Editor’s Note: After three months of work, a state consultant in early December released a report reviewing Honolulu’s financial plan for its proposed $5.5 billion rail project. Civil Beat is taking a closer look at the two analyses and will evaluate the key areas in which they differ: construction revenue, construction costs, operating revenue and operating costs.

When it comes to long-range financial projections, there’s only one thing we can be sure of: They’re all wrong. But finding out who’s closest requires a look at the methodology and assumptions each employed in coming to their conclusions.

This story, the first in our series, explores the largest piece of the puzzle — a $500 million discrepancy in tax revenue to build the train system. It looks at strengths and weaknesses in the financial models used by the city and the state’s financial consultant.

Other stories — including Civil Beat’s conclusion on the financial future of rail in Honolulu — will follow. A discussion of the topic has already begun.

Honolulu Mayor Peter Carlisle says the city is 99 percent on track to pay for construction of its rail project.

But his own numbers say otherwise. Like the city’s financial plan itself, Carlisle makes it seem like things are better than they really are. He attacked state consultants who questioned the city’s numbers, saying their work was “shoddy” and “biased.”

Honolulu Hale says revenues from the General Excise Tax surcharge of 0.5 percent will pay for two-thirds of the $5.5 billion construction price tag.1

The GET surcharge went into effect on Jan. 1, 2007, after the Hawaii Legislature and Honolulu City Council approved it specifically as a rail-funding mechanism. The tax has raised about $580 million in less than four years, according to data provided to Civil Beat by the city.

GET Surcharge Revenues Collected To Date

Fiscal Year Received2 Calendar Quarter Earned Surcharge Revenues
($ Millions)
Fiscal Year Total
($ Millions)
2007 Q1 CY 2007 12.8 12.8
2008 Q2 CY 2007
Q3 CY 2007
Q4 CY 2007
Q1 CY 2008
2009 Q2 CY 2008
Q3 CY 2008
Q4 CY 2008
Q1 CY 2009
2010 Q2 CY 2009
Q3 CY 2009
Q4 CY 2009
Q1 CY 2010
2011 Q2 CY 2010
Q3 CY 2010
Total 577.6

Source: City and County of Honolulu, Dec. 7, 2010

Carlisle’s 99 percent number is true, but misleading. To date, the city’s batting average is at 98.5 percent. But about two and a half years of revenue had already been collected when the final projections were published in August 2009. Earlier versions of the financial plan failed to account for the depth and length of the worldwide recession and the city’s track record would be around 90 percent.3

The city aced its predictions for Fiscal Years 2007, 2008 and 2009 because it had the answers in hand while it was taking the test. The accuracy continued in the first year of actual forecasting, Fiscal Year 2010, as the city pulled in 98.8 percent of its projected take.

Year 2, however, hasn’t gone according to plan.

Earnings received by the city during the first half of Fiscal Year 2011 totaled $78.3 million. If pro-rated for the rest of the fiscal year, that would add up to 91.3 percent of the $171.5 million in surcharge revenue projected by the city.4

Many may say 91.3 percent is pretty darn good — an A-minus, perhaps. But if the city’s $3 billion projections for GET surcharge revenue for the next dozen years are 91.3 percent on target, that would create a $250 million shortfall. And that assumes the city’s projections remain as accurate in 2022 as they have been in 2010.

The City’s Model

Optimism is a common theme throughout the city’s financial analysis. The report projects annual growth rates nearing 8 percent between 2012 and 2014, then sustained growth at 5.4 percent until 2022. It does not anticipate any recessions, bubbles or serious hiccups for more than a decade.

Parsons Brinckerhoff, which developed the forecast model used in the city’s financial plan, broke down the 2007 GET base into five main components: retail spending, personal and professional services, construction contracting, miscellaneous rentals; and hotels and lodging.5

The model further subdivides retail spending into spending by residents and spending by visitors. Then the latter category is broken down again into American visitors, Japanese visitors and other visitors.

The future spending of each sub-group is analyzed using three factors thought to be independent variables. For example, expenditures by Japanese tourists between now and 2023 are a function of the median Japanese international traveler age, the exchange rate between the Yen and the U.S. Dollar, and the Japanese gross domestic product.

While certainly sophisticated, this type of analysis is not foolproof. Just because the model takes many factors into account doesn’t necessarily make it more accurate 15 years out. All the sub-factors used in the city model rely on historical data through either 2007 or a chunk of 2008, meaning that the recession of 2009 and 2010 is not factored into projections of Hawaii’s future.

In short, there remains no certainty that the model is an accurate predictor of the future. And while its average annual growth rate of nearly 6 percent is not impossible, it’s certainly optimistic.

The State Consultant’s Model

The state’s consultant says there hasn’t been a period of such sustained growth in the past 20 years. That doesn’t mean it can’t happen. But it is indicative of the reach of the city’s financial plan.

The consultant took a different approach.

CB Richard Ellis, conducting a review of the GET revenues for Infrastructure Management Group, looked at factors including work force, general population, construction permits, spending and U.S. gross domestic product, and compared them against historical GET collections in Honolulu.6

The report concluded that national GDP is among the best predictors of local GET revenues. It found that GET revenue growth lagged behind GDP growth over the last two decades, 3.3 percent versus 4.5 percent.7

The Congressional Budget office predicts national GDP will rise by an average of 4.2 percent per year between 2009 and 2019, and CB Richard Ellis said it’s unlikely the Honolulu GET surcharge revenue would grow faster than that.

The Federal Transit Administration concurs with the consultant that the city’s GET projections are “optimistic.”

In a report [pdf] produced in November 2009, the FTA gave the project’s capital cost estimates, planning assumptions, and financial capacity a “low” rating, saying “assumptions regarding growth in GET revenues … are optimistic compared to historical experience.”

To test its claim, the consultant analyzed the state’s GET revenues8 during six different 15-year periods between 1990 and 2010. It found that none of them approached the growth rate the city is counting on for its revenue projections.

15-Year Compound Annual Growth Rates

Period 15-year CAGR
1990-2005 4.0%
1991-2006 4.4%
1992-2007 4.8%
1993-2008 4.6%
1994-2009 3.6%
1995-2010 3.7%
Average 4.2%
Median 4.2%

Source: Civil Beat analysis of DBEDT data

IMG used those 15-year periods to create three potential scenarios for growth in the next 15 years. It identified an average annual growth rate of 3.7 percent as the “downside” case, which would result in a shortfall of about $560 million. The “best case” was set at 4.7 percent, which would lead to a shortfall of about $370 million.

The “base case,” defined in the report as the scenario most likely to unfold, was set at an annual growth rate of 4.0 percent and would result in a shortfall of about $500 million.9

Of course, the problem with such a model is that it effectively counts the middle 10 years of the historical data — in this case, 1995 to 2005 — in every single scenario. By shifting the range just one year for each period and limiting the analysis to the past two decades, the analysts essentially argue that those 10 particular years are representative enough to be a fair predictor of the entire range of potential economic growth in Hawaii between now and 2023.

Past may be prologue, but there’s no guarantee that the future will mirror history.

For now, it remains unclear how much revenue the city will collect from the GET surcharge. IMG lays out what could happen if there’s a shortfall: The tax could be increased or extended.10

Despite the mayor’s assurances, it appears likely Honolulu taxpayers will find out that he has been looking at the rail project through rose-colored glasses and that they’ll have to bear a bigger financial burden for years to come.

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