[Senate Hearing 106-1110]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 106-1110

 
     OVERSIGHT HEARING ON THE BOSTON CENTRAL ARTERY/TUNNEL PROJECT

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 3, 2000

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation

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                            WASHINGTON : 2003

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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                  Mark Buse, Republican Staff Director
            Martha P. Allbright, Republican General Counsel
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 3, 2000......................................     1
Prepared statement of Senator Hollings...........................     7
Prepared statement of Senator Inouye.............................     8
Statement of Senator Kerry.......................................     4
    Prepared statement...........................................     6
Statement of Senator McCain......................................     1
    Prepared statement...........................................     3

                               Witnesses

Dimino, Richard A., President and CEO, Artery Business Committee.    62
    Prepared statement...........................................    65
Mead, Hon. Kenneth M., Inspector General, U.S. Department of 
  Transportation.................................................    17
    Prepared statement...........................................    21
Natsios, Andrew S., Chairman, Massachusetts Turnpike Authority, 
  accompanied by Michael Lewis, Acting Project Director for the 
  CA/T Project...................................................    47
    Prepared statement of Andrew Natsios.........................    53
Slater, Hon. Rodney E., Secretary, U.S. Department of 
  Transportation.................................................     8
    Prepared statement...........................................    13
Thomas, Richard L., Senior Vice President, American International 
  Group, Inc.....................................................    55
    Prepared statement...........................................    57
Wiley, Matthew, Project Manager, Bechtel/Parsons Brinckerhoff 
  Joint Venture..................................................    58
    Prepared statement...........................................    60

                                Appendix

Smith, Bob, U.S. Senator from New Hampshire, prepared statement..    87
Response to Written Questions Submitted by Hon. John McCain to:
    Kenneth M. Mead..............................................    87
    Andrew S. Natsios............................................    91
    Rodney E. Slater.............................................    95
    Matthew Wiley................................................   111

