- Special Projects
When the Legislature takes up a $2.4 billion bill to bail out the struggling Honolulu rail project on Monday, the carefully crafted deal faces three main obstacles.
Two were almost sure to arise in the face of the proposed deal; a third surfaced late last week, accompanied by a flurry of dueling news releases and memos from Honolulu Mayor Kirk Caldwell and members of the Legislature.
Lawmakers are suspicious that Caldwell is trying to rake in more money from taxpayers than the project actually needs.
Hotel operators insist visitors will stay away from Hawaii if the price to stay here rises any higher.
And neighbor island political leaders say it’s just plain unfair to tap their hotels and visitors to pay for a train on Oahu.
Any of these issues could derail the rail bill when lawmakers convene on Monday to start what’s expected to be a five-day session.
Initially projected to cost about $5 billion, the elevated rail now could cost as much as $10 billion, depending on the financing source.
The current taxing plan combined with federal funding is expected to bring in about $6.545 billion. But that leaves the project about $2.378 billion short, according to the Hawaii Department of Budget and Finance.
During the legislative session earlier this year, the House wanted to cover the shortfall mainly through an increase in the state’s hotel room tax. The Senate preferred an extension of the 0.5 percent rail-designated surcharge to the general excise tax paid on almost all goods and services sold on Oahu. The result was a stalemate and no deal.
It seemed unlikely that Senate President Ron Kouchi and House Speaker Scott Saiki would call a special session unless the two sides could agree.
Now there seems to be just such a deal. The compromise would raise about half the money from each source: $1.046 billion through a general excise tax increase and $1.3 billion through a hotel room tax increase.
With the Federal Transit Administration, which promised approximately $1.55 billion for the project, wanting to see a bail-out plan by Sept. 15, time is running short.
Here’s what could push the fragile agreement off track and turn the special session into a five-day train wreck.
When the Honolulu Authority for Rapid Transportation, the agency created to oversee rail construction, outlined its plan for saving the troubled project in a document sent to the FTA in April, HART estimated the cost to be $8.165 billion, not counting interest and financing fees.
That’s the number the Legislature used when crafting the bailout, said Sen. Donovan Dela Cruz, the chairman of the Senate Ways and Means Committee. Based on that figure, the Legislature’s $2.4 billion package would be more than enough to pay for the project, Dela Cruz said in an interview.
House Speaker Scott Saiki agreed.
“HART’s report makes clear that the cost is $8.165 billion,” Saiki said. “And the $8.165 includes contingency costs.”
But now the city says it needs about $8.7 billion. And lawmakers are accusing Caldwell of padding the tab.
On Friday, Caldwell issued a news release saying HART needed $3 billion. He said Oahu taxpayers would have to make up any shortfall – up to $1 billion, the mayor estimated – with property taxes. Despite the Legislature’s announced plan, Caldwell’s statement assumed the bailout would be financed entirely with general excise taxes.
“The shortfall is $3 billion, of which $1.5 billion of the shortfall is construction costs, and the remainder is in financing costs,” Caldwell wrote.
Caldwell has long called for Oahu taxpayers to foot the bill for rail with a GET increase. So Friday’s news release was nothing new.
But it seemed out of touch with the discussions over the past two weeks – not just the bailout proposal, but also statements made by key legislators weeks ago, in public, to Caldwell and his staff.
On Aug. 14, during an all-day briefing at the State Capitol, lawmakers rejected Caldwell’s repeated call to pay for the rail by extending the half-percent GET surcharge in perpetuity, instead offering to give it a three-year extension. The surcharge is set to expire in 2027.
Dela Cruz and his powerful House counterpart, House Finance Committee Chair Sylvia Luke, both pointed out that the GET extension would cost Honolulu taxpayers $1.5 billion in interest and other financing fees. In other words, half of the $3 billion paid by taxpayers would go to banks, not the rail.
That’s because under Caldwell’s preferred plan, HART would have to borrow money to pay costs now and pay off the loans, with interest, from revenue that won’t start coming in until 2028.
By creating a new source of revenue immediately, like a new hotel room tax, taxpayers could save as much as $1 billion in interest, Luke said.
“A billion dollars is nothing to laugh at,” Luke said during the briefing.
Caldwell left the briefing early and didn’t hear all of the legislators’ remarks, but his chief of staff, Gary Kurokawa, was there to face blistering criticism from lawmakers, who made clear they were not inclined to fund rail with the general excise tax.
Since then, lawmakers have been circulating an analysis from the Department of Budget and Finance showing the project will save about $208 million in financing costs by relying on the hotel room tax rather than completely on the general excise tax.
