Honolulu’s 20-mile elevated rail project estimated to cost nearly $1 billion more than anticipated.

LOS ANGELES — Honolulu City Council members are balking at a request to issue $350 million in commercial paper for the city's delayed and over-budget elevated rail transit system.

"If we float bonds for them, how are they going to repay them?" Ann Kobayashi, chair of the City Council's budget and finance committee, said in an interview Wednesday. "They don't even have enough money now to stay afloat."

The question came to a head earlier this month at a finance committee meeting in which the Honolulu Authority for Rapid Transit brought an updated financing plan for the 20-mile elevated rail project.

If the current estimates are sound, the project, once expected to cost $5.2 billion, could come in at more than $6 billion.

The new debt would be a bridge loan until federal grant money comes in, but it is not enough to cover the shortfall, Kobayashi said.

HART has received $806 million of the $1.55 billion promised in a full funding agreement through the Federal Transit Administration, with another $250 million installment agreed to by Congress in December, according to HART officials.

In addition, the project has received $1.3 billion from a local general excise and use tax surcharge for the project.

The GET surcharge is supposed to bring in $3.4 billion over its life but is running 3% behind projections.

The authority's Project Risk Update released in December calls for the authority to issue $20 million in variable rate bonds in 2015 in addition to the $350 million in commercial paper discussed at the hearing. HART wants the City Council to approval a memorandum of understanding between the authority and city in time to issue the commercial paper by June.

The update's cash flow chart also includes plans to issue $230 million in variable rate bonds and $243 million in fixed-rate bonds in 2016. In 2017, HART would issue $248 million in fixed-rate bonds, and another $272 million in fixed-rate bonds in 2018. The original plan would have been to pay off the bonds shortly after the project is completed in 2019.

The authority had announced in December projected overruns could be as much as $700 million. It came out Tuesday that the total is actually more than $900 million, Kobayashi said.

HART officials had been counting on using $200 million in federal funds that were designed for the city's bus system.

The 5307 federal urbanized Area Formula Program funds were included in the financial plan as a backup, but when HART officials said earlier that they did not plan to use the funds, Kobayashi said she and others believed that was because the authority did not need the funding. The city also needs the funding for its aging bus system.

HART chief executive officer Dan Grabauskas' presentation to the budget and finance committee Jan. 14 didn't account for the inability to use bus funding as part of the agency's projected $500 million to $700 million shortfall.

The committee hearing was to discuss a memorandum of understanding crafted by Honolulu Budget Director Nelson Koyanagi Jr. The MOU lays out the terms by which the city would issue general obligation bonds and commercial paper for HART.

Councilman Trevor Ozawa said during the hearing he wants the MOU to include more details about the financings.

"It is scary to us to float bonds using the full, faith and credit of the city to an entity that has a $1 billion shortfall," Kobayashi said.

That means if HART can't make the payments, the city would have to raise taxes on people's houses to cover debt service, she said.

Kobayashi and other council members want better assurances that will not happen before they approve the MOU.

The council would like to know how much the entire project will cost, which up until now has been a moving target, she said. The council also wants to know exactly what contracts still need to go out and how much they are going to cost.

She said a bank would not lend the authority money based on the information they have provided, so the city shouldn't either.

Grabauskas was not available for an interview. At the hearing, he described a trifecta of lagging tax revenues, rising construction costs and project delays as the reason for the shortfall.

Lawsuits filed on environmental grounds that resulted in 13 months in delays led to $190 million in delay claims from contractors who were not able to start work. Revenues from a 0.5% general excise tax on Oahu dedicated to the project were $40 million under projections as of fourth quarter 2014. Then bids received on the final 60% of the project came in several hundred million dollars more than anticipated.

"Legal and delay costs have had a cumulative effect and pushed us into a more competitive construction market resulting in bids coming in significantly higher," Grabauskas said in a Dec. 19 prepared statement. "To meet these challenges, we are repackaging and recalibrating our contract solicitations to further reduce scope and costs."

He told the committee that 60% of the project's contracts were issued in a favorable market and came in under budget. When the agency received the bids on the remaining 40% of the project in August, officials got a rude awakening.

When the bids came in several hundred million more than anticipated, he said that HART officials made a decision to recall the request for proposals, speak with contractors about why the bids came in so high and reissue it in a way that might result in cost savings. They are hoping to realize 20% savings from the original estimates on the reissue.

A decision was made to split the remaining project into three parts creating smaller jobs, so that local and smaller contractors could bid, making the pool more competitive, he said.

Trust is also a factor for council members, who first found out about the shortfall through media reports, Kobayashi said.

"It is hard to make a loan — when we have been dealing with this since 2004 — and so many things we have been told have turned out to not be true," Councilman Ikaika Anderson said during the committee meeting.

One of the amendments Koyabashi asked for before the MOU comes back to the finance committee's Feb. 11 meeting is that a line be added that not so much as a comma can be changed in the MOU without the agency returning for council approval.

Honolulu Mayor Kirk Caldwell was in Washington, D.C. this week for the U.S. Conference of Mayors, where he plans to meet with the FTA in an effort to secure additional federal funding for the rail project.

The mayor and HART officials are hoping to get state legislators to stretch out the sunset on the GET past 2020 to cover the additional costs of the project.

In a prepared statement issued in December, Caldwell said the rail project is "an essential part of our public transportation system and is critical to West Oahu and to the Island's overall future."

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