     OVERSIGHT HEARING ON THE BOSTON CENTRAL ARTERY/TUNNEL PROJECT

                              ----------                              


                         WEDNESDAY, MAY 3, 2000

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 a.m. in room 
SR-253, Russell Senate Office Building, Hon. John McCain, 
Chairman of the Committee, presiding.
    Staff members assigned to this hearing: Ann Begeman, 
Charlotte Casey, and Rob Freeman, Republican Professional 
Staff; Carl Bentzel, Democratic Senior Counsel; and Debbie 
Hersman, Democratic Professional Staff.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. Good morning. In an effort to fulfill our 
Committee's many duties, we are continuing to conduct hearings 
on legislation and to work to move bills through the 
legislative process. We also conduct oversight hearings on 
Federal programs under our jurisdiction, as well as on issues 
of public concern that have been brought to the Committee's 
attention.
    Today's hearing is designed to take a careful and in-depth 
look into the Boston Central Artery/Tunnel project, the 
biggest, most costly public works project in U.S. history, and 
commonly referred to as the Big Dig. This project has suffered 
from gross mismanagement and what appears to have been a 
complete lack of critical Federal oversight. As such, it has 
experienced billions of dollars in cost overruns.
    The Central Artery/Tunnel project was originally estimated 
to cost $2.5 billion in 1985. Today, it is estimated to cost 
U.S. taxpayers a staggering $13.6 billion. Almost daily, the 
Boston Globe or the Boston Herald publish a new and more 
embarrassing Big Dig story than the previous day's expose, 
noting the project's mismanagement and many cost overruns.
    This Committee needs to know what assurances we have that 
Federal and State highway officials responsible for overseeing 
this project finally have had their wake-up call. It is my hope 
that this hearing will enable us to explore the complete and 
utter failure of the parties involved in this immense multi-
billion dollar transportation project, including Federal and 
State officials and project managers. We must ensure that this 
project's mismanagement and oversight neglect are a thing of 
the past.
    It is also my hope that the witnesses, each of whom is 
critically involved with the Big Dig project, will provide the 
Committee with their candid views on their role in the project 
and their individual perspectives concerning how and why the 
project's cost have skyrocketed.
    I also encourage each witness to offer specific suggestions 
on what actions Congress, the administration, State officials 
and project contractors should undertake to preclude future 
mismanagement of this or other federally funded transportation 
projects.
    One area I would like to explore in some detail with the 
Secretary is the outstanding Federal financing obligation to 
the Central Artery/Tunnel project. While some Federal Highway 
Administration (FHWA) officials contend that the Federal 
funding level is capped, I am not convinced. There is no 
statutory cap on the Federal funding share for the project, 
nor, to my knowledge, is there a written agreement signed by 
the State and the FHWA capping the Federal funding share for 
the project. I fear that as of today, we really still do not 
know the final price to America's taxpayers.
    Further, I am not confident in the FHWA's ability to 
fulfill its stewardship responsibilities over the expenditure 
of American's gas tax dollars. Last year, this Committee spent 
a considerable amount of time on another issue that highlighted 
the FHWA's poor stewardship--truck safety. In many meetings on 
truck safety, we received nearly unanimous views by a wide 
range of interested parties that the FHWA lacked leadership in 
its safety enforcement efforts.
    Many felt that the FHWA's poor leadership was attributable 
to its more demanding role in overseeing the multi-billion 
dollar Federal highway construction program. Ultimately, we 
took away FHWA's motor carrier safety jurisdiction in an effort 
to improve truck safety.
    Perhaps the FHWA's problems stem more from poor performance 
generally rather than from its oversight responsibility for the 
highway funding program. If FHWA wants the Congress to permit 
it to continue to have any Federal responsibilities, it had 
better reform itself immediately.
    Much of the public attention on the Big Dig in recent 
months stems from the independent audit work carried out by the 
Department of Transportation Inspector General, Kenneth Mead, 
and his staff. This Committee holds the IG's office in very 
high regard. We know that your auditors had projected cost 
estimates, which were proven correct, that were initially 
widely criticized by FHWA and Massachussetts Central Artery 
officials. Unfortunately, your auditors were accurate, and the 
Committee appreciates the leadership demonstrated by you, Mr. 
Mead, on this controversial project.
    In the near future, I intend to hold a hearing on another 
Federal project that the IG's office has identified as posing 
serious Department of Transportation mismanagement problems--
the Quincy Shipyard project. I have grown increasingly 
concerned that the Federal government will be unable to recover 
any of the roughly $50 million it has paid out to fulfill its 
Title XI loan guarantee program obligation. Therefore, I intend 
to explore the Quincy Shipyard project during upcoming hearings 
to reauthorize the Maritime Administration.
    Again, I look forward to hearing from today's witnesses and 
am eager to hear their perspective and views on what actions 
Congress and the Department of Transportation should take to 
improve fiscal accountability on the Central Artery Tunnel 
Project and all federally funded transportation projects.
    Finally, I would also like to acknowledge the dedicated 
work of the Department of Transportation Deputy IG, Ray 
DeCarli, who I understand is retiring at the end of the month 
after 34 years of Federal service. Ray can be proud of the 
tremendous contributions his efforts have made in rooting out 
waste and fraud in transportation programs. His untiring 
efforts have saved millions of dollars for American taxpayers 
and we owe him a debt of gratitude. Senator Kerry.
    [The prepared statement of The Chairman follows:]

