This prompted the state Attorney General’s Office — acting on behalf of the rail authority — to file a brief on Oct. 8 that argued that the state could begin building the bullet train project without violating Proposition 1A, the state law providing $9.95 billion in bond seed money to the project, if it only used the federal funding it had been provided by the Obama administration.

This was odd enough — Attorney General Kamala Harris refusing to defend the legality of the state’s bullet-train business plan yet arguing that it should be allowed to proceed for now. But according to the lawyers for Kings County and two of its residents — the plaintiffs in the lawsuit still being heard by Kenny — even the state’s use of federal funds for the first 29 miles of the project may not be legal.

Federal dollars supposed to go to Fresno-Bakersfield link

In a court filing last week, attorneys Michael Brady and Stuart Flashman cited an amendment to the 2009 federal stimulus bill, the American Recovery and Reinvestment Act (ARRA), the largest source of the $3.3 billion in federal funding for the project. That amendment “restricts the use of the ARRA grant proceeds to the Fresno to Bakersfield segment of the Authority’s Central Valley rail construction project.”

This is a major problem for the state because of costly contracts the rail authority has already signed.  “Virtually the entirety of both the Caltrans [construction] contract and the Tutor-Perini-Parsons contract for design and construction of the CP-1 segment of the Authority’s Central Valley rail project cover an area between Madera and Fresno. None of the work currently planned to proceed involves the area between Fresno and Bakersfield,” the Brady-Flashman brief noted.

That means that only federal funds not from the 2009 stimulus bill can be used — about $929 million. But the total design and construction costs for the Caltrans and the Tutor-Perini-Parsons contract are $1.196 billion.

Brady’s and Flashman’s brief also targets Harris’ premise that federal funds can legally be spent on the project without violating Proposition 1A’s restrictions on the use of state bond money, noting the ARRA requirement that the federal funds be matched by state funds. “The legislature explicitly expected Proposition 1A bond funds to be used to match the federal grant funds, not some other hypothetical future fund,” the brief notes.

But even if federal waivers remove the matching-fund requirement, the available federal funding for the 29-mile Madera-Fresno link still doesn’t cover the total cost of the contracts the state has already signed.

A ‘remedies’ hearing without any remedies proposed

The Brady-Flashman brief calls for Judge Kenny to ban the rail authority from beginning construction on the project until it resolves the funding and environmental-review deficiencies identified in Kenny’s Aug. 16 ruling.

The next major chapter in the fight in Kenny’s courtroom is going to be unusual. The veteran judge is holding a Nov. 8 “remedies” hearing at which the state explains how it will resolve its funding and construction plans’ violation of the state law established by Proposition 1A’s 2008 approval.

Yet the attorney general’s “remedies” brief of Oct. 8 offered no remedies addressing Kenny’s conclusion that the state was on track to break state law.

State media coverage has focused on the fact that Harris’ office says it is legal to proceed with work on the project for now using federal funds. What has received inexplicably little emphasis, however, is the fact that the leading law-enforcement official in California government agreed with a judge that the state would break the law if it started using state funds on the project without having firm funding for the first 300 miles of the project.

The rail authority, which has at most $13 billion available, estimates the cost of the 300-mile initial segment at $31 billion. This is not a gap that cash-poor state government can address or finesse, and the prospect for more federal funding in the sequester era seems far-fetched.

Has the bullet-train end game began?

What’s going on here? A veteran Democratic elected official from  Silicon Valley, who spoke with me on the condition of anonymity, suggested we may be seeing the beginning of the end game for the bullet train.

“There are a lot of angles to this. … The support for the train isn’t nearly what it was, the cost is way up, it’s gotten a lot of bad press. People in Sacramento understand that,” the politician told me.

Harris will face major pressure from building-trades unions to let the project go forward. But she will not certify as legal something that her office has already agreed is not legal.

State Treasurer Bill Lockyer and Controller John Chiang also have fiduciary responsibilities that preclude them from approving or proceeding with the sale of billions of dollars in state bonds of shaky legality.

And all three have political motives to disassociate themselves from the increasingly unpopular project. Harris is running for governor in 2018. Chiang is running for treasurer next year. And Lockyer is retiring from politics in 2014 with his most cherished possession being a reputation as an independent maverick.

It’s tough to imagine a better final flourish to Lockyer’s career than deciding not to sell the Prop. 1A bonds in December, as is now planned, on the grounds that he will not be a party to an assault on both state law and California taxpayers.

“That might appeal to Bill,” the Democratic elected official told me. “I could see that.”

By Wayne Lusvardi

How has the stimulus program of President Obama affected California? Have things gotten better?

We can see the answer for the whole state by looking in detail at how stimulus money was spent in Pasadena. City Finance Director Vic Erganian said the city borrowed money at lower than normal interest rates and the funds opened the door for projects and jobs the city otherwise could not support.

Now winding down, the federal stimulus program pumped $133 million into Pasadena in 10 separate bond issues under the American Recovery and Reinvestment Act.

The renovation of the 89-year old Rose Bowl consumed $114 million of the funding by Build America Bonds at a blended interest rate of 4.8 percent.  But the price tag for renovation has now run up to $162 million, leaving the city with a $39 million financing gap.  The Rose Bowl is a revenue generator for the local Old Town restaurant district in Pasadena, as well as for tourism and hotels.

The National Football League may consider “temporarily” locating a team in the Rose Bowl until a new stadium can be built elsewhere.  Speculation is that the Rose Bowl may well become the permanent stadium for whatever NFL team finds a home in the Los Angeles area.

