Honolulu rail project gets a scathing audit ahead of bond sale

Hawaii’s state auditors released two reports highly critical of Honolulu’s 20-mile rail transit project just ahead of plans to price $250 million in general obligation bonds for the project.

Construction costs for the 20.1-mile automated elevated transit line project have ballooned to $8.29 billion from the original estimate of $5.1 billion in 2012.

Honolulu Authority for Rapid Transit train testing at the under-construction Pouhala station in May 2018.

The bonds are takeout financing for $144 million in commercial paper the City and County of Honolulu has issued for the rail project. The remainder helps to fund ongoing costs to build the rail system. A retail order period is planned for Tuesday with institutional pricing set for Wednesday.

The bonds will be sold in two tranches: the $212.2 million Series 2019 A have maturities from 2023 to 2030 and the $38.2 million Series 2019B have maturities from 2019 to 2043.

Bank of America Merrill Lynch is senior manager and Piper Jaffray is co-manager. Orrick, Herrington & Sutcliffe is bond counsel.

The GO backing of the bonds is likely to insulate them from any audit-related turbulence. Moody's affirmed its Aa1 rating of Honolulu GOs Wednesday. Fitch Ratings assigned its AA-plus rating to Honolulu's most recent GO deal in September.

Honolulu Mayor Kirk Caldwell declined to comment on whether he thought the audit might affect the bond sale.

The audit report released Monday is the second of four planned by State Auditor Les Kondo.

The first audit report released last week blasted the Honolulu Authority for Rapid Transportation and the city for rushing the project and hiring contractors two years before the financials were solid, resulting in massive cost overruns. That report claimed that prematurely awarded rail contracts resulted in delay claims and change orders that increased the cost of the project by more than $354 million.

“Over-promise, under-deliver. It has been the hallmark of the Honolulu Rail Transit Project’s near decade-long stop-and-go journey,” the report concluded. “We also found that from the beginning these unrealistic projections resulted from a desire to demonstrate that the project was progressing satisfactorily and to minimize public criticism, which could have eroded public support.”

The second audit released Monday criticized the use of third-party consultants, who it contends have been used extensively in decision-making that should have been done by rail authority personnel. It also criticized management for not keeping board members informed of contract changes.

The audit noted that the Federal Transit Administration was also critical of HART’s use of outside consultants. The FTA recommended that HART hire city employees to eventually replace the embedded consultants to “have more ownership and maintain stronger control of the project," the audit said.

Four of the top five construction positions including project director and director of design are held by employees of consultant HDR Engineering, Inc., not city workers, the audit said.

The FTA has yet to release the final $744 million of the $1.55 billion in federal funding it agreed to contribute. Concerned about cost overruns, the FTA had asked HART officials in June 2018 to present it with a recovery plan for the project by November, a milestone HART met.

FTA also required that the city issue $44 million in short-term notes to demonstrate its commitment to the project and cover cash flow problems. Honolulu received a letter from FTA in December saying all the conditions had been met in order for the federal agency to review the recovery plan.

Honolulu lawmakers approved two measures last year allowing the issuance of bonds up to $494 million. The city and county already issued $350 million in floating rate bonds for the project in September 2017, which are currently callable.

The bonds are Honolulu GOs, but the city and HART have a memorandum of understanding that entitles the city to reimbursement from HART for debt service and costs associated with the issuance of the GO bonds related to rail.

Caldwell applauded the effort put into Kondo’s audit reports in a statement on the first report in which he said “vigorous and constructive oversight of HART makes for better management.”

The mayor added that HART Board member Ember Shinn and her colleagues have adopted and are implementing internal policies and procedures that affect decision-making responsibilities between themselves and the authority’s executive management.

“I am encouraged that HART is willing to address the auditor’s concern about bringing greater transparency to overall project costs, including contingency amounts,” Caldwell said.

Nelson H. Koyanagi Jr., Honolulu’s budget and fiscal service director, didn’t return calls or emails seeking comment about the upcoming bond sale.

Keli‘i Akina, president of the conservative think tank Grassroot Institute of Hawaii, said, “Hawaii’s taxpayers deserve public servants who hold truth and transparency as key values in their work. This audit has shown that HART staff did not demonstrate these values.”

Akina said he looks forward to seeing the remaining parts of the audit, but his organization still would like an independent forensic audit for fraud, waste and abuse to be conducted.

“It may be the only way to restore the public’s faith in a project that has long been suggested of being handled dishonestly — a suspicion confirmed by this audit,” he said. “It’s no secret that HART is plagued by cost overruns, and that there are major questions about where the money has gone, or whether the rail will ever be self-sufficient. Instead of misrepresenting and hiding information, HART should seek greater transparency, which would help restore some confidence in this out-of-control project.”

The HART board decided in September 2018 to seek a private partner to help pay the $1.4 billion cost of the city center project and build a Pearl Highlands Parking Garage and Transit Center and the final 4.16 miles of rail line from Middle Street to Ala Moana.

HART had completed 46% of the project comprising 10 miles of elevated guideway and a maintenance and storage facility built in West Oahu by the time it made the decision to seek out a P3 partner for the transit center. The project is now 47% complete, according to bond documents.

The project, originally slated to partially open in 2018, is now expected to open in 2026.

The audit was requested by state lawmakers when they approved a $2.4 billion financial bailout of rail in a special session of the Legislature in 2017.

In the special session, the Legislature approved the extension of the 0.5% general excise and use tax surcharge through 2030. The additional revenue is expected to bring in $1.5 billion for total of funding through the GET of $6 billion for the project. The Legislature also dedicated a 1% increase in the state transient accommodation tax to the project, which is expected to generate $1.18 billion through 2030.

That marked the second time lawmakers had to step in to back up the rail project’s finances.

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Primary bond market Public-private partnership Transportation industry Hawaii
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