   Prepared Statement of Hon. John McCain, U.S. Senator from Arizona
    In an effort to fulfill our Committee's many duties, we continually 
conduct hearings on legislation and work to move bills through the 
legislative process. We also conduct oversight hearings on federal 
programs under our jurisdiction, as well as on issues of public concern 
that have been brought to the Committee's attention.
    Today's hearing is designed to take a careful and in-depth look 
into the Boston Central Artery/Tunnel project--the biggest, most costly 
public works project in U.S. history--and commonly referred to as ``the 
Big Dig.'' This project has suffered from gross mismanagement and what 
appears to have been a complete lack of critical federal oversight. As 
such, it has experienced billions of dollars in cost overruns.
    The Central/Artery Tunnel project was originally estimated to cost 
$2.5 billion in 1985. Today it is estimated to cost U.S. taxpayers a 
staggering $13.6 billion. Almost daily, the Boston Globe or the Boston 
Herald publish a new and more embarrassing Big Dig story than the 
previous day's expose noting the project's mismanagement and many cost 
overruns. This Committee needs to know what assurances we have that the 
Federal and State highway officials responsible for overseeing this 
project finally have had their wake-up call.
    It is my hope this hearing will enable us to explore the complete 
and utter failure of the parties involved in this immense, multi-
billion dollar transportation project, including Federal and State 
officials and project managers. We must ensure that this project's 
mismanagement and oversight neglect are a thing of the past.
    It is also my hope that the witnesses--each of whom is critically 
involved with the Big Dig project--will provide the Committee with 
their candid views on their role in the project and their individual 
perspective concerning how and why the project's costs skyrocketed. I 
also encourage each witness to offer specific suggestions on what 
actions Congress, the Administration, State officials, and project 
contractors should undertake to preclude future mismanagement of this 
or other federally-funded transportation projects.
    One area I plan on exploring in some detail with the Secretary is 
the outstanding federal financial obligation to the Central Artery/
Tunnel project. While some Federal Highway Administration (FHWA) 
officials contend the federal funding level is ``capped,'' I am not 
convinced. There is no statutory cap on the Federal funding share for 
the project. Nor, to my knowledge, is there a written agreement signed 
by the State and FHWA capping the Federal funding share for the 
project. I fear that as of today, we really still don't know the final 
price to America's taxpayers.
    Further, I am not confident in the FHWA's ability to fulfill its 
stewardship responsibilities over the expenditure of American's gas-tax 
dollars. Last year, this Committee spent a considerable amount of time 
on another issue that highlighted the FHWA's poor stewardship--truck 
safety. In many meetings on truck safety, we received nearly unanimous 
views by a wide range of interested parties that the FHWA lacked 
``leadership'' in its safety enforcement efforts. Many felt that the 
FHWA's poor leadership was attributable to its more demanding role in 
overseeing the multi-billion dollar federal highway construction 
program. Ultimately, we took away FHWA's motor carrier safety 
jurisdiction in an effort to improve truck safety.
    Perhaps the FHWA's problems stem more from poor performance 
generally rather than from its oversight responsibility for the highway 
funding program. If FHWA wants the Congress to permit it to continue to 
have any federal responsibilities, it had better reform itself 
immediately.
    Much of the public attention on the Big Dig in recent months stems 
from the independent audit work carried out by the Department of 
Transportation Inspector General (IG), Kenneth Mead, and his staff. 
This Committee holds the IG's office in very high regard. We know that 
your auditors had projected cost estimates--which were proven correct--
that were initially widely criticized by FHWA and State Central Artery 
officials. Unfortunately, your auditors were accurate and the Committee 
appreciates the leadership demonstrated by you, Mr. Mead, on this 
controversial project.
    In the near future, I intend to hold a hearing on another federal 
project that the IG's office has identified as posing serious 
Department of Transportation mismanagement problems--the Quincy 
Shipyard Project. I have grown increasingly concerned that the federal 
government will be unable to recover any of the roughly $50 million it 
has paid out to fulfill its title XI loan guarantee program obligation. 
Therefore, I intend to fully explore the Quincy Shipyard project during 
upcoming hearings to reauthorize the Maritime Administration.
    Again, I look forward to hearing from today's witnesses and am 
eager to hear their perspective and views on what actions Congress and 
the DOT should take to improve fiscal accountability on the Central 
Artery/Tunnel project and all federally funded transportation projects.
    I also want to acknowledge the dedicated work of the DOT Deputy IG, 
Ray DeCarli who, I understand, is retiring at the end of the month 
after 34 years of Federal service. Ray can be proud of the tremendous 
contributions his efforts have made in rooting out waste and fraud in 
transportation programs. His untiring efforts have saved millions of 
dollars for American taxpayers and we owe him a debt of gratitude.

