Editor’s Note: Civil Beat has spent months examining financial records relating to the Honolulu rail project. “Off Track” is an ongoing series that explores what’s happening to the taxpayer money that is going into the biggest public works project in Hawaii history. 

If Gov. David Ige signs legislation authorizing the Honolulu City Council to extend GET  surcharge collections for another five years, it is unlikely the additional revenue will be enough to insure the financial viability of a commuter rail system facing increasingly serious financial problems.

A review of HART financial projections submitted separately to state officials and city council members during the debate over a bill to extend the surcharge suggests that billions of dollars will be needed to pay for operating the 20-­mile railroad once it gets up and running.

Since the bill extending the surcharge prohibits use of the tax money to pay for operating costs, HART officials may have to find another municipal money tree to shake.

Although the recent legislative debate focused on HART’s need for additional funds to cover a shortfall currently estimated at $900 million on a project already behind schedule, it appears state lawmakers overlooked – or ignored – the  huge amounts of money that will be required for operations and maintenance.

Cranes and other machines as the guideway heads towards Waipahu.  18 may 2015. photograph Cory Lum/Civil Beat

Honolulu officials still don’t how they will pay for the operations and maintenance costs of a city rail system that is already over budget.

Cory Lum/Civil Beat

According to HART’s projections, between 2019 – when HART now hopes to begin  limited operation – and 2031 those costs will exceed $1.7 billion.

At the same time, current projections show rail fare revenues will generate less than one­ third of those costs – leaving HART with an O&M deficit of about $1.2 billion. That’s a lot money the city will need to scrounge up just to keep the trains running, yet it’s still not clear where those funds will come from. The city already subsidizes its bus and Handi-Van operations by more than $200 million per year.

Former Hawaii Gov. Ben Cayetano, who ran for Honolulu mayor in 2012 in an attempt to kill the rail project, doesn’t see many payment options outside of increased property taxes or another request to extend the GET surcharge. He also questions the accuracy of HART’s projections, saying the numbers seem low based on the fact that there are still a lot of unknowns.

“Very little has been said about the operating and maintenance costs,” Cayetano said. “The city can’t even tell you what the fare will be. If they can’t tell you what the fare will be how can they responsibly calculate what the costs will be? That’s a big concern.”

Lawmakers acknowledged HART’s financial dilemma in at least two reports by committees considering the agency’s plea for a surcharge extension. One committee found HART was experiencing “significant financial difficulties,” while another committee reported HART was “in serious financial jeopardy which threatens the likelihood of completion of the project by 2022.”

Despite the legislative consensus that HART could potentially become a fiscal basket case, lawmakers ultimately were willing only to help out with a surcharge extension considerably less than city and HART officials had begged for, and restricted the additional money solely to capital costs – expenditures directly related to design, engineering, equipment, materials and actual costs of building the project.

“If they can’t tell you what the fare will be how can they responsibly calculate what the costs will be?” — Former Hawaii Gov. Ben Cayetano

Lawmakers did throw HART a bone – ultimately expanding the definition of capital costs to include certain personal services and other overhead costs related to planning and design of future system extensions.

Sen. Jill Tokuda was a lead negotiator for the surcharge as chairwoman of the Ways and Means Committee. She told Civil Beat she refused to budge beyond a five-year GET extension because she had serious concerns about how city officials planned to pay for rail once it was operational. The fact was they had no plan. They said they were still studying it.

Legislators worried that city officials weren’t taking ownership of their project, and instead were relying on the state to bail them out with a continuation of the GET surcharge in perpetuity. But the lack of specific financial detail on operations and maintenance costs made it hard for lawmakers to cut a blank check.

“It was quite alarming,” Tokuda said. “They seriously need to look at what their operating costs are going to look like. You need to figure out how to pay for what you build.”

Federal Officials Are Already Raising Questions

How HART will cover this operating deficit is certain to generate considerable future debate in view of a recent examination of the project conducted by consultants to the Federal Transit Administration questioning the city’s financial ability to complete construction of the railroad, let alone actually operate it.

HART’s looming financial problems were underscored in a “triennial review” submitted to the FTA earlier this year and released in April­­ by consultants who studied the city’s transportation operations.

Federal law requires municipal  programs receiving transportation grants to be reviewed every three years. Honolulu’s review, conducted between December and February by Milligan & Company, a Philadelphia consulting firm working for the FTA, found that “in light of recent cost projections, HART’s financial plan does not demonstrate sufficient financial capacity to complete the rail project as currently planned.”

The review noted GET surcharge receipts – the primary source of local funding – were below projections and that unless HART came up with additional money, received favorable bids on future contracts and continued to successfully implement effective cost­ cutting measures, financial problems would undoubtedly worsen.

