A bill that would bail out Honolulu’s floundering rail project with about $2.4 billion from Oahu taxpayers and hotel guests statewide contains one key provision missing from earlier proposals: a requirement that the Hawaii State Auditor conduct a sweeping audit of the rail project and its manager, the Honolulu Authority for Rapid Transportation.

The audit requirement follows calls from rail opponents for HART to conduct a “forensic audit” of the entity’s management.

It also follows a 2016 audit by the Honolulu City Auditor. Conducted at a time when the project’s anticipated costs had risen by $1.3 billion, to $6.5 billion from an earlier estimate of $5.2 billion, the audit sparked acrimony between the City Auditor and HART.

The bill is expected to be taken up by lawmakers in a special session that begins Monday. The bill is scheduled to go before the Senate Ways and Means Committee 3 p.m.

HART rail guideway car photo op Farrington Hwy Waipahu Sugar Mill train wide1. 30 may 2017
A $2.4 billion rail bailout bill asks the State Auditor to examine the project’s finances and contracting, Cory Lum/Civil Beat

Among other things, the audit found that HART lacked information on project costs, including support for $46 million in cost overruns and $120 million in utility costs. HART strongly objected to the findings and accused the auditor of being politically motivated and intentionally misleading the public.

Bill Brennan, a HART spokesman, acknowledged HART’s concerns with the 2016 audit but said HART generally welcomes audits and frequently subjects itself to such reviews, including a December 2016 financial audit by KMH LLP, an independent consulting and accounting firm.

The rail is now expected to cost about $8.2 billion in construction costs ($10 billion when financing costs are added in), although that price tag also appears to be in dispute. (See related story.)

In a plan submitted to the Federal Transit Authority in April, HART estimated the project would cost $8.165 billion to complete, and legislative leaders have used that figure to craft a bailout plan valued at approximately $2.4 billion, including about $1.046 billion from an increase in Oahu’s general excise tax and $1.3 billion from an increase in the statewide hotel room tax.

But Honolulu Mayor Kirk Caldwell now says the project needs about $8.7 billion.

In any case, the Legislature’s proposal is designed to give the project the extra money it needs only to finish building the 20-mile rail line from East Kapolei to Ala Moana Center, but not to operate it.

The audit requirement would add an extra level of accountability over the rail project.

Ethics commission. Les Kondo. 27 may 2015. photograph by Cory Lum/Civil Beat
State Auditor Les Kondo has been asked to conduct an extensive audit of the Honolulu rail project. Cory Lum/Civil Beat

The rail bill’s audit provision goes beyond analyses that are standard in a government performance audit, including an examination of HART’s financial policies and records, procedures related to design and construction, and payments made to contractors and subcontractors.

The bill also asks the auditor to identify alternative routes and options and projected costs for each alternative. In addition, the bill asks the auditor to see if HART is complying with its funding agreement with the Federal Transit Administration. And it asks for the auditor to obtain from HART “a detailed financial plan” on how HART and the City and County of Honolulu intend to pay for operating the rail, without additional state money.

Finally, the bill asks the auditor to review “any other subjects that the auditor deems necessary for review, to determine whether funds received by the Honolulu authority for rapid transportation from the county surcharge on state tax are being managed and used in a reasonable manner.”

Such an extensive description can help an auditor produce a report that addresses lawmakers’ concerns, said Drummond Kahn, a former director of audit services for the City of Portland who is a past president of the Association of Local Government Auditors.

The Hawaii State Auditor is staffed with a multi-disciplinary team that includes performance auditors, accountants, attorneys, journalists and professionals with expertise in other fields. The office conducts its audits according to Generally Accepted Government Auditing Standards used by the U.S. Government Accountability Office.

Although these so-called “Yellow Book” standards lay out a broad framework for conducting audits, the Yellow Book also allows for flexibility. While one audit might focus on financial statements another could look at the management controls that help make sure the organization is effective and efficient, Kahn said. Yet another could focus on certain types of transactions.

“The clearer the audit objective the better the audit report will meet the needs of the organization,” said Kahn, who stressed he was speaking generally and not about the rail project or the bill, which he said he had not seen.

“Setting an audit objective is a Goldilocks question: Is it too broad or too narrow or just right?” said Kahn.

“You’ve got to be very attentive to the way you phrase the question. What are you perceiving as a problem that’s driving this question?” — John Woolley, Washington state deputy legislative auditor

John Woolley, deputy legislative auditor with the Washington State Legislature’s Joint Legislative Audit & Review Committee, agreed. Woolley said the key is for lawmakers to clearly frame the questions they want the audit to answer.

“You’ve got to be very attentive to the way you phrase the question,” Woolley said. “What are you perceiving as a problem that’s driving this question?”

Rail critics had asked HART to conduct a forensic audit to figure out why costs had ballooned and whether fraud or malfeasance had occurred under HART’s watch.

The current bill does not require a forensic audit, but Natalie Iwasa, a certified public accountant who has publicly called for greater accountability over the rail project, said she was pleased with some aspects of the bill, particularly that it lets the auditor expand the scope if necessary.

But Iwasa said it’s important that the State Auditor’s office have the skills to do what the Legislature wants.

“The goal is to actually look for fraud, waste, and abuse, and to do that requires the right skills,” she said.

Randy Roth, a retired tax law professor who also has urged a forensic audit, said he had not seen the bill but that he heard it is going in the right direction.

“I’ve had a couple of people describe it to me, and I think they’re talking about a pretty thorough inquiry of why the cost has gone up exponentially without an explanation of why that happened,” Roth said.

Still, he questioned why the Legislature would commit more money for the rail before the auditor completes the report, which is due 20 days before the start of the 2019 legislative session.

Reporter Stewart Yerton worked for the State Auditor for several years before joining Civil Beat.

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