Editor’s Note: Cliff Slater of Honolulutraffic.comprovided this commentary to Civil Beat in response to its article Friday, Civil Beat Analysis: City’s Rail Tax Plan Optimistic. The article explored the differences between the city’s perspective on tax revenues to pay for the project and the projections of a consultant hired by the state.

The Governor’s Report on rail transit finances predicts the city’s funds from the 0.5 percent General Excise Tax (GET) surcharge on Oahu will not generate the money needed for the project.

“The prediction that there will be less money raised from the GET tax is wrong,” Mayor Carlisle said in response.

The following excerpts all reference the June 2010 Final EIS financial plan, which is unchanged to date and is linked below:

The FTA’s Financial Management Oversight Contractor (FOMC) wrote in its September 2, 2009 review, that if it applied the Council on Revenues (COR) forecasts through 2015 and the City’s forecasts thereafter, the City would need to reduce its forecast tax collections by $322 million. For the category Capital Cost Estimates, Planning Assumptions, and Financial Capacity the FOMC rated the City Low. They added that, “The major factors contributing to this rating are: (i) material downside risks to the GET surcharge revenue forecast, and consequently the inability to cover all debt service cost; (ii) no net debt capacity; and (iii) lack of information to substantiate the City’s capacity to absorb a material amount (up to $535 million) of cost risk.”

In an August 12, 2009, letter to FTA, the City acknowledged FTA’s requirement that it obtain a waiver from the City’s Administrative Policy restricting the debt financing to 20 percent of the City’s annual budget. It is also required to engage an independent financial professional for the GE Tax revenue projections. The City has not done that yet.

The FTA’s letter giving permission for the City to enter the Preliminary Engineering phase contained the following statement:
 “Some elements of the current financial plan may not fare well in the stress tests that FTA will apply to evaluate robustness. These elements include the projected revenue stream from the General Excise Tax, the diversion of FTA Section 5307 funds from ongoing capital needs of the bus system, and the increasing share of the City’s annual budget that is required to fund the transit system. Were this plan submitted today in support of a request to advance the project into final design, its weaknesses would likely cause FTA to deny the request.” (emphasis added)

Clearly the FTA and its FOMC both doubt that the City will actually collect the $3.5 billion it projects. Let’s review the logic of the FOMC in its calculation of a $322 million shortfall:

We followed the FOMC’s comments above in restating the City’s forecast to reflect the COR’s forecasted rate of growth for GET revenues, and using the City financial plan’s forecasted growth rates from that point forward.

The latest COR forecast we have is their May 27, 2010, forecast shown in the table below. We calculated the percentage change. Note that this is a statewide forecast for GE Tax collections but Honolulu tracks the statewide GE Tax collection and the common usage is to use the statewide data.

COR’s statewide GE tax revenue forecast as of 5/27/2010

Budget year Total Tax Percentage change
2009 $2,417,580
2010 $2,424,236 0.3%
2011 $2,717,157 12.1%
2012 $2,777,039 2.2%
2013 $2,947,647 6.1%
2014 $3,123,119 6.0%
2015 $3,281,768 5.1%
2016 $3,491,927 6.4%

Source: http://www6.hawaii.gov/tax/cor/2010gf05-27_with0601_Rpt2Gov.pdf

We find the 2011 COR forecast not to be credible. We are seven months into the City Rail Fiscal Year (April to March) and Y-T-D we are at -2.7 percent. We have made an educated guess and used an increase of +1.9 percent (see in table as the olive cell) but even that is going to require a significant turnaround in the last five months of the 2011 fiscal year.

The blue cells show the percentage increases forecast by the COR. The brown cells reflect the percentage increases used by the City in its Final EIS, which can be confirmed at http://www.honolulutransit.org/library/files/summary%20cash%20flow%20tables_10aug09_v1.pdf

The COR forecast is statewide and thus an approximation of City tax collections. Our forecast tracks almost to the dollar the amount computed by FOMC; it is $325 million less than the City currently forecasts.

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