Governor David Ige walks into press conference on TMT and later shared 10 points about future of Mauna Kea summit. 26 may 2015. photograph Cory Lum/Civil Beat

Gov. David Ige still must decide what to do about a tax extension for Honolulu’s rail project.

Cory Lum/Civil Beat

These findings were not news to HART. They echoed warnings by Jacobs Engineering Group, HART’s Project Management Oversight Consultant, a separate FTA overseer specifically assigned to monitor the rail project.

For almost a year Jacobs has warned HART that funding shortfalls – which have already been estimated to exceed $900 million – and rising prices for construction materials coupled with lower­-than-­expected revenues from the tax surcharge earmarked to pay for most of  the project, needed to be addressed and that HART needed “to identify substitute funding” to bolster its finances, noting a primary option would be a GET surcharge extension.

That was the path chosen by Honolulu Mayor Kirk Caldwell and HART Executive Director and CEO Dan Grabauskas who spent hours before legislative committees pleading poverty and the need for extending the surcharge – and illustrating their point with colorful charts and graphs.

However, the full­-court press, which ultimately convinced lawmakers to extend the tax surcharge for five years, was focused on paying solely for construction and downplayed the estimated costs of actually operating the system once it’s built – substantial expenses that may prompt renewed attempts to squeeze additional money from taxpayers.

Ige has yet to decide on whether he will sign the tax extension into law, let it pass without his signature or veto the bill altogether. A spokeswoman for the governor said Wednesday that the surcharge is still going through the necessary legal and policy review, which is standard procedure for any new legislation.

While city officials continue to grapple with current deficits, railroad O&M shortfalls may begin appearing on the budget radar more rapidly than expected.

Hawaii Budget Director Wes Machida told Civil Beat he has yet to speak with Ige about the tax extension, although he expects that to occur soon. Machida said he’s aware of the massive subsidy needed to run the train, but that he has yet to receive any information from the city on exactly where that money will come from.

“We just have to ensure that whatever assumptions are being used to generate these numbers are realistic,” Machida said. “We’ll be monitoring them closely throughout the year and beyond for that matter to make sure there will be no surprises coming up in the future.”

How Will the City Pay to Run the Rail Line?

Grabauskas says paying for running the trains isn’t HART’s problem — it’s the city’s. This appears to leave the Caldwell administration and Honolulu City Council facing a financial predicament it would rather avoid because it requires devising some other funding mechanism to cover operating deficits.

Honolulu Transportation Services Director Mike Formby told Civil Beat that the city is still working on a plan to address the O&M costs, but that it has several issues that need to be resolved first.

Formby said the city and HART are still trying to finalize its farebox pricing as well as studying other possible revenue sources, such as advertising, station-naming rights, broadband and other value-capture mechanisms, that can help bring more money into the city. He said the city is also looking for efficiencies between rail, TheBus and Handi-Van that could help reduce O&M costs. The city will also look for grants to help cover the costs.

Center, HART Boardmember Michael Formby at HART board meeting held at Kapolei Hale flanked left, HART boardmember Carrie Okinaga and right, HART Board Chair Ivan Lui-Kwan. 18 dec 2014. photo Cory Lum.

Honolulu Director of Transportation Services Mike Formby is still looking for ways to pay for railroad operations.

Cory Lum/Civil Beat

“Bottom line, the city’s goal is to operate an intermodal transit system that is affordable and financially sustainable,” Formby said. “It’s the same goal the city has for its current Bus/Handi-van operation.”

In an updated financial plan submitted to the FTA last September, HART anticipated issuing $1.02 billion in General Obligation bonds and $350 million in commercial paper to supplement federal funds and surcharge revenues being used for construction. However, HART did not address its plan for covering operating expenses, which generally cannot be paid from General Obligation bond proceeds.

A Civil Beat survey of six transit authorities around the country operating heavy rail commuter lines of between 14 and 24 miles in length found that all require operating and maintenance subsidies, money derived from state and local government general and special funds as well as other sources including sales tax surcharges, and in one case, a portion of the state corporate income tax. Many of these agencies pay for O&M costs from proceeds of revenue bonds collateralized by fare collections.

What remains unanswered is the question of whether the restriction on use of surcharge revenues in Honolulu will force the city to use revenue bonds, or concoct some other funding mechanism to cover operating deficits.

HART told Civil Beat at this point, revenue bonds were not being considered.

18 may 2015. photograph Cory Lum/Civil Beat

The city’s rail line will initially run from East Kapolei to Ala Moana Center. But city officials hope to one day extend it to the University of Hawaii at Manoa and downtown Kapolei.

Cory Lum/Civil Beat

The need for providing huge operating subsidies to HART should come as no surprise to city officials who have already been paying hundreds of millions of dollars to cover operating deficits for other municipal services. During the past five years Honolulu has provided subsidies totaling $1.9 billion to keep the city’s solid waste division, the existing bus system and its housing development operations from drowning in deficits. The bus system alone has required $862.7 million in subsidies since 2010.

