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Where Fantasy Meets Reality in the Stimulus

Dan Nguyen/ProPublica

Once upon a time, at a news conference that now seems long, long ago, there was word that a dazzling paradise would rise from the swamps of New Jersey.

There would be a 16-story indoor snow slope, where residents could ski on the sultriest of summer days. They would build the tallest Ferris wheel in America, an Egyptian-themed movie theater, a skydiving simulation tunnel, a candy dreamland with a chocolate waterfall and a 1,000-gallon jellyfish aquarium that would light up like a lava lamp.

They called it: Xanadu.

Five years later, the 2.3 million-square-foot complex at the Meadowlands stands as a cautionary tale of the parochial politics awaiting the $787 billion federal stimulus plan. The same regional authorities behind a troubled train line to Xanadu are now preparing one of the biggest "shovel ready" projects in the nation -- a $9 billion rail tunnel under the Hudson River.

As stimulus money begins to flow to state and local governments, the Obama administration last week warned state auditors and budget officers that a lot is riding on how responsibly they handle the infusion of taxpayer dollars.

"If the verdict on this effort is that we've wasted the money, we built things that were unnecessary, or we've done things that are legal but make no sense, then, folks, don't look for any help from the federal government for a long while," Vice President Joe Biden said.

It won't be an easy task. Though most of the money will flow through states, some of the projects will be managed by local and regional authorities that have proliferated in recent decades but get little scrutiny. Obscure federal agencies that have mismanaged funds in the past will now have billions to spend. And relentlessly, fraud experts say, the common huckster will try to make a buck by rigging a bid or overbilling the government.

Xanadu is slated to open in August, but some have their doubts. The development and its publicly-financed rail link have faced delays, increased costs and recurring controversy ever since ground broke.

Conflict-of-interest allegations pervaded the project. Losing bidders sued. The developer endured a securities investigation and nearly went bankrupt. The train line was routed through toxic lagoons where an oil company dumped chemicals for decades.

The stimulus package allocates $350 million for oversight, with plans to hire dozens of new auditors and investigators. The Association of Certified Fraud Examiners has estimated that U.S. organizations lose 7 percent of annual revenues to fraud. Should it hold true for the stimulus plan, that's $55 billion -- roughly the state budget of Ohio.

"If there's money to be had, someone will come along and try to find a way to deprive you of it," said Allan Bachman, the association's education manager. "The government resources are stretched right now in terms of accountability. To add this task to them is going to be a huge burden."

Unprecedented Cascade of Cash

With spending spread far and wide, the stimulus package signed by President Obama in mid-February reads like a Nano version of the federal budget. Everything from lead abatement in public housing to space exploration gets money. Some will be doled out to states and some to federal contractors, some by formula and some by grant.

The various tentacles have public interest groups on edge, given the billions of dollars wasted and abused in the reconstruction of Iraq and after Hurricane Katrina.

"It's monumental," said Craig Jennings of the open government group OMB Watch. "I don't want to be too hyperbolic, but this is something that hasn't been done before and it's a lot of money."

Some small agencies will see their budgets balloon. Take the Rural Utilities Service, an Agriculture Department bureau started in the 1930s to bring electricity to the heartland. Its broadband loan program, which in the 2009 budget had $300 million, will now administer grants and loans worth $2.5 billion.

In 2005, the inspector general found problems with a quarter of the funds the program had received in its first four years. The service spent $45 million, intended to bring Internet service to underserved rural areas, to wire 19 affluent subdivisions in the Houston suburbs. One of those, the Sienna Plantation, is built around a golf course within five miles of the city limits. Another, River Park West, is just outside Sugar Land, which has a median household income of $95,000 -- one of the highest in Texas.

Government watchdogs also might have a hard time stopping crooked contractors from getting stimulus money. One of their main shields against fraud, a database of banned contractors, is riddled with holes, according to a Government Accountability Office report (PDF) last month. Companies that have defrauded the government continued to receive contracts by simply changing their addresses or because officials failed to check the system, the GAO found.

In one case, a computer-services company convicted of falsifying records received a new contract because, when searching the database, procurement officers left out a comma. In another, the owner of a medical equipment firm evaded a five-year ban for Medicare fraud by transferring the company to a neighbor, who transferred it back to the owner's wife, who used her maiden name to avoid detection.

Political thorns also await the stimulus as state and local officials fight over how to spend it.