               STATEMENT OF HON. JOHN F. KERRY, 
                U.S. SENATOR FROM MASSACHUSETTS

    Senator Kerry. Thank you, Mr. Chairman. Thank you for 
holding this hearing today, and I appreciate the way in which 
you have approached this issue. I thank you for the 
conversations we have had regarding the project itself, and I 
think everybody in Massachusetts is grateful for your 
assurances that the dialog we will have here will be 
substantive and that your intent is certainly to keep this from 
becoming some kind of political process. I think we all 
appreciate that.
    But second, I want to thank you for your assurances that 
you and others are not seeking to freeze or cut-off funds, 
given the nature of this project and its importance to the 
country, really, but also to Massachusetts.
    I have enjoyed working with you, Mr. Chairman, as you know, 
on a lot of different issues, and you and I have joined 
together on some budget-buster efforts, and so I share with you 
the concern about expenditures. I raised some of those 
questions back in 1996, but regrettably the nature of the 
political contest then sort of precluded those questions from 
being answered in an way that did not also carry with it a sort 
of political baggage, and it was a little bit lost in the 
electoral process.
    But I think that subsequently the IG, who you have already 
praised, and others, have already taken note of some of the 
early questions that I and others had, and have pursued those 
now to a point where we have a better understanding of the 
funding issues with respect to the Big Dig.
    As we think about those issues, let me just make clear what 
I understand the issue to be, and I think Secretary Slater will 
help to clarify it. It is my understanding, Mr. Chairman, that 
there is, in fact, a limit on the liability of Federal 
taxpayers with respect to the Big Dig, specifically. The 
specific allocation and funding of the Big Dig was under a 
specific authorization and a specific appropriation, and those 
funds are in effect capped. There is a limit as to how much 
money the Federal Government will specifically designate to the 
Big Dig.
    Now, that said, there are legitimate questions--I have 
raised them, as have Senator Kennedy, Congressman McGovern, 
Congressman Moakley, and other members of the delegation--about 
what happens to the TEA-21 money, which is also Federal 
dollars. No one is masking the notion that a certain component 
of TEA-21 dollars, that are Federal dollars which the State has 
a right to choose how to spend, can be spent also on some of 
those expenses.
    However, all of us feel very strongly--and this will 
clearly be a subject that I intend to pursue today with the 
Secretary and others--that that TEA-21 money cannot become a 
victim of this overrun, and that particularly the towns and 
cities of Massachusetts, the mayors and local authorities who 
increasingly have been distressed by the allocation process, 
cannot be short-changed in their expectations.
    Secretary Slater, to his credit, and the meeting we had 
with the delegation and with the Governor made it very clear 
that a component of Federal acceptance of a new financing plan 
must include an adequate guarantee with respect to the State 
allocation and share for the roads, bridges, and projects of 
