Construction costs for Honolulu’s commuter rail line have spiraled to more than $6.5 billion; and they could go higher by the time trains actually begin running along the 20-mile corridor, depending upon the accuracy of revised project expenses outlined for the Honolulu Authority for Rapid Transit’s board of directors last week.

But even as HART asks the City Council for more tax revenues to help cover the costs, one council member is floating a proposal to cap future rail spending and divert tax revenues to other needs, such as affordable housing.

HART still has to finalize its new estimates of project expenses before the authority submits them to federal officials; but these may not be the last cost increases HART will seek before the project is completed. With the rail line already 18 months behind schedule and at least $1.1 billion over budget, the draft revised budget presented to HART directors last week doesn’t account for possible future cost increases that could result from changes in economic conditions or further increases in construction costs.

The authority’s cash supply is dwindling at a time construction work is accelerating. Expenses are expected to begin exceeding revenues, possibly as early as January, meaning HART faces challenges in paying current contractor invoices and coming up with enough money to cover future bills.

The price of rail keeps going up, and taxpayers will be on the hook for another five years if the Honolulu City Council approves a five-year tax extension.

The price tag of rail keeps going up, and taxpayers will be on the hook for another five years if the Honolulu City Council approves a tax extension.

Cory Lum/Civil Beat

HART’s problem, as it has been for years, is money – and lots of it. Rather than abbreviating or abandoning the project altogether, the authority is seeking to boost the flow of cash by collecting additional General Excise Tax surcharges and by more interim borrowing.

The Honolulu City Council is scheduled to discuss both options during a Budget Committee hearing Wednesday. But some critics, including former Hawaii Gov. Ben Cayetano, say giving more money to the project shouldn’t be an easy sell for Council members.

“I didn’t think the project would get up to $6.5 billion at this early stage,” Cayetano said, adding that he believes the final cost will be closer to $10 billion. “The question now is: What are you going to do about it?”

HART’s current financial predicament highlights how far off base the original cost estimates were, prepared by the administration of former Mayor Mufi Hannemann nearly a decade ago to support its request for $1.55 billion in federal funding.

Another early misstep, as the city rushed to begin construction, was its failure to anticipate possible legal challenges that, so far, have added more than $190 million to the final cost.

All Eyes on the City Council

The City Council could pull HART from its fiscal quagmire.

Before the rail agency sees a penny of the additional money it says it so desperately needs, council members would have to approve collecting the half-cent surcharge for five more years. The council also has to extricate itself from a legal mess created in September when Abigail Kawananakoa filed a lawsuit in state court alleging undisclosed conflicts of interest by several city council members who voted to authorize early rail agency borrowing.

Wednesday, the budget committee may take a step toward bailing out HART when it considers whether to extend the surcharge through December 2027. HART estimates the extension would generate an additional $1.52 billion – bringing to about $4.81 billion the total tax revenue from the surcharge since it was imposed in 2007.

But nobody really knows just how much additional revenue actually would be collected during the five-year extension period. Three different projections ranging from $1.23 billion to $1.8 billion were laid out for HART directors last week, with a mid-range estimate of $1.52 billion. HART apparently will have to revise its revenue estimate for the Federal Transit Administration, which originally was told $1.8 billion would be raked in.

“No matter what we do it’s never going to be enough, and that’s what I think the chair is worried about. We just have to stop the bleeding” — Budget Chair Ann Kobayashi

Council Chairman Ernie Martin has proposed his own draft extension ordinance that would cap the amount of money to go toward rail at $4.58 billion. He said he believes that would be enough to cover the initial $910 million shortfall that was announced by HART officials in December.

Martin also proposed a resolution to use any money collected above $4.58 billion to build affordable housing on Oahu. Martin said while he understands that his proposal wouldn’t cover the current cost estimates for the project, it should be up to HART and city officials to figure it out.

Martin’s ordinance also would require HART to submit quarterly reports on its project status and cash balances and to provide detailed annual reports on all amounts billed by and paid to project contractors, including breakdowns of amounts paid to subcontractors.

Budget Committee Chairwoman Ann Kobayashi called Martin’s proposal interesting, saying it adds a new dimension to upcoming discussions. For instance, if the council goes along with Martin, the extension would have to go back to the Legislature for approval.

Capping revenues also poses significant questions for council members about how they expect to pay for the project or push for modifications — such as a shorter route and fewer stations — that might make it less expensive.

“No matter what we do it’s never going to be enough, and that’s what I think the chair is worried about,” Kobayashi said. “We just have to stop the bleeding.”

Honolulu City Council Chair Ernie Martin. 1 apr 2015. photograph Cory Lum/Civil Beat

Honolulu City Council Chairman Ernie Martin wants to cap rail tax revenues to force HART officials to develop better plans for cost containment.

Cory Lum/Civil Beat

At the same time, committee members will consider an ordinance, discussed by the full council last week, designed to address the conflict-of-interest issues raised in Kawananakoa’s lawsuit. The measure would repeal its questioned 2012 borrowing ordinance and authorize a new commercial paper and bond program.

The Honolulu Ethics Commission last week ended its investigation of council members Ann Kobayashi, who chairs the budget committee, Ikaika Anderson and their former colleague Donovan Dela Cruz, who is now a state senator.