In Texas, the stimulus dredged up an old political quarrel when the initial project list devoted money to repairing toll roads. That inflamed critics who say people shouldn't have to pay to use a road that is also built with tax dollars.

"The stimulus package came into play after all these years of battling," said Terri Hall, director of the anti-toll group Texans Uniting for Reform and Freedom. "It brings up the double-tax open wound and just puts salt in it."

Complicating the politics and oversight is a maze of local and regional authorities that will be conduits for large chunks of stimulus money.

In the 1950s, the U.S. Census counted 12,000 such districts, which develop everything from water supplies to railroads to housing, sometimes mixing public money in partnership with private developers. By 2007, they proliferated to more than 37,000.

The original idea behind such districts was to cut through red tape and reform a patronage-driven system of public works. But more recently, appointments to these special district boards have been dominated by campaign contributors and developers, creating potential conflicts of interest that can raise suspicions about who benefits.

“Those authorities were created in response to the shortcomings of the political system and multitude of municipal boundaries,” said James Hughes, dean of the Bloustein School of Planning and Public Policy at Rutgers University. “In creating those instruments to solve a problem, they added additional problems.”

Rail Line a Critical Link

Perhaps no place shows the potential for conflicts more than northeast New Jersey.

That is where two authorities involved in helping Xanadu get rail service -- the Port Authority of New York and New Jersey and NJ Transit – are hoping to land $3 billion from the stimulus for the Hudson River tunnel. As recently as January, local officials talked about landing stimulus money for a second rail line to Xanadu.

Xanadu was conceived in 2002 as a way to redevelop the Meadowlands, a series of wetlands in northeast New Jersey best known as the home of Giants Stadium and the Nets basketball arena.

The $2.3 billion project has relied on hundreds of millions of dollars in public spending for transportation improvements and environmental cleanup. But as with many aspects of Xanadu, precisely how much the public has invested is in dispute.

The New Jersey Sierra Club estimates the public contribution exceeds $900 million when property tax breaks, financing and other types of subsidies are counted. But John Samerjan, a spokesman for the New Jersey Sports and Exposition Authority, disputes that. He said the developers have so far spent $260 million for lease payments to the state and for transportation and environmental cleanup costs.

Inside Xanadu, workers are laying tile and installing wires. The structure itself is nearly finished, but much work remains for the tenants. Two years behind schedule, the carnival-colored complex looms over the highway as a vibrant monument to economic revitalization or a gaudy albatross, depending on whom you ask. Local newspapers have exhaustively chronicled the project’s many ups and downs.

In 2003, The New York Times reported that Earle Mack, who sat on the board of one of Xanadu’s developers, Mack-Cali Realty Corp., provided a private jet to then-New York Gov. George Pataki for a Caribbean trip. A month later, Pataki and New Jersey Gov. James McGreevey agreed to have the Port Authority finance the $150 million NJ Transit rail link. Aides said at the time that Pataki wasn’t lobbied by Mack and had repaid him for the flight.

Costs of the rail line have since ballooned to nearly $200 million. The connection was critical: Xanadu’s promotional materials say the train is capable of bringing 10,000 people an hour to the complex. The 2.3-mile link also would cut traffic congestion and fulfill a long plan to connect the Meadowlands to New York City by rail, benefiting not only Xanadu but the stadiums, racetrack and concert hall.

By 2006, when it came time for a Port Authority vote to formally approve the rail spur, four of the 10 commissioners present had to recuse themselves. The chairman, Anthony Coscia, works for a law firm that represents the Sports Authority, the board overseeing the Xanadu project. Another commissioner was David Mack, Earle’s brother and a director at Mack-Cali.

Xanadu’s main developer, Mills Corp., disclosed in 2006 that the Securities and Exchange Commission had opened a formal investigation into the company and that it would restate its earnings because of accounting errors.

With Mills teetering toward bankruptcy, New Jersey Gov. Jon Corzine’s economic development chief, Gary Rose, helped find new investors for Xanadu – Colony Capital and Dune Real Estate, The Record of Bergen County reported.

At the time, Rose had an equity interest in Dune, The Record said, citing public disclosure forms. Rose also held stock and mutual funds in Goldman Sachs, which stood to lose more than $1 billion in loans if Xanadu went under, the newspaper said.

