Rail operations will raise taxes 9%, officials say

It was a short answer to a loaded question: How much will rail operations and maintenance cost Oahu property owners in taxes?

The response was that broadly speaking and “using today’s numbers,” property taxpayers can expect to see a 9 percent increase in rates to subsidize annual operational costs for the 20-mile rail system when it comes online in late 2021.

The 90-second exchange on Jan. 13 between City Council Budget Chairwoman Ann Kobayashi and city Deputy Budget Director Gary Kurokawa was overshadowed by more immediate news that day. The Council Budget Committee had voted 4-1 to give its final approval to Bill 23 (2015), extending the contentious 0.5 percent Oahu surcharge on the general excise tax for five more years — setting the stage for a final vote by the full Council on Wednesday.

The estimate was based on the Honolulu Authority for Rail Transportation’s own early estimates that operations and maintenance would cost $120 million annually with a return at the fare box of 30 percent.

Assuming no other sources of revenue, Kurokawa told the Budget Committee, that would leave a $90 million shortfall for rail each year. This year’s expected property tax take is approximately $1 billion, he said, “so if you need to raise $90 million a year, that would make a 9 percent increase … in the overall property taxes.”

Rail supporters say the 9 percent figure is a worst-case scenario and doesn’t factor in a number of variables. But skeptics say 9 percent won’t be enough and that the annual tab will be much higher.

“The 9 percent number is correct based on the assumption of no other variables,” said Don Horner, HART chairman, adding that he can count at least five variables to consider in Kurokawa’s answer.

A 30 percent fare box recovery ratio, while currently the policy for bus operations, is not necessarily what a transit authority or the Council will set for an integrated rail line, Horner said. The ratio for a transportation system that includes rail is typically closer to 50 percent, he said.

Once up and running, the line will create development projects around stations that will enhance the value of existing properties around rail stations, Horner said. That, in turn, would increase the tax base that the city will be able to tap, he said.

Rail is also expected to increase the efficiency of transit services on the island, he said, because rail operations cost 40 percent less than buses on the route.

Horner said Kurokawa’s scenario also does not consider other sources of revenue, including station and train advertising, rental space for vending and ATM machines, or different fares for kamaaina and tourists.

It also doesn’t factor anticipated cost-saving measures like the use of photovoltaic panels and a reduction in projected staff, he said.

Mike Formby, the city’s transportation services director, agreed that there are too many unknown variables to determine now what property owners will need to pay in taxes.

“We just can’t know that yet,” Formby said. The fare box recovery ratio, by itself, is a complex issue that needs to be decided by the Council with advice from the city transit authority, he said.

Council Transportation Chairman Joey Manahan said he has always envisioned that the 0.5 percent Oahu surcharge on the GET for rail would continue to pay for rail operations.

It makes sense for the city to return to the Legislature for a further extension to help pay for operations, he said. “Hopefully, (state lawmakers) can consider that when the time comes,” he said.

During last year’s session of the state Legislature, HART and the Caldwell administration asked for an indefinite time extension for the surcharge. Instead, the Legislature approved a five-year extension through 2027, with the revenue to be used only for construction costs, not operations.

Caldwell, Manahan and others say using the surcharge to pay for operations is preferable to using property taxes because tourists would help foot a larger portion of the tab.

Using property taxes to pay for rail operations remains “a last, last, last, last, last choice,” Manahan said.

Kobayashi, the Council’s staunchest rail critic, said she had finally received the answer she had been looking for after repeated attempts.

“I think we’re finally facing the reality that, yes, the taxpayers will be responsible,” Kobayashi told the Honolulu Star-Advertiser. “I’ve always said that: that the construction is one thing, but the operation and maintenance goes on forever and ever.”

While some say costs will be lower than projected, Kobayashi said it’s inevitable that costs instead will go up. “O&M costs don’t decrease; they usually stay the same or increase.”

Ridership projections are also questionable, she said. “If the ridership is not there, we will have to subsidize it even more.”

Panos Prevedouros, chairman of the University of Hawaii’s Civil and Environmental Engineering Department and a leading critic, said rail projects have also incurred higher costs and lower ridership than projected.

If ridership comes in at only half of projections and operational costs are higher due to unanticipated issues, as is often the case, Prevedouros said, property taxes could increase by double the 9 percent.

Council Chairman Ernie Martin, a rail supporter who has been critical of HART’s management of the project, said Kurokawa’s projection is bothersome.

“There is little statistical data to validate an estimated 9 percent increase, including what may be overly ambitious ridership projections,” Martin said in an email. “It is troubling to me that we don’t already have a definitive plan to fund operation and maintenance cost. The sooner we develop a plan to deal with O&M, the less pressure will be placed on property tax increases as the source of funds for that purpose.”

Said Horner, “Operating cost is going to be the next priority that we’re going to take a look at as a board to validate those numbers.”

CORRECTION: The City Council is voting on Bill 23 tomorrow. An earlier version of this story and the story in today’s paper said the vote was on Bill 22.