The Honolulu City Council enters the new year with push coming to shove on the $6.6 billion commuter rail project.

For months, Honolulu Authority for Rapid Transportation officials have appeared before the full council and its budget committee urging the leaders to approve a five-year extension of the 0.5 percent general excise tax surcharge for rail.

The rail agency estimates the extension will generate about $1.5 billion in additional revenue through 2027, money it desperately needs to cover overruns that have already reached about $900 million.

HART officials say that money is crucial to completing the 20-mile system from East Kapolei to Ala Moana Center.

As the City Council prepares for a final round of public hearings and an ultimate decision on the extension, lawmakers must determine whether Honolulu taxpayers are buying a pig in a poke.

Pressure for quick council approval has been mounting since Gov. David Ige signed a bill last July authorizing an extension — but giving local lawmakers a year to approve its actual implementation. And the state made it clear that Honolulu could not make another trip to shake the money tree.

HART says it can’t wait much longer for the council to make up its mind. With the first of the final round of public hearings scheduled Wednesday, pivotal questions remain:

Will the extra money be enough to complete the project?

No one really knows how much the rail project will ultimately cost Honolulu taxpayers.
No one really knows how much the rail project will ultimately cost Honolulu taxpayers. Cory Lum/Civil Beat

Nobody knows what the final cost of building the rail system will be. When the Federal Transit Administration approved the project in 2012 and agreed to contribute $1.5 billion, HART estimated total project costs would be $5.1 billion. Today, that estimate has jumped by almost 30 percent to around $6.6 billion.

Coming up with accurate estimates of the final costs is HART’s biggest quandary. Until the council approves the tax surcharge extension and the rail agency is assured of the additional revenue, it can’t provide the FTA with a revised baseline budget, something federal officials have been demanding for months. To underscore those demands the FTA had said it could delay releasing the next $250 million allotment until the council makes up its mind.

According to HART’s most recent reports it has already spent $447 million in federal funds with $109 million remaining from its last allotment, but will receive no more until the surcharge extension is approved. At the same time, HART says council inaction could delay awarding of the final two major construction contracts, something that could push costs even higher for a project that is already nearly two years behind schedule.

Will HART’s cost containment strategy work?

CEO for the Honolulu Authority for Rapid Transportation (HART) answers questions from the Honolulu City Council on June 4, 2014.
HART Executive Director and CEO Dan Grabauskas says his plans to reduce project costs appear to be working. PF Bentley/Civil Beat

HART’s most difficult hurdle in producing accurate cost estimates has been its partial reliance on projections made nearly four years ago when the final financial plan was submitted for FTA approval. With changing economic conditions and other unanticipated circumstances, those early projections have proved to be off-base in several areas.

Project costs have escalated far above original estimates and revenues have dropped millions below what the FTA was told they would be. Although HART updated many of its estimates several times last year, its inability to produce a more precise bottom line has been hampered by the uncertainty of additional surcharge collections needed to balance its checkbook.

For example, in 2012 HART estimated construction costs would increase an average of 4.5 percent annually. Instead they jumped by an average of 10.3 percent for 2013 and 2014 and are estimated to go even higher during the next two years.

HART has worked to reduce construction costs through repackaging contracts and making other reductions. When bids for the first nine stations came in 60 percent over the agency’s own estimates, HART re-bid the work in separate packages of three stations each.

Although its repackaging strategy appears to have saved some money, HART has hedged its bets with revised project cost estimates that added an additional $539 million in contingency funds – $240 million allocated for construction cost overruns and $299 million in “unallocated” money to cover unexpected expenses.

The unallocated contingency may come in handy. One of the project’s biggest financial unknowns is the final costs for utility relocations and other expenses related to work being performed by Hawaiian Electric Co.

Despite more than doubling the cost estimates in October from $50 million to $120 million for potentially having to lay HECO power lines underground along portions of the Dillingham Highway guideway and other potential costs related to the location of power poles, HART has no idea what its final HECO bill will be.

Already it appears that HECO costs have increased even more. In a Dec. 23 letter responding to council questions, HART executive director Daniel Grabauskas further quantified those costs, saying a total of about $157 million has been budgeted for laying underground power lines — $67 million in the original project plans and an additional $90 million for increasing the scope of the work.

Grabauskas said the final costs will be “determined by the contractors” bidding on the remaining airport and city center sections of the project. He added that discussions with HECO on other matters related to utility work on the western half of the rail line were ongoing and several options were being considered, but any additional costs would come from HART contingency funds.

In addition, HART may be on the hook to reimburse HECO for some, if not all, of any additional wages and benefits the utility may be required to pay if the U.S. Department of Labor denies its request to waive requirement of the Davis-Bacon Act — an 84-year-old federal law requiring contractors and subcontractors on all projects receiving federal funding to pay the “locally prevailing wages and fringe benefits for the same work performed on similar projects in the area” as determined by the labor department.

Existing HECO labor contracts contain wage scales and pay periods that do not fully comply with federal requirements. HECO’s request for a waiver of those requirements was initially denied and has been appealed.

And then there’s the Pearl Highlands parking garage. Back in 2012 HART estimated the cost for the garage, an attendant freeway off ramp and bus transit facility would be $173 million. The agency’s updated plan now pegs the cost at $240 million — but doesn’t directly include the $110 million cost of the garage. Instead HART hopes to come up with that money through a public-private partnership.

How much will the city pay to run the trains?

