High rail costs demand audit

Even those who support the idea of completing a 20-mile Oahu rail system, as designed, harbor the same burning question that nobody has come close to answering.

Why is this thing costing something approaching $10 billion, almost twice as much as was promised?

That is a question raised about the Honolulu Authority for Rapid Transportation, the agency overseeing construction, in a report filed by city Auditor Edwin Young in April 2016.

That audit was a contentious process, with HART officials rejecting its conclusions. Nonetheless, the auditor’s office ultimately stood by its finding: There’s a need to “improve financial management, planning, project management, contract administration and other operations to ensure the rail project costs are minimized.”

And yes, that means Young found HART needed to improve just about everything in how it operates.

He came back before the City Council last week, and he hasn’t changed his mind. In fact, he put things even more starkly. While he found no evidence of fraud in the conduct of the contractors or the overseeing agency, “the red flags were there.”

Speaking at a Council Budget Committee meeting on Wednesday, Young added that the audit concluded that “internal controls were so weak, that if fraud, waste or abuse were to occur, HART and (others) would not have detected it, could not prevent it, and could not have taken corrective action, if it had occurred.”

Young explained further that HART lacked an internal audit function, except for whatever was being reported to the executive director by individuals working “for their own purposes, not for the purposes of (ensuring) openness and transparency in the expenditure process.”

That’s a stunning assertion, and one that only reinforces the case for a closer look at how the rail contracts were executed.

It’s therefore no surprise that the budget panel voted unanimously to advance Resolution 17-199 to a final draft that requests the city auditor to conduct a follow-up economy and efficiency audit to explain where things went awry with contracts.

That is undeniably the right move at this juncture, as the project moves toward a critical decision point to resolve its financial shortfall. State lawmakers will convene in a little more than a week’s time in a special session.

The Legislature will decide whether and how to close a fiscal gap approaching $3 billion, including financing charges, to complete the project as approved by the Federal Transit Administration, meeting the terms of the $1.55 billion in federal subsidies.

State legislators do have viable options for crafting a “rescue plan” that’s due the FTA in about three weeks; these include a 10-year extension of the 0.5 percent general excise tax surcharge, or a shorter GET extension combined with a bump in the transient accommodations tax.

Taxpayers are being asked to open their wallets for an extended period of yet-to-be-determined duration. They deserve at least some firm answers about where and how the bloat happened.

When the 2016 audit was released, Dan Grabauskas, then the executive director of HART, countered its conclusions. But his interim successor, Krishniah Murthy, has affirmed that the agency has followed the management recommendations of the audit nonetheless.

And, Murthy added, the agency now supports and will cooperate with the new audit.

Further, Terrence Lee, the HART board’s vice chairman, has said that if there is evidence of wrongdoing, the panel would seek an independent forensic audit to investigate.

That is encouraging; it falls to the Council to press HART to meet this commitment.

The new inquiry needs to uncover what resulted from the authority’s weak oversight controls by digging into the contracts and subcontracts themselves. Were they padded with unnecessary charges? Were the contracts executed without precision so that there were excessive change orders? Or was there such uncertainty that the contractors had to insure themselves against potential losses?

HART had reported efforts to restructure contracts to reduce this uncertainty: How well did that work?

Ember Shinn, the former city managing director now appointed to the HART board, has voiced some doubt about the relative value of a backwards look at agency practice, when much of the current concern is how to move ahead with the project, financially.

Most independent observers would beg to differ. There is certainly utility to such an examination because it would afford some guidance about how to manage the remaining contracts. And, further into the future, it might inform preliminary planning for an extension of the rail system beyond its initial terminus.

Finally, HART needs to send a message to its near-term contractors that the agency is sharpening its pencil and watching closely. This new audit could accomplish that, too.