our State, and I think we will look into that further today.
    I know the State of Massachusetts has made clear its 
willingness, its preparedness, and its obligation to pick up 
the difference so that the Federal taxpayer in effect is not 
being asked for a bail-out, and the Federal taxpayer is not 
exposed beyond the normal processes that the U.S. Congress is 
engaged in.
    Finally, Mr. Chairman, let me just say something. You and I 
have chatted about your affection for Boston and your great 
feeling about--and it is reciprocated, and I know we want to 
keep it that way.
    [Laughter.]
    Senator Kerry. But Mr. Chairman, the fact is, this project 
is more than just 160 highway miles of lanes. It is more than 
the 7-plus miles of depressing of the artery today. It really 
is the reconfiguration of one of America's great cities. It is 
going to restore a city in a way that future generations, I am 
confident, are not going to talk about how much it cost.
    They are going to talk about its impact on this city, and 
they are going to talk about it as a gateway city for the 
United States of America from the Atlantic. And others who 
travel to our Nation and come to the part of New England where 
the country was founded, and I will tell you that from an 
environmental point of view, in terms of clean air, in terms of 
open space, in terms of the cultural benefits that will come 
because of the linking of the city to its harbor and to a 
community that has been cut-off in the North End, this is a 
remarkable project, and it is going to have a profound, lasting 
impact.
    I believe you have seen something we always talk about in 
Boston, which is the emerald necklace. There is not a person 
who does not visit Boston that does not extol the virtues of 
the Charles River, the half-shell, the Esplanade, the 
extraordinary belt of green that goes all the way out to Newton 
and Watertown and Cambridge. It is one of the great assets, and 
we always talk about what we did 100 years ago, what Frederick 
Law Olmstead did.
    One of the reasons I worked on this project since I was 
Lieutenant Governor and since I came here to the Senate is that 
I think this is our legacy for the end of this millennium to 
the next centuries, and this will be the continuation of that 
belt through Boston in a way that affords us extraordinary 
opportunities for the entire development of the south side, 
what is called the seaport, extending all the way to South 
Boston and the Castle Island, and ultimately it will be what 
defines our city, in my judgment.
    So this is much more than just a highway project. It is 
leveraged by the highway project, but it is parks, recreation 
areas, open space, clean air, and indeed the cultural and 
aesthetic assets of an entire city, and I think people need to 
view it as such.
    That does not mean that the overruns are excusable. They 
are not, and Secretary Slater through his actions and the 
Governor through his actions have already made that clear. 
People are paying a price for that, and unfortunately our 
taxpayers will pay a price for that, but I still think we have 
to be measured and thoughtful about our approach to it, and I 
thank you, Mr. Chairman, for your willingness to be exactly 
that, and to engage in a good dialogue here today.
    [The prepared statement of Senator Kerry follows:]

