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Appellate Justices ponder reversal of Superior Court decisions on Prop 1A

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The hearing was held on May 23rd in front of full house. This was the important appeals case involving Superior Court Judge Michael Kenny’s rulings. First, the requirement that the High-Speed Rail Authority rescind it’s funding plan of November 2011 because it had inadequate funding and incomplete environmental work. The second ruling involved Judge Kenny’s refusal to validation the bond sale because no evidence was presented. This act is preventing the sale of $8.6 billion dollars of bonds.

It appeared that questions asked by the justices were leaning toward a reversal of Judge Kenny’s decisions. One of the key reasons concerning the Tos/Fukuda/Kings County case seems to be that the arguments are premature.

The case about the bond validation, which is preventing the sale of $8.6 billion dollars of bonds, also seemed in jeopardy of being overturned because the court’s decision was based on very technical issues. There have been no other cases ever been presented on this subject in anyone’s memory. But as Attorney Stuart Flashman reminded the court, they had to show evidence. It’s a requirement of the law and it’s still a legal hurdle that has to be cleared.

Stuart Flashman, the co-counsel for the Tos/Fukuda/Kings County case, reaction after the hearing.

“The justices have been confronted with a stark dichotomy. On the one hand they have Governor Brown demanding, by way of the Attorney General, that the court let him move ahead with building his "legacy" high-speed rail project.

On the other hand, they are faced with having to emasculate the clear language of a bond measure that had been placed before and approved by the state's voters. If they do Brown's bidding, I fear they will do long-term damage, not only to the court's reputation as a fair arbiter of justice, but perhaps even more importantly to voters' trust in the meaning of language placed before them on the ballot. The potential damage to Californians confidence in state government could perhaps be compared to that done to the integrity of national elections by the U.S. Supreme Court's 2000 Bush vs. Gore decision.”

The Hearing:

According to Presiding Justice Raye and agreed with by Deputy Attorney General Ross C. Moody, who presented for the state, ‘the time was later not now.” It was later… when the 2nd funding plan was prepared. That’s the one that would ultimately authorize the spending of construction dollars. Presiding Justice Raye said, “No one is suggesting that the challenge shouldn’t be entertained or heard, the question is are we there yet.”

Associate Justice Robie hammered at defense counsel, Stuart Flashman on a number of things including the sweeping statement, “you’re trying too hard”, you can’t compare other projects to this one, your objections belong in a CEQA suit and he felt there was a separation of powers issue between the legislature and the courts. There was no allowance for the justices’ questions so Flashman seemed more handicapped to present his case. In addition he had to share with the allotted 30 minutes with Howard Jarvis and Union Pacific Railroad. The questioning of Deputy Attorney General Ross Moody was more cordial and conversational, even laughter during his time at the podium. He had the full 30 minutes to give his presentation.

Ross C. Moody, attorney for the AG’s office stated that these incorrect actions, both the funding plan action and the validation case, by the Superior Court was preventing the start of the project. He felt the legislature should be the sole judge of the first “preliminary” funding plan. He stated they accepted it and appropriated the money. Moody said it would be “nonsensical” to require a change in the funding plan when the appropriation was already made.

Separation of Powers:

Justice Robie said this is a separation of powers issue and that they were effectively being asked to question a decision by the legislature. Stuart Flashman, one of the attorney’s for the Tos/Fukuda/Kings County case, emphasized that Judge Kenny did not require the appropriation to be resubmitted, only the funding plan. But Justice Robie persisted. It had the same effect.

Note: The Superior court ruling did not ask the Legislature to overturn the appropriation. Judge Kenny was aware of the separation of power issues. He asked that the Authority redo their funding plan since it did not follow Prop 1A’s specific requirements to complete environmental work and find the funds to build the project for the 300 mile stretch in the Central Valley. Those requirements were to be completed by the time the funding plan was turned in.

A through K requirements:

Later when Justice Raye questioned Deputy AG Moody about the specific requirements in the bond act called the A through K in section 2704.08. There were 11 promises that were to be included for the first funding plan; Justice Raye asked if those requirements mattered.

Moody responded, yes but the question was where it is decided and he argued the place was in the legislature. He stated those promises were meant as informational information to the legislature. The legislature then considered them, listened to all the arguments for and against in the following 11 months, from when the funding plan was submitted. It heard all sides and it was then they voted for the appropriation.

Associate Justice Kathleen Butz, seemed to help along the Deputy AG’s arguments when she said, “is it any salvation” that the legislature included expressed stipulations.

Note: What she may not have known were the senators who knew the most about the project and helped craft those stipulations, voted no for the funding of the project.

“To submit a plan for an appropriation already received makes no sense, “Moody stated. He went on, “It matters that we not interfere at this point and throw up these road blocks to the project because we have this big pot of federal money that’s sitting out there that we have to spend by 2017.”

Importance of the funding plans- both of them:

The AG’s office seemed to play both sides of the argument, it’s too early to sue, come back when the second plan is being submitted but he also argued it’s also too late to change the plan because the legislature has already appropriated the money. It is true the second plan is important and has many requirements but the second plan is not voted by the Legislature but it’s the first plan that the appropriation is based on. AB 3034, 2704.08 section D, says this: “The authority shall have approved and concurrently submitted to the Director of Finance and the Chairperson of the Joint Legislative Budget Committee.” This follows with a long list of requirements, immediately after section C, which lists the 11 requirements A-K before the first funding plan can be submitted. By the way both plans are identified the same, not one preliminary. The law describes both funding plans identically, they use the term “detailed funding plan." One does not appear less important than the other. While the second funding plan is necessary before funds are spent for construction, the AG's use of the term preliminary when he identified the first funding plan made it appear less important.