In an interview Saturday, Dela Cruz said it would be irresponsible to spend hundreds of millions of dollars on interest payments when the state faces major liabilities for items such as the state employee health and retirement funds.
“We have too much of our own liability,” he said. “There’s no way.”
While the Legislature’s plan to extend the GET surcharge by three years estimates the extension will raise about $1.046 billion, Dela Cruz said that number is conservative.
Hawaii Department of Budget and Finance based its estimate on a general excise growth rate of 3 percent. That compares to a 4.6 percent growth rate HART predicted in its submission to the FTA.
“The fact is he’ll get a windfall if his numbers actualize,” Dela Cruz said of Caldwell.
Still, there has been no shortage of drama between the mayor and his fellow politicians.
“Colleen Hanabusa summed it up best when she said it looks like the mayor is trying to cover for something.” — House Speaker Scott Saiki
Caldwell and Kurokawa met privately with legislative leaders last week to discuss a deal. U.S. Sen. Brian Schatz and Congresswoman Colleen Hanabusa, the former chairwoman of HART, were also there. It ended with Caldwell storming out.
The Honolulu Star-Advertiser reported Caldwell was upset with the tone of the meeting, which apparently included a criticism of his leadership and honesty. He also told the newspaper that it appeared that at least one lawmaker, who he declined to name, was drunk during the meeting.
Sen. President Ron Kouchi admitted that tensions were high in the room, but he told Civil Beat that as far as he was aware no one had been drinking, as the mayor alleged. Kouchi refused to disclose who was involved in the negotiations, saying that he didn’t want to go “tit-for-tat” with Caldwell in the press.
“The discussion got a little passionate and the mayor chose to leave,” Kouchi said. “That’s my take on the whole thing. But we were hoping to work together.”
Regardless, it appears Honolulu’s mayor has a credibility problem with his counterparts.
“Colleen Hanabusa summed it up best when she said it looks like the mayor is trying to cover for something,” House Speaker Saiki said.
Caldwell’s spokesman did not return calls seeking comment for this story.
In addition to the three-year general excise tax extension, the proposal would raise Hawaii’s hotel room tax by 1 percentage point, from 9.25 percent to 10.25 percent, for 13 years. The industry says this is too much for an already highly taxed industry.
Visitors to Honolulu now pay 13.75 percent of the cost of a hotel room in taxes, counting the hotel room and general excise tax. That puts Honolulu toward the middle of the top 150 urban centers based on total lodging tax-rate ranking for 2015, according to tourism consulting firm HVS Convention, Sports & Entertainment’s “2016 HVS Lodging Tax Report – USA.”
The proposal would increase the tax to 14.75 percent, or about $34 for an average Waikiki hotel room, based on an average daily rate of $234.84 provided by Outrigger Hotels and Resorts based on market data from the firm STR (formerly Smith Travel Research).
A 1 percentage point increase would equal about $2.35, based on the Waikiki average.
The question is whether that increase will drive tourists away. So far it hasn’t.
During the Aug. 14 briefing at the Capitol legislators peppered Outrigger’s spokesman, former Hawaii Congressman Ed Case, with questions about resort fees. Hotels have begun charging as much as $35 for items that once were part of the cost of a room; one Waikiki hotel, for example, charges $15 for “amenities” that include pool access and an in-room safe.
In light of the resort fees, the industry’s stated concerns that a cost increase will drive away tourists seem disingenuous to Sen. Donna Mercado Kim, a former Senate president. The concern about price “hasn’t stopped the industry from raising rates and imposing resort fees,” Mercado Kim said during the Aug. 14 briefing.
Perhaps more persuasive are data from the Hawaii Department of Taxation. In an Aug. 10 presentation to the Hawaii Tax Review Commission, Seth Colby, a DoTAX economist, said there was no evidence that the hotel room tax, known as the TAT, had affected visitor arrivals or expenditures.
Still, tourism officials are worried.
“Tourists can and do vote,” Case said during the rail briefing this month. “They vote with their feet.”
The issue for some neighbor island lawmakers is that their hotel guests would end up footing the bill for the Oahu rail.
Tom Yamachika, president of the Tax Foundation of Hawaii, a nonpartisan think tank, said he has heard that argument but asks whether the people lodging the complaints realize that Oahu supports neighbor island projects, such as hospitals and airports.
“What would they do if Honolulu’s residents said, ‘We’re not paying for it because we’re 80 percent of the population,” Yamachika said.
Still, Yamachika said the neighbor island reluctance to force their tourists to pay for rail could upend the deal.
“It’s a point I’m hearing, and there are some lawmakers who are very serious about it,” he said. “The argument is going to sway some lawmakers, and it might make a difference.”
Civil Beat reporter Nick Grube contributed to this article.