In an interview, Rose disputed The Record account and said he was only trying to help the players work together. He said he disposed of his interests in Dune as soon as he was advised they were joining Colony in an effort to rescue Xanadu.

The close connections feed skepticism nonetheless.

“If you look at who’s involved and at what levels they’re involved,” said Jeff Tittel, director of the Sierra Club’s New Jersey chapter, “you end up seeing that this is part of this whole witch’s brew of New Jersey political insider dealings.”

Also raising critics’ suspicion was the decision to route the rail link through a federal Superfund site, which the Sports Authority purchased from Honeywell International for $6.2 million, a price some said was unnecessarily high.

Honeywell, based in New Jersey, has donated tens of thousands of dollars in campaign contributions through its political action committee in recent years. The firm has hired several former political aides and state officials, including the former assistant commissioner of the Department of Environmental Protection.

“You wonder, ‘Why did they pick that site over all other places?’ ” said Mayor John Hipp of Rutherford, just south of the Meadowlands. “I think that an investigation should be warranted. It’s a disaster.”

Honeywell spokeswoman Victoria Streitfeld denied that politics influenced the property deal. The company remains on the hook for remediation on the property it sold.

Samerjan, the Sports Authority spokesman, said it’s difficult to avoid environmental problems in the Meadowlands, given its history as an industrial landfill.

Port Authority spokesman Steve Sigmund said it’s unfair to compare the Xanadu rail link with the Hudson River tunnel. “Yes, they are both rail projects that happen to start in the Meadowlands,” he said. “But beyond that they are totally different projects.”

In the past few years, he said, the Port Authority has taken steps to become more transparent – opening committee meetings to the public, allowing public comment periods before decisions and broadcasting meetings on the Internet.

A New Sheriff in Town

Not all stimulus projects will involve as much money or murky politics.

With the fraud in Iraq and New Orleans fresh in their minds, Democratic leaders included what they say is “unprecedented” accountability and transparency in the stimulus: $350 million for oversight, or about $1 for every $2,250 in the plan.

Spending will be overseen by the new Recovery Accountability and Transparency Board, which some have dubbed the RAT board. It is composed of the inspectors general from every major federal agency receiving money.

Earlier this month, Obama appointed Earl Devaney, a respected inspector general in the Interior Department, to head the board. Given the awe and praise that followed, one might have guessed that a tumbleweed had blown through the Capitol while someone cued the theme to The Good, The Bad and The Ugly.

Devaney’s resume includes taking down powerful lobbyist Jack Abramoff. He exposed sex, cocaine and corruption in the government’s oil-and-gas royalty program. He once caught someone taking a bribe with a camera hidden in the mouth of a shellacked alligator’s head.

“Earl is not one for sweeping things under the rug,” said Joseph Hungate, chief deputy to the Treasury inspector general for tax administration.

In a few weeks, the stimulus board will take over, the Web site where President Obama has promised that the public can track "every dime" of spending. But the president's Office of Management and Budget issued reporting guidelines that some critics say contradict his pledge.

Recipients of funds -- states, federal contractors and regional transit and housing authorities -- are required to report how they spend the money and to whom they award contracts. Those who receive funds from the recipients, such as cities and community college districts, will not.

“All State A has to do is report the subgrant to City B, but City B has no requirement to report anything,” Sen. Claire McCaskill, D-Mo., said at a recent hearing. “So how to do we get to the contracts?”

Robert Nabors, OMB deputy director, responded that the Obama administration was trying to balance the desire for transparency with the burden on small businesses.

“I just think this guidance doesn’t match what we’ve advertised,” McCaskill shot back.

Jennings’ group, OMB Watch, is urging the administration to provide detailed data in such a way that citizen watchdogs can look for political influence.

“It’s going to be very difficult to go through reams of [documents], find one particular contractor and say, ‘Ah! This one particular contractor has gotten 500 contracts and he’s made X number of campaign contributions,’ ” he said.

Pay-to-play cases draw big headlines. But the dire economy and the influx of stimulus dollars create textbook conditions for more mundane abuse, fraud examiner Bachman said.

“I’m holding my breath on this,” he said. “I wouldn’t be surprised if some period of time down the line we’re still prosecuting frauds going years back because of the stimulus package.”

Bob Hennelly of public radio station WNYC in New York contributed reporting on Xanadu. This story is part of ShovelWatch, a collaboration by ProPublica and WNYC to track the $787 billion stimulus bill Congress passed in February.

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