According to the commission, Anderson, Kobayashi and Dela Cruz did not violate city ethics rules by accepting free meals and drinks from lobbyists pushing the city’s rail project forward.

It’s unclear how the Ethics Commission decision might affect the Kawananakoa lawsuit, since former City Councilman Todd Apo is still subject to the investigation. Kawananakoa’s attorney, Bridget Morgan, says the Ethics Commission’s decision to dismiss its complaints against Kobayashi, Anderson and Dela Cruz will not affect the lawsuit, since it’s her view that ethics codes were violated.

“These are legal issues that a court should decide,” Morgan said, noting that there are dozens of other measures that can be called into question. “The fact that the Ethics Commission decided to dismiss its own complaints does not change the potential ramifications for these ethics violations.”

Borrowing Crucial for HART

Under the ballot measure that created HART, only the City Council can authorize incurring debt for the rail agency. In 2012, the Council passed an ordinance approving the sale of up to $450 million in commercial paper that can be used for interim HART funding. However, the Kawanankoa lawsuit questioned the legality of that ordinance, forcing the council to correct the problem.

HART’s funding plan calls for the sale of $350 million in commercial paper – in essence promissory notes providing short-term loans to cover cash flow shortfalls. The loans must be repaid within 270 days and have interest rates lower than those for long-term bonds. Commercial paper can be rolled over or repaid from the proceeds of subsequent long-term bond issues.

In HART’s case, the city guarantees payment of any debt and is reimbursed by the rail agency for all principal, interest and other costs associated with selling commercial paper or bonds under an agreement signed last May requiring repayment from GET surcharge and other revenues collected by HART.

Money from the proposed GET surcharge extension would be used to repay principal and interest on long-term bonds HART apparently plans to ask the city to offer between 2016 and 2019,

Although the city council has until next June to approve the surcharge extension, HART’s executive director, Dan Grabauskas, told board members last week that approval of the extension is crucial to keeping the project on schedule and the Federal Transit Administration happy.

HART Executive Director and CEO Dan Grabauskas wants the City Council to approve the GET tax extension as soon as possible so as to avoid future cost overruns.

HART Executive Director and CEO Dan Grabauskas wants the City Council to approve the GET tax extension as soon as possible so as to avoid future cost overruns.

Cory Lum/Civil Beat

The day before the board meeting, the FTA’s acting administrator, Therese McMillan,  wrote to Grabauskas expressing concerns about HART’s current schedule, contingency fund and finances. McMillan wrote that until the city council takes final action on the surcharge extension, “the onset of additional and necessary revenue collection remains uncertain and could delay the timely award of future construction contracts.”

Grabauskas told board members it was imperative for the city council to approve the surcharge extension before the end of the year, because any delay in issuing planned contracts for other sections of the system could drive costs higher.

He acknowledged the budget revision presented to the board was a draft; but he said HART was working to refine the numbers and fit the final pieces into place.

FTA Concerned About HART’s Numbers

A potentially more significant federal concern, however, may be HART’s financial projections themselves.

According to McMillan’s letter, nearly two months ago her agency asked for additional information to evaluate the adequacy of HART’s updated budget. Yet, despite a September visit by the FTA’s oversight contractor, HART has only provided some updated budget numbers. She wrote that the FTA is still waiting for more “realistic” information – something McMillan said was critical to updating the project’s risk assessment.

Those assessments, called “Risk Refresh,” periodically examine all aspects of the rail project, including HART’s technical capacity and capabilities, cost estimates, construction schedule, progress, and financial and construction management.

So far three risk assessments have been conducted: in 2009, when the city was conducting early planning and hadn’t yet gained federal approval of preliminary engineering, the first step toward obtaining federal funding; in 2012, before an agreement was signed authorizing federal funding; and in 2014, after construction was finally underway.

The 2014 assessment found, among other things, that HART was inconsistent in estimating revenues and expenses. It recommended several adjustments to cost estimates. HART promised to give the FTA revised project-cost estimates by the first quarter of 2015, a deadline HART failed to meet.

How much HART’s numbers may change by the time it produces final estimates isn’t clear.

HART will have to reconcile the discrepancy between the revenues it estimated to the FTA and what it told directors.

Originally, the GET surcharge was expected to generate $3.3 billion through 2022, when the tax is scheduled to expire. While actual revenues collected so far have fluctuated — failing to meet HART projections some years and exceeding them others — the uncertainty of future collections poses risks.

According to the state tax department, from the start of the surcharge in 2007 through the end of the 2015 fiscal year on June 30, the total amount of surcharge collections was $1.69 billion, with $1.52 billion passed along to HART and $169 million pocketed by the state for collecting the tax. Between fiscal years 2010 and 2015 total surcharge collections were $1.27 billion with $1.14 billion going to HART, an amount slightly more than the rail agency’s 2012 estimates.

During the past three fiscal years, 2013 to 2015, surcharge collections exceeded HART’s 2014 revised estimates by almost $3 million. Collections for the first quarter of the current fiscal year have not been reported.

The Budget Committee has scheduled two more special hearings on the GET extension for early November, one in Kapolei and the other at Washington Middle School. Kobayashi said she doesn’t expect the budget committee to vote on a GET measure until after the  hearings.

About the Authors