While city officials continue to grapple with current deficits, railroad O&M shortfalls may begin appearing on the budget radar more rapidly than expected.

One clause in HART’s core systems contract with Ansaldo Honolulu JV — a general partnership of Ansaldo STS, a Pittsburgh, Pennsylvania-based manufacturer of railroad control systems and other equipment and Ansaldo Breda, an Italian rail transport engineering company recently purchased by Hitachi – may force City Council action sooner rather than later.

Just how accurate HART’s projections of its own O&M costs will prove to be is unknown.

Under terms of the contract Ansaldo will be paid $573.8 million for its design-­build activities that include providing the railcars (change orders so far have increased that amount to $595.8 million) and, subject to the availability of future funds, potentially another $823.6 million for maintaining and running the trains.

The contract calls for an initial $166.9 million for operating limited passenger service during an “intermediate period” that was originally scheduled to begin in December 2015, but has been delayed until June of 2018, according to HART’s Master Project Schedule.

Another $339 million would be paid for the first five years of full operation originally scheduled to commence in March 2019 and a final $317.6 million would be paid for an optional additional five-year period unless HART terminates the contract.

While delays have disrupted the actual start date for rail operations, contract documents specify the intermediate O&M period will be divided into two parts — the first being when limited service between East Kapolei and Aloha Stadium begins and the second when service is extended to Middle Street.

Council member chair Ernie Martin listens to testimony. 6 may 2015. photograph by Cory Lum/Civil Beat

Honolulu City Council Chairman Ernie Martin says it appears property taxes will need to be raised to pay for rail.

Cory Lum/Civil Beat

Caldwell and the City Council now have three years to come up with a plan to pay O&M costs. ­­And it sounds like property taxes will be a part of the solution.

Honolulu City Council Chairman Ernie Martin told Civil Beat in an email that the hope was the Legislature would approve a longer extension of the GET surcharge to help cover future operating costs. But he said it became clear early on that lawmakers wanted more “skin in the game,” meaning they wanted to see the city cover some of the rail costs itself.

“Should the Governor allow the GET surcharge extension to be enacted into law, then the issue of financing the operation and maintenance of the system will be one of the primary topics of discussion,” Martin said.  “It would appear the real property tax revenues is the most readily available source for these purposes and the city administration should be prepared to offer a detailed explanation and financial analysis on the impacts of financing the operation and maintenance through real property tax revenues to include any potential rate increases as well as its ability to meet our existing obligations once the system is fully operational.”

Rail Consultants Predicted Shortfall Years Ago

Ironically, HART’s current financial problems, and the city’s tenuous ability to bail the agency out, were predicted in 2012 by Porter & Associates, a consulting firm contracted by Milligan & Co. to assess the city’s financial capacity to pay for the  railroad. That assessment encompassed both the rail project and an expanded city bus system that would feed the railroad with passengers.

Porter’s analysis focused on the need for future integrated transit system subsidies and the source of that money – primarily the city’s General and Highway Funds. Because the analysis viewed the GET surcharge as being strictly limited to railroad costs, all anticipated bus system revenue was excluded from the calculations.

The key question, Porter said, was how much money Honolulu would have to cough up to cover on­going operating and capital needs for the integrated transit system, and concluded that future costs would have to be covered by funding sources that exist today, principally cash and borrowing by the city.

Just how accurate HART’s projections of its own O&M costs will prove to be is unknown.

“At this time, there is no additional capacity in the Project (railroad) financing plan to fund Project cost increases or to mitigate other adverse events,” Porter concluded.

Porter’s analysis found most of the assumptions in the HART financial projections were  reasonable “with the exception of operating subsidies, the costs of which would  increase drastically through 2030 and concluded on the basis of a “stress test” it conducted that it was “doubtful the City could cover the additional funding requirements from current resources,” suggesting that additional sources of revenue might be generated by tax increment finance districts or benefit assessment districts.

Both of  these revenue sources rely heavily, if not solely, on property taxes or other real estate  assessments. Porter also recommended Honolulu devise a “specific plan as to how the  City would fund project cost increases from resources that would require no further  approvals.” This recommendation suggests finding a way to raise money that would not require a taxpayer vote.

Opening day of the legislature on the House of Representatives side.  21 jan 2015. photograph Cory Lum/Civil Beat

It’s unlikely the Legislature will approve another rail tax extension anytime soon.

Cory Lum/Civil Beat

The $1.7 billion in HART O&M cost projections presented to both the Legislature and City Council in February included $162.1 million in updated calculations. After being offset by an estimated $511 million in rail revenue, the deficit would be $1.2 billion – money that would have to come from somewhere other than GET surcharge collections.