               Prepared Statement of Hon. John F. Kerry, 
                    U.S. Senator from Massachusetts
    Mr. Chairman, I want to thank you for holding this hearing today, 
and for the way in which you have approached this issue. It is no 
secret in the United States Senate that you have an outstanding record 
when it comes to holding government accountable for waste. Whether it's 
by targeting pork in the federal budget or working--in an effort I've 
been proud to be a part of--to close wasteful corporate loopholes, 
you've always kept an eye out for the very best interests of the 
taxpayers and the citizens of this country. I know your efforts to 
understand and investigate the Big Dig are motivated by those same 
intentions--by a desire to have more public accountability, and more 
sunshine on our political process, not less--and I will tell you that 
on this issue of such central importance to so many in Massachusetts, 
your commitment to a fair and substantive dialogue is deeply 
appreciated.
    We've heard over the years that the Big Dig is the single largest 
public works project in the history of the United States--and it is. 
We've heard that the Big Dig is truly a marvel of modern engineering, 
and that's true as well. But these descriptions don't do a thing to 
give you a real sense of the way in which the Big Dig will transform 
life for the City of Boston--or the way in which it has literally been 
at the center or close to the center of every debate, every budget, 
every political calculation in Massachusetts politics now for close to 
20 years.
    This is a project which I remember hearing about and working on all 
the way back in 1982 when I was Lieutenant Governor. It's the first 
project I went to work on when I came to the Senate in 1985 after Paul 
Tsongas retired. This is the transportation effort that Tip O'Neill, 
Joe Moakley, Ted Kennedy and I worked for year in and year out every 
time federal money needed to be authorized to move us closer to the day 
when Boston would have a fully modernized, state of the art highway 
system beneath our streets.
    The Big Dig has been a part of everyday life in Boston for years--
and now that it's almost finished, just think about what that means: 
The Big Dig will be 7.5 miles long, and will include approximately 160 
lane miles. There will be 27 acres on corridor, which should, and I'll 
talk more about this later, mean no less than 20 acres of new green 
space added above ground in a city known for its historic preservation, 
known for the Boston Commons and the Emerald Necklace.
    And so here we are on the cusp--hard to believe given the events of 
the last months, but almost there--the design phase is 98 percent 
complete, construction is 60 percent complete and we believe the Big 
Dig will be completed in 2004.
    That--make no mistake--is a huge accomplishment for the State of 
Massachusetts, for all the members of our congressional delegation and 
the Democratic and Republican Administrations which have worked so hard 
on this project over the years. It is a victory that can't be measured 
in terms of miles or statistics because it is literally the story of 
the reconfiguration of one of our nation's oldest city--a city 
rebuilt--off ramps added, roads rebuilt, a new access route out to the 
airport--roads rerouted right through downtown--it is literally a story 
of Boston's rebirth.
    Now let's be clear, though, no one here--and no one in 
Massachusetts--supports massive cost overruns--we don't support people 
being less than candid in how they deal with the government, or with 
us, or with each other--but we believe in the importance of the Big 
Dig, and we believe that through the continued stewardship of Secretary 
Slater, and with the leadership today of Andrew Natsios, who has 
brought a reputation for integrity to the central artery efforts, the 
project is on track and the goal is on target.
    And so, before we turn everything over to our witnesses, to 
Secretary Slater and Kenneth Mead, to Andrew Natsios, let me just say 
that I am pleased that we're able to come together in a thoughtful and 
substantive way for this hearing, to talk about where this project has 
fallen short of our expectations and where it has exceeded them, but 
most importantly, to focus, in a meaningful way, on the work we must 
all continue to do to ensure that we move the Big Dig over the finish 
line in a reasonable and responsible appropriate financial condition, 
how we can protect taxpayers and ensure accountability, and how, most 
importantly, we can deliver for Massachusetts the marvel in engineering 
and transportation that will transform Boston for all who live there 
and for the millions who visit our city each year.

