Debate over $44M in city bonds for rail

Nearly 10 years ago, back in November 2008, with frustration over congested roads apparently outweighing cost concerns, voters authorized the city to build an elevated commuter rail line. At that time, limited service was slated to start in 2013 followed by full service by the end of this year.

Given the city’s commitment to its largest-ever public works effort, despite years of stops and starts, and with the price tag now set at $8.165 billion — about double the figure voters weighed at the polls — it’s puzzling that a disagreement over relative pocket change, $44 million in funding, could now threaten plans to complete the half-constructed 20-mile route from Kapolei to Ala Moana.

Mayor Kirk Caldwell warns that’s the case. But the City Council’s recently reorganized leadership sees the matter differently.

The $44 million snag surfaced about six months ago, when the city secured a $2.4 billion bailout for the cash-strapped rail project from a special session of the Legislature. As part of the deal, state lawmakers put the city on the hook for that amount to cover rail administrative costs for 2018 and 2019 — the first chunk of what’s estimated to be a $214 million city share through remaining rail construction.

The bailout, “Act 1,” extended the general excise tax 0.5 percent rail surcharge by three years, to 2030, and raises the state’s transient accommodations tax (TAT) by a percentage point, to 10.25 percent, for the next 13 years.

City leaders in mid-September presented the funding package to rail partners at the Federal Transit Administration (FTA), who have yet to accept or reject it. If accepted, the FTA will eventually release about $744 million left in its $1.55 billion rail funding agreement with the city.

But the potential holdup? The city’s $44 million slice, which the FTA views as a possible funding gap.

City officials maintain that the gap, which is due to differing state and city financial projections, is an on-paper- only problem. It turns out that due to a current solid cash flow, the Honolulu Authority for Rapid Transportation (HART) doesn’t need the $44 million slated through the 2019 fiscal year.

Regardless, Caldwell said FTA officials have told him in private meetings that the city must show them the money anyway or risk losing its remaining $744 million in federal dollars.

“I do think, talking to people in Washington, it’s a difficult time,” Caldwell told the Star-Advertiser editorial board recently. “You’ve got the people at the FTA who are still committed to our project.” Some administrators on the top floor of the U.S. Department of Transportation, however, are “not keen about our project.”

He continued, “They want to eliminate all starts. The Trump administration is saying: ‘No more new starts for rail projects.’ We’re the largest new start. If there’s a way you can pull the plug on us, that largest new start project goes away and they can focus on their infrastructure initiatives,” such as bridges and toll roads, for example, not rail projects.

City funds for rail under Bill 42

With an urgency to win the FTA’s approval for the rail recovery funding plan, Caldwell introduced a city budget package last month that calls for adding $44 million in borrowed money to its capital spending ledger. Once budgeted, the city would not have to actually float bonds for those costs — since HART’s cash flow is not short, he said; rather, the move would amount to a line item in the budget that goes unused.

However, even when presented as a placeholder of sorts, Council members under new leadership are either opposed or have strong concerns about now setting up the option of using bond money to pay for rail. They point to the city’s initial funding plan — established in 2006, two years before city voters authorized rail construction. It mentions using federal and state money, but not city dollars.

The Council is currently evaluating Bill 42 (2017), which would allow the use of city funds for rail. The bill was deferred in March and recommitted to the Council Budget Committee.

Caldwell contends that city leaders are now, unfortunately, forced to grapple with the bill by state lawmakers, who have called on the city to “put more skin in the game.” The mayor said: “Now we’re in a position where we have to kick money in for the first time to build rail.” He added, “There’s a lot of concern … but what is our choice, if this is required” under Act 1? “We committed to the $214 million (in city dollars) to make their recovery plan work.”

Honolulu Hale is expecting feedback from the FTA this month regarding rail’s latest scheduling and cost projections. And that leaves Caldwell worried about the “no bond money” stance assumed by Council’s leadership, now headed by Ernie Martin, a frequent critic of the mayor.

“If they don’t support a budget with $44 million, there’s a puka here, and at that point, my hands are tied — I don’t know what to tell the FTA,” Caldwell said. If FTA officials decide against approving the recovery plan, they could put the city on the hook by denying the release of the $744 million balance and requiring partial or even full return of some $1 billion in rail funding the city has already received.

City Council members at odds

If the nine-member Council’s majority stands firm in a rebuff of the mayor’s current budget package, Caldwell said, the puka problem could be plugged by cutting $44 million in the city’s operating budget. Cringing at that option, Caldwell said it would result in reduction of city services, needlessly causing “real pain.”

Martin has argued that he cannot support the call to tag bond money for HART operations because it would set a “bad precedent.” If bonds are ever actually issued — after setting up the possibility for using “borrowed money” to pay for one-time fixed costs linked to rail construction, including salaries — he said, “At the end of the day, our taxpayers will be paying more, because of interest on the bonds.”

Council member Ron Menor, who had served as chairman for 15 months before Martin reclaimed the post last month, countered that he sees the mayor’s proposal as viable because it would “enable the city to avoid having to increase taxes and fees and/or cut badly needed core services.”

What’s more, he said, the city administration has explained that “an appropriation authorizing the issuance of bonds in the FY 19 CIP (capital improvement project) budget would not affect our bond rating and would only be expended if the amount of federal funds and GET and TAT revenues were not sufficient to cover HART’s administrative and operating expenses.” Menor added, “It would function more like a line of credit, that would only be used if necessary.”

The city has a AA+ credit rating from the investor service Moody’s, which helps keep borrowing costs low. Still, according to various news reports, Caldwell, Menor and others have fretted that the city could lose that rating if rail cost overruns are not sufficiently curbed, making the overall cost to borrow more expensive.

Menor and Martin also have colliding takes on Bill 42.

Menor contended: “The Council needs to pass Bill 42 in order to lift the restriction on the use of city funds to cover rail construction- related costs. However, I would be open to an amendment that would cap the amount of city funds that can be used to finance construction costs.”

Martin countered: “I have consistently voted against using city funds to pay for rail” because HART, under the previous leadership, had “not done everything in its power to control costs and fully explore public-private partnerships to help offset the costs of constructing rail stations.” He added, “I look forward to working with the new HART leadership, administration, state leaders and the FTA to develop a comprehensive and sensible plan to meet our federal obligation.”

Working with the FTA

The governor’s signing of Act 1 in early September coincided with new HART Executive Director Andrew Robbins’ first day on the job.

Regarding what should be done to address the FTA’s concern about a funding gap, whether real or not, Martin said: “I believe it was a mistake to move to submit a financial recovery plan to FTA knowing the plan identified a $214 million funding gap but did not identify a mechanism to fund this shortfall. I understand the FTA is concerned about the $44 million deficiency for this fiscal year, but the funding gap should have been addressed long ago. Had this deficiency been addressed we would not be in this situation today.”

Considering how to move forward, Martin said, “I believe there are other options available to satisfy the FTA’s concerns. We need to sit down with the FTA sooner than later. The Council, the administration and HART need to be at that meeting. We have to be on the same page going forward and get this project done.”

Caldwell, meanwhile, offered a flicker of optimism. “I’m hopeful that … a plan will be approved” by the FTA. “But I do think if the $44 million isn’t there, we going to have a problem.”