State lawmakers announced their new plan Thursday to raise $2.37 billion to bail out the city’s financially troubled rail project, but Honolulu Mayor Kirk Caldwell warned the money is “not sufficient” to cover the budget shortfall for rail.
House and Senate negotiators agreed to the bailout package, which involves raising hotel room taxes statewide by 1 percentage point for the next 13 years to raise $1.32 billion for rail. That would increase the state’s hotel room tax to 10.25 percent.
The plan also would require lawmakers extend the half-percent excise tax surcharge on Oahu for another three years to raise $1.04 billion.
Caldwell told lawmakers in a letter Thursday that even with that additional funding, the city would need another $600 million to $900 million to pay for the 20-mile rail project, and he said the city has only a few ways to raise that money.
“We have only limited sources of revenue: property tax, fuel tax and vehicle weight tax,” Caldwell said. “And we just raised the weight tax over the next two full years. We tried with the fuel tax, and it didn’t pass. So the only other thing we have is real property.”
U.S. Sen. Brian Schatz and U.S. Rep. Colleen Hanabusa pushed Caldwell to accept the deal and questioned his statement that the additional $2.37 billion would not be enough to pay for rail.
Schatz said he urged Caldwell to accept the new proposal “because this is more revenue for the project than was contemplated during the regular session, and because … they worked to a number that was provided to the Legislature by the city and HART, and they hit the number. And so, now he’s introducing new numbers.”
Those “new numbers,” as Schatz described it, involve a $548 million “stress test” contingency above and beyond rail’s normal contingency.
City leaders say that under rail’s financial plan they need to show the Federal Transit Administration that they can cover a surprise 10 percent increase in the project’s capital costs. Rail currently has about $5.5 billion left in capital costs, city finance officials estimate.
Hanabusa, former chairwoman of the Honolulu Authority for Rapid Transportation, said that “with all due respect to the mayor and the city, they can’t come out as they’ve done in the past and pick numbers out of the air.”
“Having said that, I think that with all due respect, that $500 million or $600 million may be a figure to cover up for something else. I don’t know what it would be, but it’s definitely not something that has been presented to the Legislature or documented in the reports that they have,” Hanabusa said.
“If they want to do that, they have to be fair,” Hanabusa said. “To say that these figures have been there all along is, in my own opinion, not true. I could use another word but it’s not true.”
Caldwell and members of his Cabinet disagreed with that take.
“We presented this number multiple times over the entire (legislative) session. And after, whenever they asked for stress numbers, that figure was in there,” Caldwell said.
The state Legislature is scheduled to meet in a special session next week to debate and vote on the plan to pump more money into the rail project, but it is unclear whether there are enough votes in the state Senate to approve the package. By some accounts, only a bare majority of 13 out of the 25 members of the Senate support the new plan.
Senate President Ron Kouchi said Thursday he believes there is adequate funding in the package, and said he is optimistic the full Senate will support it.
“Will all of the neighbor island counties be happy? Probably not,” Kouchi said. “Is the hotel industry happy that we’re at 1 percent for the next 13 years? Probably not. Are taxpayers happy with the half-percent being extended another three years? Probably not, so there was a lot of give on a lot of fronts to come to a compromise.”
The tentative House-Senate agreement also calls for reducing the so-called “skim” of revenue that the state takes from the general excise surcharge collections on Oahu. The proposal would reduce the skim from about $30 million a year today to about $3 million a year in the future, which would provide tens of millions of dollars in additional funding for rail each year.
The deal brokered by leading lawmakers would also require the state auditor to conduct a “forensic” audit of spending on the rail project to determine exactly how its cost grew so rapidly. The auditor would also be tasked with conducting an annual review of rail’s spending in the years ahead.
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, including financing costs.
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 costs for rail.
During the regular legislative session session this spring, lawmakers deadlocked on how to provide the billions of dollars in additional funding that are 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 excise surcharge for a year and increase the hotel tax to help fund the project.
Members of the House and Senate met in closed-door caucuses Thursday morning at the state Capitol to review the latest proposal for providing more funding for rail, and Hanabusa and Schatz joined House and Senate leaders later in the day to publicly present the plan to the media.
If lawmakers move ahead with the funding package, the city would have little choice but to raise taxes, cut services or both to make up the $600 million to $900 million, Council Chairman Ron Menor said.
“The only way that the city is going to make up that shortfall, realistically, is to make draconian cuts in important core services such as police and fire protection, moneys to improve our parks and roadways; and if we don’t do that, then the other alternative is going to have to be increasing real property taxes,” Menor said.
There are several other features of the agreement that might not sit well with the city, including how the city would be paid.
Currently the state pays out money from the excise surcharge in quarterly installments, and the House-Senate agreement proposes to change that arrangement. Under the tentative new agreement, the city would be required to pay contractors who work on the rail project, and then submit invoices to the state seeking reimbursements for those costs.
Lawmakers described that as a method for controlling costs because all expenses would then be subject to additional scrutiny. Caldwell said that invoicing arrangement might not be legally allowed.
Another portion of the agreement would prohibit city officials from using the excise tax surcharge or hotel tax revenue to pay for the cost of operations for the rail authority. The Honolulu Authority for Rapid Transportation now costs about $21 million a year, and the agreement requires the city to absorb that cost.
The city has a Sept. 15 deadline to show the Federal Transit Authority how it plans to raise the money to cover the project’s budget shortfall.
$2.37 BILLION BAILOUT
– Increase hotel room tax statewide by 1 percentage point to 10.25 over 13 years.
– Amount generated: $1.32 billion
– Extend the half-percent excise tax surcharge on Oahu by three years.
– Amount generated: $1.04 billion
– Permanently increase counties’ share of hotel tax to $103 million from $93 million.
– Reduce state’s administrative fee on the excise tax surcharge to $3 million from $30 million.
– Mandatory state-run audit and annual financial reviews
– Disbursement of funds based on state review of costs rather than lump sum to keep track of spending and construction
Caldwell's letter to lawmakers on rail by Honolulu Star-Advertiser on Scribd
Rail Financing Bill by Honolulu Star-Advertiser on Scribd
Star-Advertiser reporter Gordon Y.K. Pang contributed to this story.