House and Senate negotiators have tentatively agreed on a plan to bail out the city’s rail project by raising hotel room taxes statewide and extending the general excise tax surcharge on Oahu for another three or four years, according to sources familiar with the discussions.
The new plan calls for increasing the hotel room tax by 1 percentage point for more than a decade, which would provide an entirely new source of cash for the rail project. That would temporarily increase the hotel room tax, also known as the transient accommodations tax, to 10.25 percent.
House and Senate negotiators also have agreed to dramatically reduce the so-called “skim” of revenue the state takes from the excise tax surcharge collections from about $30 million a year today to about $3 million a year in the future, sources said. That adjustment would provide tens of millions of dollars more funding for rail.
The agreement, reached by state House and Senate negotiators, would:
>> Increase the statewide hotel room tax by 1 percentage point to 10.25 percent for more than 10 years.
>> Extend Oahu’s general excise tax surcharge for three or four years and reducing the amount the state skims from that surcharge to about $3 million a year from about $30 million a year.
>> Require a “forensic” audit to determine how rail money has been spent.
It’s not clear yet how much total additional money the proposed new funding package would generate, but state officials previously estimated a two-year extension of the general excise tax surcharge combined with a 1-percentage-point increase in the hotel room tax for 14 years would provide another $2.3 billion for rail construction. Rail officials now expect the full rail line to be completed by December 2025.
Members of the House and Senate are scheduled to meet in closed-door caucuses this morning to review a draft bill that incorporates the proposed changes. Those meetings will give a clear sense of whether enough lawmakers support the package to push it through the state Legislature in a five-day special session scheduled for next week.
As of Wednesday, the vote remained tight in the Senate, according to sources in that chamber.
Other stakeholders including Honolulu Mayor Kirk Caldwell, Honolulu City Council leaders, and representatives from the hotel and construction industries are to be briefed later in the day, said officials familiar with those plans. No one was willing to discuss those plans or the negotiations publicly.
However, in a statement released by his office Wednesday, Caldwell said that any plan raising less than $3 billion “is not a viable solution.”
“Any shortfall or shifting of any other state or city funds currently dedicated to city operations and services would force a property tax increase on our residents and businesses,” the mayor’s statement added.
The partially built rail line is vastly over budget, with the estimated price tag for the project increasing from $5.26 billion in late 2014 to nearly $10 billion today, including financing costs.
The tentative deal brokered by House and Senate leaders this week also would require by law a “forensic” audit of spending on the rail project to determine exactly how the cost of the project has apparently spun out of control, sources said.
City officials estimate the project now has a budget deficit of about $3 billion including financing costs, and Caldwell this year asked the legislature to extend the excise tax surcharge on Oahu to cover the shortfall. The surcharge generates about $300 million a year and now pays most of the construction cost for rail.
Federal funds withheld
Without more help from state lawmakers, it’s likely the city would struggle to build the transit system as far as Middle Street, let alone get it all the way to Ala Moana Center.
Rail currently has a total budget of $6.8 billion — which is also the amount that rail officials now say it will cost to build to Middle Street. (During a June 2016 public meeting, rail officials estimated it would cost at least $6.22 billion to build that far.)
However, that $6.8 billion budget includes the Federal Transit Administration’s full $1.55 billion share, and the federal agency is withholding its remaining $744 million until the city provides a “viable plan” to deliver the project.
About a year ago, city and rail leaders met with the FTA during closed-door meetings in San Francisco and then reported the agency would not accept a line that stops at Middle Street.
Then, earlier this summer, the FTA set its latest deadline — Sept. 15 — for rail leaders to provide a financial plan to complete the “total project.”
In a statement this week, an FTA spokeswoman added that until the Honolulu Authority for Rapid Transportation “can demonstrate a commitment for all local funding required to deliver the project, FTA cannot award further increments of Capital Investment Grants funds and could require the return of all federal funds provided to HART for the project.”
Furthermore, the FTA has rejected rail’s so-called “Plan B,” which would have stopped the elevated line near Aloha Tower and deferred the stations between there and Middle Street, along with the project’s Pearl Highlands transit center, according to HART Project Director Sam Carnaggio.
That all leaves the city in a difficult position, where it risks losing the federal funding to get rail even to Middle Street if it can’t find the funding to reach Ala Moana.
It remains unclear how the city would respond if it lost its remaining federal dollars or had to refund some or all of what it already has been paid.
Last summer, HART issued an $875 million contract to the joint venture Shimmick Traylor Granite to build rail’s guideway and stations from Aloha Stadium to Middle Street. That work is already underway.
Some critics of how the project has been handled argue that the island’s elected leaders still have time to consider alternatives, despite the FTA’s latest deadline.
“We’ve seen time and time again … how the FTA has extended that deadline,” outspoken rail critic and certified public accountant Natalie Iwasa told City Council members during a rail-related hearing Wednesday. “It seems to me anyway that it’s not that critical to rush through any legislation.”
This was the second time Caldwell was forced to petition lawmakers for an excise surcharge extension to provide more money to cover the ballooning costs of the rail project. The legislature in 2015 approved a five-year extension of the excise surcharge to 2027.
During the regular legislative session this spring, lawmakers were unable to agree on a package that would provide the billions of dollars in additional funding needed to complete the project.
The Senate approved a plan to extend the half-percent excise tax surcharge for 10 years, while the House approved a plan to extend the surcharge for a year along with increasing the hotel tax to help fund the project.
House lawmakers contend they can save taxpayers hundreds of millions of dollars in interest by providing extra money from the hotel room tax increase, which will reduce the need to borrow money to fund the rail project.
Star-Advertiser reporters Nanea Kalani and Gordon Pang contributed to this report.