Stuart Flashman reminded the court there were no environmental requirements in the second funding plan because they were required to be completed before the first funding plan was submitted.

Moody also argued that environmental clearances could be done at the time of the second funding plan since material changes could be made. He said you couldn’t get the financial consultant to approve the plan, which is required for the Second Funding Plan and the idea that the project “would evade environmental clearance is simply false.”

Flashman argued that those specific requirements such as environmental review and funding were there to project the public from a project that could just stop should there be an issue with the environmental work or even a problem with a city such as Bakersfield (BTW who just announced it was suing the authority on the Fresno to Bakersfield segment) And Flashman persisted, said those were protections to the public and they were not a requirement in the second funding plan. The justices seemed to pay attention to his argument.

Howard Jarvis Taxpayers Association and the bookend projects:

Attorney Tim Biddle made the point that this project has gelled and that the constitution prohibits the project from going forward unless it complies stated in the bond act. He explained how the appropriation allocated $1.1 billion on bookend projects and emphasized the fact that the legislation forbids the project from going forward as planned because they can’t afford it as indicated in the bond measure.

Note: In the Journal notes dated August 9th, 2012 in the appropriation bill, says this about the blended system.

“The project-level environmental documents certified for this segment, and related construction and operation funded by the Appropriation, shall be consistent with the blended approach of the Revised 2012 Business Plan, and shall not reflect the four-track system in the Program-level environmental document.”

Later Senator Jerry Hill passed legislation that essentially promised the peninsula public primarily a two-track system.

Biddle claimed if they don’t make the argument today that the project has changed, they would never have the opportunity to send this back to the voters to approve the project. He also argued that the sale of the bonds was very important and covered under the constitution.

Justice Vance Raye asked if that couldn’t be addressed later. He was under the impression if in fact the bonds were sold for the high-speed rail project that somehow the Treasurer could give back the money to the buyers. He admitted that he could not remember in his memory if that had been done but that’s an option.

Note: Assembly member Diane Harkey, a 30 year business background in finance and a degree in economics comments on the bond sell back:

“That statement might have been made with the understanding that the bonds being sold are specifically sold as High Speed Rail Bonds to investors (who would be relying on an Investment Grade Project analysis) with a specified repayment source from future HSR projected revenues (similar to what the voters were told in Prop 1A).

It still assumes that the State is on the hook for repayment and that the State would have the ability to issue another debt instrument (to call the bonds), sufficient cash flow to repay the HSR bond debt outstanding on demand, or sufficient restraint not to spend the bond funds issued (not to contract or obligate) until certain the project works out.

However, the bonds are being sold as General Obligation Bonds, by the State of California, to be repaid by the general revenue of the State of California. Investors are not investing depending on a project working out or not. They are merely comfortable that California won't default on the debt. “

Union Pacific Railroad:

Attorney Blaine Green was the last to speak and had probably less than 2 minutes to make his points out of the very strict 30 minute allowance of time on the defendants side shared with Stuart Flashman, Howard Jarvis and Union Pacific.

His points were about validation only. UPRR is not involved in the Tos/Fukuda/Kings County case. He opened by saying they were the only actual railroad involved in this case.

UPRR was concerned about the scope of a validation action- “it’s far overbroad,” said Green. They felt the way the bond validation might be written would confirm that the Rail Authority was compliant with all factors within Prop 1A. Green argued there are other issues such as items such as trip time and the blended system were in question. They had concerns about the blended system if it operated on or near UPRR’s tracks that it would interfere with the operation of their freight railroad.

The AG’s office argued later that the issuance of the bonds was a separate action than the spending of the bonds and UPRR could raise objections later. He stated in large projects this was done as opposed to other bond projects that combined bond issuance with actual spending if they were ready to go. Large projects like HSR would be done in stages.

Conclusion:

It appears the number one thing the Authority wants to do is start construction in hope that they can spend the federal funds in the Central Valley and not be required to return them. The Attorney General’s office stated in the beginning he has a pot of money that has to be expended by September 2017.

Mike Brady, co-counsel on the Tos case later said, “It appears the court may be interested in a narrow procedural issue, namely whether our challenge to the Authority’s compliance with Proposition 1A is premature and should wait until the actual spending of Proposition 1A money for construction is closer in time. If this is the decision, we are prepared to do so, since no matter what, the same substantive legal violations still exist such as failure to be able to get the passenger from San Francisco to Los Angeles in 2 hours and forty minutes and the fact that the system will require a heavy government subsidy which is forbidden.

The fact that the Authority has only a fraction of the money on hand to complete the usable segment that they selected, when they have to have all of it; the fact that they have not completed the environmental work and received clearances for the distance between Bakersfield and the Los Angeles Basin, including crossing the difficult Tehachapi’s, which doesn’t even have an electric gird—a task that could take years. We are poised right now to raise all these issues in pending litigation and in supplemental hearings. These issues are the heart of the case.”

There are more questions that answers that arise from arguments at this hearing but we’ll first have to await the courts decision. The court officially has 90 days but because of the state’s request for an expedited hearing, most legal observers expect a decision in the next 30 to 45 days.

The total audio can be heard at: https://www.youtube.com/watch?v=twdcDrKBBVY&feature=youtu.be

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