the first time, a plan for fully funding the first segment. It relies on a combination of bond funds, federal grants and allocations from the state's cap-and-trade program.

But according to the Legislative Analyst's Office, there is a flaw with this plan: It assumes the availability of cap-and-trade revenues (which make up roughly half of the funding plan for the first leg) beyond 2020, something that the current law doesn't authorize and that would require new legislation.

The LAO also noted that the rail authority plans to securitize the net revenues from the first segment to pay for other line segments. But it is unclear, the LAO report states, "whether the system will actually generate an operating surplus."

"Moreover, the plan estimates that the amount of funding that could be generated would fall significantly short of the level needed to complete Phase I and does not identify how this shortfall would be met," the LAO report states.

The rail authority also made a case in the business plan that connecting Central Valley and Silicon Valley will create great opportunities for both regions.

"New job markets will be opened up for people living in the Central Valley, and creating a high-speed connection to the Central Valley would help address the affordable housing crisis in the Bay Area," the business plan states.

But not everyone was thrilled about the change. Rep. Adam Gray, D-Merced, expressed frustration about the rail authority's recent shift away from Merced (which was the line's northern bookend under the prior plan and which would be completely bypassed in the first segment of the new plan) and criticized the rail authority for not notifying the project's proponents in the area about the change before the plan was released.

"There was no heads up, no input, no notice of this significant change," Gray said.

Richard apologized for what he acknowledged to be inadequate communication but argued that the only thing that has changed when it comes to the project's plans is the sequence. No part of the state, he said, will be left behind.

"We're not doing things in a way that would necessarily be optimal or that would be a logical sequence if we didn't have those constraints," Richard said.

Committee Chair Jim Frazier, D-Oakley, also expressed frustration about the shift away from Merced, even as he touted the project's potential to give the Central Valley a boost. He characterized the Merced situation as one in which "people were putting skin in the game and then there was a bait-and-switch."

The LAO also raised concerns about the new plan, noting that the southern terminus of the first segment "does not appear to be an effective approach because it would not have the necessary facilities to support train passengers."

On the Peninsula, where the project has been galvanizing significant opposition since 2009, local officials are also finding causes for concern. Last Wednesday, the Palo Alto City Council's recently reconstituted Rail Committee authorized two of its members to work with city staff on a draft letter to the rail authority, expressing concerns about the project.

Mayor Pat Burt, who sits on the committee and who is also a member of policymaker group that meets monthly to discuss the project, said the business plan raises a "bunch of questionable issues" about the project's cost. He cited the fact that the plan relies on cap-and-trade funds that may never materialize and that it only accounts for the costs of stretching the line from Bakersfield to San Jose and not to San Francisco, the proposed northern terminus of the first segment.

Committee Chair Marc Berman concurred and said that there are "a lot of arguments to make about the inadequacies of the plan, and the impacts it would have."