A series of “prematurely” awarded rail contracts doled out to construction companies as early as 2009 prompted delay claims and change orders that increased the cost of the Honolulu rail project by more than $354 million, according to a new report the Hawaii State Auditor released Thursday.

The report also noted some delay claims and change orders are unresolved, which means the cost of those claims will continue to rise. For example, rail officials are now trying to settle a claim by rail contractor Ansaldo Honolulu JV, which sources say originally demanded $200 million in 2016 in connection with rail construction delays.

The auditor’s report also concluded the Honolulu Authority for Rapid Transportation staff reported one set of rail cost and schedule estimates to the HART board of directors, political leaders and the public throughout 2015 and reported different cost and schedule estimates to the federal government.

“Bold, overly optimistic projections, it’s been the story of the rail project from the beginning,” said state Auditor Les Kondo in a written statement. “However, high hopes and poor planning eventually ran headlong into cold, hard reality.”

The half-built rail line is the largest public works project in state history, and its cost has wildly exceeded its original budget. In 2012 the city pledged to complete construction of rail for $5.12 billion.

According to the audit report, “from the beginning these unrealistic projections resulted from a desire to demonstrate that the project was progressing satisfactorily and to minimize public criticism, which could have eroded public support.”

The official rail construction budget for the 20-mile rail line from East Kapolei to Ala Moana is now nearly $8.3 billion, but the total cost is expected to climb to more than $9.2 billion when financing costs are figured in.

The auditor calculated the rail line from East Kapolei to Ala Moana Center will have an average cost of more than $457 million per mile provided there are no further cost increases.

“The cost overruns and delays that have sent the city’s share of the final price tag soaring have also eroded public confidence in a project that relies largely on local funding,” according to the auditor’s report.

Honolulu Mayor Kirk Caldwell said in a written statement Thursday that he welcomes the auditor’s report.

“The findings contained in the audit report is a further call to action by the HART Board of Directors to maintain strong management oversight of the transit authority and to ensure that HART incorporates into their everyday practices the suggested recommendations contained in the state auditor’s report,” Caldwell said in his statement.

The 39-page audit is the first of four reports that were ordered up by state lawmakers when they approved a $2.4 billion financial bailout of rail in a special session of the Legislature in 2017. That marked the second time lawmakers had to step in to shore up rail’s finances, and they instructed the auditor to scrutinize the financial management of rail.

Rail’s cost trail

The report traces the enormous rail cost overruns back to former Mayor Mufi Hannemann’s administration in 2009, when the city claimed the rail project was “shovel-ready” and awarded a $483 million contract to Kiewit Pacific Co. to design and build the first rail segment starting in East Kapolei.

But the environmental impact statement for rail was not even completed until mid-2010, and the Federal Transit Administration did not issue a “record of decision” that was necessary to begin construction until January 2011, according to the auditor.

The city went on to award nearly $2 billion in rail design, construction and operations contracts in 2010 and 2011 before it obtained the federal clearances it needed to proceed with construction, according to the report, and at least some of those contracts are expected to result in delay claims.

The groundbreaking for preliminary work to relocate utilities in the path of the first segment of rail line did not begin until February 2011, and the Federal Transit Administration did not authorize the city to begin construction of the elevated rail guideway itself until February 2012.

“Cost increases following those delayed federal approvals, higher-than-anticipated inflation as well as a court-ordered injunction on construction resulting from a decision to short cut archaeological reviews, would result in the project’s first budget shortfall of $910 million,” according to the audit report.

In its response to the audit, HART said the city did not “short cut” the archaeological survey, but rather followed the instructions of the State Historic Preservation Division in carrying out the survey. The approach the city used with the approval of SHPD was later rejected by the state Supreme Court.

In his own reply to the audit, Hannemann said that “I stand by what we did.” Hannemann said in an interview that only one rail construction contract was awarded on his watch because he resigned as mayor to run for governor in mid-2010.

The economy was slow in 2009 when the first contract was awarded to Kiewit Pacific, and Hannemann expected the bids would be low because construction companies needed the work. He also was concerned that state lawmakers would “raid” the city rail funds to help balance the state budget if work did not begin quickly.

Hannemann said the city divided up the work into smaller contracts so local companies could compete for the work, but HART CEO Dan Grabauskas overhauled the city’s strategy when he arrived in 2012. Hannemann said Grabauskas repackaged the work into larger contracts and then reversed himself and divided the work into smaller contracts again, which delayed the project.

“My humble belief is this: They hired the wrong guy in Dan Grabauskas to run this project,” Hannemann said. One of the conditions of Grabauskas’ severance agreement with the city is city officials cannot discuss his job performance, “and to me that’s so ludicrous because these things happened under his watch,” Hannemann said.

Different data

The audit report also cited records showing that HART staff repeatedly provided different data in 2015 about the projected cost and schedule for rail to different audiences.

For example, the report found a former HART deputy director told staff in an internal briefing on April 15, 2015, that the project might cost as much as $6.72 billion if it was to be completed by January 2020. However, HART staff told the board of directors two months later the projected cost of the project was only $5.12 billion and that it would open in late 2019.

“We found that throughout 2015, when HART was grappling with major unanticipated cost increases, HART’s monthly progress reports to the board failed to include updated estimated cost at completion and updated opening date information that was reported in FTA oversight contractor meetings and documented in FTA monthly reports,” the report states.

That finding prompted a harsh response Thursday from the Grassroot Institute of Hawaii.

“Hawaii’s taxpayers deserve public servants who hold truth and transparency as key values in their work,” said Kelii Akina, institute president. “This audit has shown that HART staff did not demonstrate these values. The fact that HART inaccurately reported the project cost and completion schedule is an egregious example of government agencies subverting their responsibility to the public.”

The auditor’s staff was unable to determine what the HART board might have been told privately about the 2015 cost increases because the board refused to provide the auditor with its 2015 executive session minutes, according to the report.

“Since 2009, when the first rail contract was awarded under an artificial timetable and financial plan, city officials have neglected their responsibility to spend money prudently,” the auditor concluded.

Grabauskas resigned in 2016 and has been replaced by CEO Andrew Robbins.

In a response to the audit, the rail authority said that since January 2017 “we have applied and practiced prudent accounting through a system that tracks all financial costs. Using this information, the HART board is provided and updated with financial reports on a monthly basis.”

HART also disputed claims that the auditor struggled to get certain information from HART, pointing out that it provided the audit team with access to more than 36,400 pages of electronic documents, and rail authority staff participated in more than 35 interviews with audit staff.

HART declined to release most of the executive session minutes sought by the auditor because of “certain contractual and legal obligations of confidentiality and privacy,” according to the rail authority.

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