According to Porter’s 2012 analysis, HART’s original projected operating costs were calculated on the basis of data obtained from the 2010 bid submitted by Ansaldo, which ended up with the contract to produce HART’s railcars and provide the “core systems” that will operate the driverless trains.

If the Ansaldo contract remains intact, and is extended for the optional five-year period, based upon core systems operating cost projections provided to the Legislature, HART has contracted to pay Ansaldo some $103.3 million less that the costs the contractor itself expected to incur – something that could require a contract amendment or issuing change orders.

What is not covered by Ansaldo’s contract, according to the Porter analysis and HART’s own financial plan submitted to the FTA in support of its application for $1.55 billion in  federal funding, are operating responsibilities HART must pay for itself. HART’s responsibilities include guideway structural inspections and maintenance, security patrols, station maintenance including elevators and escalators, fare collection and overseeing Ansaldo’s operations.

Transit Authority Costs Have Yet To Be Determined

Just how accurate HART’s projections of its own O&M costs will prove to be is unknown. For example, HART has yet to select a fare collection system and begin the bidding process for its installation let alone establishing how much the system will collect for each ride.

In 2012 the cost of services HART would be required to provide were estimated to total around $161 million, or 10  percent of total railroad operating expenses, not including HART staff and management  payrolls.

Based upon estimates provided to the Legislature this year, HART’s share of  overall operating costs through 2031 has ballooned to some $784.4 million, including estimated minimums of $275.5 million for electricity and $196.2 million for HART’s “O&M rail administration” — expenses that must be shouldered by the city.

Worker use equipment to build rail foundations off of Kualakai Parkway near Kapolei with concrete rail (foundations) in the background.  Kapolei, Hawaii. 14 November 2014. photograph Cory Lum

Construction is already underway on Honolulu’s rail project, yet there are still a lot of questions about the finances.

Cory Lum/Civil Beat

HART confirmed the cost of electricity is not included in the Ansaldo contract, but the mechanics of how electric bills will be paid has yet to be decided. Ansaldo could “pass through” power costs to the city for reimbursement or the city could pay the utility directly.

HART said “that will be determined through ongoing discussions with the utility companies and agencies.”

What’s included in the “O&M rail administration costs” isn’t detailed, so at this point taxpayers, and future commuters have no idea how much they’ll ultimately be dunned for funding their quasi-independent rail transit authority. One key element will be the overall cost of salaries and benefits for HART employees, and how much of this will be apportioned to rail administration.

During its first full three years of existence HART spent $50.7 million for its own operations with almost 90 percent — or $45.6 million — paid out in salaries and benefits for direct HART employees and city workers performing full-time services to the authority, as well as payments to consultants performing work under personal services contracts that do not include benefits. Of this total amount $2.6 million was paid for Central Administrative Services fees to the city for providing accounting, legal and other work. Those administrative services agreements expire in 2016 and may or may not be renewed.

HART’s budget for the current fiscal year is about $21.4 million – including $13.8 million in compensation and fringe benefits. Actual costs won’t be known until the agency’s books close on June 30. HART’s preliminary budget for 2016 is $21.2 million, with $14 million in anticipated personnel costs. Although HART has included $195,000 in its 2016 budget for Other Post Employment Benefit costs, what hasn’t been addressed is HART’s growing unfunded OPEB and pension fund liabilities.

How much HART’s payroll will increase over the next 16 years is anybody’s guess. As of May 31 HART had 127 of 139 authorized full time positions occupied — 106 by city employees and 21 by project management support consultants. Once full commuter rail service begins, it’s uncertain how many contractor positions will be transitioned to full-time city employees and how much additional staff will be added.

“They seriously need to look at what their operating costs are going to look like. You need to figure out how to pay for what you build.” — State Sen. Jill Tokuda

And nobody knows how inflation and future labor negotiations will impact HART’s payroll.

Finding the money to cover O&M costs — including HART’s share — will be a continuing quandary for City Council members who may not have fully understood the magnitude of the obligation they were facing or how close HART might be to the financial third rail.

HART’s original 2012 project projections — which have only been minimally revised since they were included in the application for federal funds nearly four years ago — estimated the cost to operate an integrated bus-rail transit system through 2030 would exceed combined fare revenues from both bus and rail by $5.9 billion, requiring the city to cover that deficit.

Cash flow projections submitted to the Legislature in February contained substantially the same numbers provided to the FTA in 2012 with just a few minor adjustments related to a possible GET surcharge extension. And, unlike the 2012 estimates that included projections of the total cost of operating subsidies required for the entire integrated bus-rail transit system — state lawmaker’s considering the surcharge extension were only provided with HART’s share of those expenses.

But even these numbers may change. HART is scheduled to present a more detailed revision of its overall financial plan next month.

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