Another Day, Another $3 Billion In Red Ink

Whatever the Obama administration may lack in economic accomplishments, we have to acknowledge that when it comes to spending money we don’t have, the president has put together a Dream Team. Nobody has ever done it better.

According to the latest estimates, this year’s federal budget deficit will be $1.2 trillion. This is the fourth year – out of four for President Obama – that the deficit has topped $1 trillion. No other president managed to pull off this feat even once, not even the free-spending and tax-cutting George W. Bush

To generate a $1 trillion budget gap, the people who control the purse strings (though I’m not sure “control” is the right word) must spend $3 billion more each day than the government takes in. This is a government with about $2.3 trillion in annual revenues; a $1 trillion deficit requires least $9 billion in spending each and every day. There are no days off for weekends, federal holidays or political campaigns.

This requires out-of-the-box thinking. You have got to be willing to swing for the fences by paying for things no rational person would buy. Things like a high-speed train to nowhere.

This is the story of how the spending superstars in Washington, with help from their AAA farm team in Sacramento, Calif., managed to meet their $3 billion deficit quota for a single day. They even generated an extra $200 million in red ink to put in the rainy day fund.

Washington was willing to sink that $3.2 billion – in fact, it practically insisted on sinking it – into a plan for California to build a high-speed train that the state claims will eventually allow passengers to travel between San Francisco and Los Angeles in three hours. Calif. Gov. Jerry Brown signed a bill last month that commits California to contribute its own $2.6 billion.

Don’t book your ticket yet. That $5.8 billion only buys the first section of the rail line: a 130-mile stretch that will run through the state’s Central Valley. The Central Valley has plenty of agriculture, but not much you’d ever need to travel up to 220 miles per hour to reach. Building the entire train line will cost $68 billion – if it ever happens. Since the rest of the funding is not arranged, there is a good chance that the train will never have any stops other than Nowhere and No Place.

Even the $68 billion project is a slashed version of an earlier plan, which was originally projected to cost $35 billion to $42 billion but ultimately rose to a $98.5 billion price tag. To lower the estimated cost back to the current $68 billion, officials had to compromise by agreeing to run fewer trains at slower speeds and to use some existing tracks.

As I wrote when the changes were announced, the modifications will eliminate whatever utility the train might have had. The point of a high-speed train is, as the name suggests, that it goes at a high speed. According to a recent survey, 59 percent of Californians now oppose the rail project, which was originally approved as a voter initiative back in 2008, when the state claimed it could build the entire, pre-scaled-back line for under $42 billion.

The rail line wasn’t a good idea even then. The train addresses a problem California does not have, because there are other ways to get between its two biggest metropolitan areas quickly and cost-effectively. L.A. and San Francisco are connected by several highways, the most direct of which takes only around six and a half hours by car. Cars carry passengers door to door. High-speed trains don’t.

Neither do planes, but planes fly between the airports where they are most needed. There are dozens of daily flights between the five airports serving the Los Angeles area and the three along the San Francisco Bay. Sixty-nine percent of Californians say they would never or hardly ever ride the train if it were built, according to a Los Angeles Times poll. With such minimal enthusiasm, the chance that the train will ever be able to pay for its own operations is practically zero.

The Obama administration, however, is set on spending cash on high-speed rail, apparently without much concern over where those tracks go. The president’s proposed 2013 budget called for $47 billion in funding for high-speed rail over the next six years. That would be enough to take care of the daily $3 billion deficit for more than two weeks.

It took Team Obama some time to reach championship spending form. The president devoted a big part of his 2009 economic stimulus plan (price tag: $840 billion) to what he called “shovel-ready” public works projects. After the government failed to actually give much money to these “shovel-ready” projects, Obama declared, in October 2010, that “there’s no such thing as shovel-ready projects.” The $3.2 billion appropriation to California, which will not be spent for several more years, comes from the same $840 billion appropriation that was supposed to stimulate the economy back in 2009.

Better late than never, I suppose. The White House was so pleased with this opportunity to spend unspent money that it recently named California High-Speed Rail Authority Chairman Dan Richard a “Transportation Innovator Champion of Change.”

California isn’t the only place the feds are throwing money. Illinois and Michigan are laying new, faster tracks for Amtrak trains, mostly using stimulus money. Towns in those states are also beefing up their stations. But instead of creating revenue for the states, the upgrades may require Illinois and Michigan to increase the subsidies they already grant to Amtrak.

It would probably be too much to ask state governors to go against their own interests to protect the national treasury. States, however, should at least protect their own finances. Illinois, in particular, has an unfortunate tendency to fall behind on its bills – a problem that ought to make it think twice, and preferably three or four times, before committing to any pricey new projects, even if someone else is footing part of the bill.

At least a few governors have been sensible and gutsy enough to turn down federal money. Last year, Florida Gov. Rick Scott refused $2.4 billion in federal funding for a proposed rail project on the grounds that taking the “free” money could ultimately cost his state more than $3 billion if the project went over budget. Ohio Gov. John Kasich similarly rejected $400 million. Wisconsin Gov. Scott Walker also turned down federal funding for high-speed rail – $810 million in 2010 – but Wisconsin later joined other Midwestern states in asking for some of the money Scott originally rejected.

With or without governors’ help, however, the administration will likely barrel ahead, spending money we don’t have at rates no bullet train can hope to match, one day and $3 billion at a time.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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