    The Chairman. Well, I thank you, Senator Kerry, and I 
appreciate the long relationship and communications we have had 
on this and many other issues. I am an unashamed admirer of the 
city of Boston and the surrounding area. It is an incredible 
cultural and, frankly, historic part of America that I have 
grown to admire and love very much. I appreciate your 
willingness to address this issue forthrightly, including to 
make sure that there is a cap.
    There seems to be some question here as to whether there 
really is or is not, and perhaps we can elicit from our 
witnesses a better depiction of that situation. So I thank you, 
and I thank our witnesses, and we would like to begin with you, 
Secretary Slater. Welcome back before the Committee.
    [The prepared statement of Senator Hollings follows:]

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina
    Today we are here to review the Boston Central Artery and Tunnel 
Project. This important project has been the source of both a large 
amount of federal investment as well as a considerable amount of 
federal scrutiny. The project has been under consideration for almost 
fifteen years, and to date we have invested over $5.8 billion in 
federal funds. The project has also been the subject of numerous audits 
by the Department of Transportation's Inspector General and the General 
Accounting Office.
    I was pleased to see that Secretary Slater established a task force 
to conduct a complete review of the Federal Highway Administration's 
(FHWA) oversight process of the Central Artery and Tunnel Project. 
According to the findings of the Task Force, the Federal Government's 
role in the CA/T Project oversight was lacking. The FHWA acts as 
stewards of federal tax dollars spent on any project, and in the case 
of the Central Artery and Tunnel Project they did not adequately review 
costs, expenditures and estimates. While most in the government would 
strive to achieve federal/state partnerships, we should not blindly 
accept the positions of partners.
    I am encouraged by the Federal Highway Administration's decision to 
accept and implement all of the Department of Transportation Inspector 
General's (IG) recommendations to help ensure against similar lapses in 
oversight. I believe that this is a good first step in addressing 
outstanding concerns about the project. The IG has been reviewing this 
project for many years and I believe that there are many solid 
recommendations contained in recent reports. For example, the most 
recent IG audit pointed out that the Project's 1998 Finance Plan did 
not disclose significant cost information about the Project, such as 
construction cost increases or that contract awards were exceeding 
budget. These warnings should have caused the FHWA to scrutinize the 
information being provided by the project more closely and place less 
reliance on state reported data. If the FHWA had independently reviewed 
the data provided by the OIG rather than relying on assertions from the 
State that future cost increases were unlikely, it would not have 
approved the finance plan presented by the Project in January 2000.
    One thing is clear--the cost to complete the Central Artery and 
Tunnel Project has increased tremendously from the initial estimate of 
$2.56 billion in 1985. Prior to February of this year, the total 
project cost was estimated to be $10.8 billion. On March 31, 2000, the 
Federal Task Force on the Boston Central Artery and Tunnel Project 
projected that a realistic cost estimate for the project is now $13.4 
to $13.6 billion. While I am encouraged that there have been changes 
made at both the state and federal level to improve oversight of this 
project, I believe that the repeated and deliberate failure by local 
project managers to disclose the full financial picture puts into 
question the integrity of the Federal/State partnership. This project 
is vitally important to the future of transportation in the 
metropolitan Boston area and should not be jeopardized by obstruction 
and non-disclosure.
    I am pleased to welcome Secretary Slater and Inspector General Mead 
back to the Committee and I look forward to hearing testimony from all 
of the witnesses this morning.

    [The prepared statement of Senator Inouye follows:]

 Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
    Today we are here to review one of the largest and most 
technologically challenging transportation projects ever constructed--
the Boston Central Artery and Tunnel Project. This important project 
has required a lot of planning and engineering as well as a large 
investment of federal infrastructure dollars. Recently it has been 
brought to our attention that this project should have been the 
recipient of a greater level of state and federal oversight as well.
    While the scope of this project is enormous, so too is the 
responsibility that comes along with it. The management system of this 
project failed to detect cost overruns and unconditionally accepted 
inaccurate information provided by the State. While it is fair to 
expect that the State would provide reliable data, the Federal Highway 
Administration continued to rely on State data rather than undertaking 
an independent review, even when faced with contradictory information 
from the Department of Transportation's own Inspector General.
    I was pleased to see the recent report of the Federal Task Force on 
the Boston Central Artery/Tunnel Project. Clearly the implementation of 
the 34 recommendations contained in the Task Force's report will begin 
to restore the integrity and public confidence in the project. The 
relationship between the State and Federal governments needs to be 
based on trust rather than suspicion. I believe that the recent changes 
in the management structure and reporting begin to repair the breach, 
but all of the parties involved in this project will need to be 
constantly vigilant--it will take time to restore the faith that was 
lost. Additionally, at the Federal level, we need to put into place a 
process or system that will prevent this type of failure from occurring 
again.
    I am pleased to welcome all of the witnesses to the Commerce 
Committee. I look forward to hearing testimony from all of you this 
morning.