Lone HART rail car displayed inside Kapolei Hale. 20 may 2015. photograph Cory Lum/Civil Beat
It’ll be awhile before rail cars are zipping between Kapolei and Honolulu, but that hasn’t stopped some politicians from worrying about how to pay for those operations. Cory Lum/Civil Beat

Paying for construction of the railroad is one thing. Covering the cost of running the trains is something else again, especially when GET surcharge revenue can’t be used except for the $193 million HART expects to have left over from construction to use for operations and maintenance.

Future operating costs have been a concern for some state legislators and City Councilman Joey Manahan, but the current focus on a surcharge extension has seemingly put the issue on a back burner.

Whatever the cost, Grabauskas told Civil Beat last June it’s not HART’s problem. Operations and maintenance costs are the city’s responsibility.

At the same time Mike Formby, the city’s director of transportation services and a HART board member, said the city was working on a plan to address these costs but had to resolve several other issues first such as fare pricing and integrating Honolulu’s bus and Handi-Van operations.

Whatever  transit plan the city devises for getting people from one place to another, taxpayers will be tapped for hefty subsidies to pay for municipal transportation.

Based upon the city’s 2012 projections submitted to the FTA, from 2016 — when rail was expected to begin limited operation — to 2030 the city estimated it would collect $1.8 billion in combined fare revenues, with less than 30 percent actually coming from rail.

During the same period the city calculated that combined operations and maintenance expenses for bus, rail and Handi-Van would be about $7 billion, requiring a subsidy of about $5.2 billion. Some, if not all, of this subsidy would likely come from the city’s general fund, which is replenished annually with hundreds of millions in property and other taxes.

Revised estimates prepared for the Legislature last year focused solely on rail and projected an $894.5 million deficit from 2019, when limited service is now expected to begin, to 2030. This deficit could increase substantially depending upon HART’s actual construction surplus.

Much of this deficit will be created by HART’s share of the operations and maintenance costs not included in Ansaldo’s (now Hitachi Rail’s) $1.4 billion contract to design and manufacture HART’s railcars and provide the “core systems” that will operate the driverless trains.

That contract included $824 million for operating the system during an interim service period – originally scheduled to begin last month, but now delayed until at least 2019 – and the first five years of full service plus an optional five-year period that could be terminated by HART.

Excluded from that contract was HART’s $709.5 million share of the operations and maintenance costs, which included an estimated $250 million for electrical power and $175.9 million to cover HART administrative costs.

How much sway does Ernie Martin have, really?

Honolulu City Council Chair Ernie Martin. 2 sept 2015. photograph Cory Lum/Civil Beat
Honolulu City Council Chairman Ernie Martin wants to have more control over the rail project. Cory Lum/Civil Beat

Honolulu City Council Chairman Ernie Martin has drawn a hard line on extending the GET extension, saying he won’t support any measure that doesn’t put a spending cap on any new taxes collected from the surcharge. He initially wanted that cap to be $910 million, but based on HART’s latest projections that’s not enough to complete the project to FTA standards.

Several of Martin’s colleagues have pushed back against the cap, saying it’s unrealistic given current realities. The most notable critic of Martin’s cap was Vice Chair Ikaika Anderson, who said he would not support a measure that includes a cap on spending.

The divide sets the stage for a political showdown between Martin and the rest of the council over what to do about extending the tax. HART officials and Honolulu Mayor Kirk Caldwell have made it clear that they don’t support a cap. Council members Kymberly Pine and Brandon Elefante have also proposed measures to remove it, although neither bill gained enough to support.

What remains to be seen are the final oversight mechanisms the council inserts into the tax-extension bill to keep tabs on HART. Martin’s proposal included several provisions that will require HART to disclose more information to the council about the project, including details about how much subcontractors are being paid.

Anderson has also said he will put forth a bill that will call for more council control over approving change orders on the project. These details will have to be hammered out before any final tax extension can be approved, which is expected to occur this month.

What does this all mean for the 2016 Honolulu mayoral race?

Will Honolulu Mayor Kirk Caldwell hold on to his seat in 2016?
Will Honolulu Mayor Kirk Caldwell hold on to his job in 2016? Cory Lum/Civil Beat

Caldwell is up for re-election, and although no serious candidate has officially announced a challenge, Martin has expressed his desire to seek higher office in city government. And the council chairman sure hasn’t let the rail project’s persistent fiscal woes go to waste.

Martin has used the tax extension to slam HART and the administration for lax oversight of the project. He’s also openly questioned whether the city should break its $1.5 billion contract with the FTA so that Honolulu is not forced to build a “seriously flawed and mismanaged project.”

Martin is not the only critic of the project who might run for mayor, however. Former Lt. Gov. Duke Aiona — who ran for governor as a Republican in the last two elections — has said Caldwell is doing a “terrible” job and is considering his own run for office.

Unlike Martin, Aiona does not support the rail project, saying it’s too expensive. Anti-rail sentiment is alive and well on Oahu, and the former judge stands to gain a baseline of support simply because of his stance.

Former Gov. Ben Cayetano took this tack in 2012 and nearly pulled it off. Cayetano was a front-runner for much of the campaign. He eventually lost to Caldwell in a runoff after pro-rail groups — and in particular the Pacific Resource Partnership — spent millions of dollars to undermine Cayetano’s candidacy.

Could history repeat itself if Aiona decides to run? And how would Martin’s candidacy play in a three-way race for mayor?

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