And $7.4 million of stimulus money went to subsidize a 43-unit low-income senior housing project with a total cost of $17 million.  That reflects a whopping cost of $395,000 for each one-bedroom unit, or $296 per square foot of building area. The units now rent at $416 per unit per month. Market rates would be at least $1,200 a month, probably higher.

Other projects funded with stimulus funds include $4.3 million on roads; $2.8 million on employment and training programs; $2.25 million on energy efficient upgrades; $1 million on water and power infrastructure; and $908,000 to homeless housing programs.

Arguably, what the stimulus funded in Pasadena was just more luxury improvements to the Rose Bowl than could have been conventionally financed anyway, a windfall to a low-income housing developer for a financially dubious project, and a smattering of other projects that didn’t do much to generate the local economy on a permanent basis.

Why Stimulus Failed and Eroded Middle Class

Stock and bond traders and small businesspersons consulted by this writer who asked to remain anonymous said the stimulus didn’t work because “it never reached the domestic economy by becoming business loans.”

Banks have no logical reason to lend to small/medium sized businesses when they can make higher returns by reinvesting the money into Treasury bonds or any other investments.

A stock and bond investor explained it this way: “When the Federal Reserve Board lends at a 0 percent nominal interest rate (free money), it’s equal to about 4-5 percent of real return (nominal rate – real inflation = real return).

“Add to that the about a 1.5 percent yield currently offered by the 10-year bond and you end up with an about 5.5 percent to 6.5 percent real return depending on how you account for inflation.”

A small businessperson described how this affects his business: “You can do this without any risk. Why take the additional risk of lending to small business for the same interest rate yield that carries a considerable default rate, especially in the current economy?  Risk-free trading beats risky investments any day. Can’t blame the banks.  I would do exactly the same.  It’s just logical. Blame the policies.  The stimulus wasn’t a Keynesian intervention but a wealth transfer from the U.S. taxpayers.  Be that as it may, it will cause inflation and higher taxes because it was a public expenditure.”

Keynesianism is an economic theory that came about during the Great Depression by John M. Keynes advocating government money and financial policies to increase employment and spending during down cycles in the economy.

The Obama Administration’s low-interest rate monetary policy, combined with the repeal of the Glass Steagall Act in 1999 under President Bill Clinton, has had the intended effect of eroding the middle business class.  The repeal of the Glass Stegall Act permitted commercial banks and investment banks to merge. Thus, big commercial banks solely committed to financing small and mid-size businesses declined. Loan capital was diverted to big investment banks looking for the best return rates at the least risk.

Government gets what it provides incentives for and doesn’t get what it has created disincentives against. It is no surprise that big money is now diverted to government and big investment banks to the detriment of small and medium-sized businesses.

It has been the explicit policies of the Clinton, Bush and Obama administrations to provide less capital to the business middle class (“starve business, feed government and big banks”). This certainly is reflected in stimulus funding in Pasadena.  And it is reflected in new statistics that show a declining middle class. 

Pasadena’s renovation of the Rose Bowl won’t be completed until 2014.  So technically the use of $133 million in federal Build America Bonds positively affected only construction jobs and unions, not necessarily the private sector economy in Pasadena during the depression that began in 2007.  The Rose Bowl renovation contract contains a “hire local” provision but that will not do much to finance private sector business creation in the long run.

City Revenue Growth 6 Percent/Year During Recession

According to Erganian, “revenues at the city are growing but…we’re certainly not at pre-recession levels.”

Pasadena forecasts it will take in $216 million in general-fund revenues in the 2012-13 fiscal year. That is $96 million more than in 2003, before the Mortgage Bubble, when city general fund revenues were $120 million.

The growth of general-fund revenues reflects a compound rate of revenue growth of 6.1 percent per year from 2003 to 2012.

The rate of city revenue growth since before the depression in 2007 to 2012 is an identical 6.1 percent per year.

According to the Bureau of Labor Statistics Inflation Calculator, monetary inflation from 2003 to 2012 ran 2.3 percent per year.

The unemployment rate in Pasadena has gone from 6.7 percent in 2000 to 11.5 percent in 2012:

Pasadena Unemployment Rate, General Fund Revenues, and Stimulus Funding 2000 to 2012

Government and public sector unions are apparently weathering the managed depression fine, despite rhetoric to the contrary.  But private enterprise has mostly been skipped over by big banks connected with financing big government business enterprises such as the renovation of the Rose Bowl.

Where did the money go?

Pasadena’s “stimulus” monies went into the hands of unions, local governments, and big investment banks for politically popular projects that had a small positive effect on the private economy.  And the Rose Bowl Renovation is advancing in 2014: six years after the sudden drop in employment and the shutdown in private lending due to the Mortgage Meltdown and Bank Crisis of 2008.

Pasadena’s Stimulus spending program is like one of those pretty floats in the Rose Parade on New Year’s Day that displays a bridge of flowers, but the float is going nowhere except to the end of the political parade.

Obama’s low interest rate monetary policy, coupled with the repeal of the Glass Steagall Act, has had ruinous consequences to small and mid-size businesses as investors have sought risk-free returns in alternative investments instead of in business and industry.

The federal stimulus was not a “bridge over troubled waters” for the private sector economy in Pasadena.  Now you know why many small and mid-size businesspersons say they are not better off after four years of federal stimulus programs and monetary policies of the Obama administration and high taxation and regulation in California.