        STATEMENT OF HON. RODNEY E. SLATER, SECRETARY, 
               U.S. DEPARTMENT OF TRANSPORTATION

    Secretary Slater. Thank you, Mr. Chairman. Let me also say 
welcome back to you as well. It is a pleasure to be before you 
once again and to talk about matters of importance to the 
American people. Let me also say, Senator Kerry, it is a 
pleasure to be before you, and I am also pleased to be joined 
at the witness table by our distinguished IG, Ken Mead. Much 
has been made of the fine work that he has done along with his 
staff. You mentioned Ray DeCarli. I saw Ray a little earlier. 
He is here today. He has done a wonderful job, Mr. Chairman, 
and I appreciate your having made note of that.
    In that regard, again I just want to say that I am pleased 
to be here at the witness table with our Inspector General, Ken 
Mead, and we look forward to the testimony about this important 
project. If I might, though, Mr. Chairman, let me also just 
make passing note of some of the other issues that you raised, 
just acknowledging that I, too, understand the importance of 
those concerns.
    We have talked on many occasions about the importance of 
truck safety, the growing importance of the trucking community 
and the fact that we need to be mindful of the sharing the road 
responsibilities that passenger vehicles along with truck and 
bus drivers share.
    As you noted, we have established as a result of our effort 
working with you, the Congress, and the Administration, the new 
Federal Motor Carrier Safety Administration. We have moved 
forth expeditiously getting the work of that organization 
underway. We recently dealt with a matter pertaining to hours 
of service, and we are moving forward on our goal of a 50-
percent reduction in fatalities and crashes involving motor 
carrier vehicles over the next decade, so we appreciate your 
leadership on this issue and look forward to our continued work 
together in this regard.
    We also look forward to the hearings dealing with the 
reauthorization of the Maritime Administration and issues that 
might come up in that regard. This is a very important piece of 
legislation, and we look forward to future hearings dealing 
with the Quincy Shipyard issue as well as others pertaining to 
the reauthorization of the Maritime Administration.
    With that, Mr. Chairman, let me move, then, quickly to the 
issue at hand. Let me join Senator Kerry in saying to you 
thanks for the opportunity to come into this forum and discuss 
a very important project, but I dare say not only to Boston and 
to the New England region but to our Nation as a whole.
    This project is one of the largest, most complex, and most 
technologically challenging infrastructure projects ever 
undertaken. When it is completed, and it will be completed, it 
will be a vital and important addition to our transportation 
network, and it will also speak to the dreams and hopes and 
aspirations of our system for the 21st Century and the new 
millennium.
    But just as this project is about to set standards and has 
set standards as it relates to engineering excellence, so, too, 
should it set standards as it relates to the integrity, and we 
mean this in a positive way, the integrity of highway project 
management, and in that regard we have just got a lot of work 
to do.
    The Central Artery project has, to be frank, suffered under 
a failed management system. No one is blameless in this regard. 
The State failed to fully disclose material matters about cost 
overruns, and we at U.S. Department of Transportation failed to 
exercise independent and critical oversight. In the October 7, 
1999 draft report that has been referred to by the IG, the IG 
warned that the project was experiencing significant 
construction cost increases, and that the project's 1998 
finance plan did not disclose these construction cost increases 
or contract awards that were exceeding budget.
    Despite these warnings, the Federal Highway Administration 
Division Office continued to rely on State cost data, rather 
than undertaking an independent review. This failure of 
management significantly--and I underscore that word, 
significantly--tarnished the Federal-State partnership that 
dates back to 1916, and it led to the formation of a Federal 
task force on the Boston Central Artery/Tunnel project.
    The Federal task force was charged with analyzing the 
oversight process of this project, reviewing the structure of 
the FHWA division's office, and determining the effectiveness 
of the reporting documents, along with being charged with 
recommending changes to FHWA as it relates to policies or 
procedures pertaining to this matter.
    The task force has completed its work, and it did so in 
early April of this year, and it has presented its findings and 
recommendations to the Federal Highway Administrator, Ken 
Wykle, who is here with me today, and to me. Here I would like 
to especially note the quality of leadership of our Deputy 
Administrator of the Federal Highway Administration, Walter 
Sutton, who was selected by Administrator Wykle to lead this 
effort. I commend Mr. Sutton and all the members of our team, 
who did very important work not only for this project but for 
our future understanding of projects of this nature as we go 
forward.
    On April 11, I presented the task force findings to the 
Massachusetts congressional delegation. Senator Kerry was 
there, all the members of the delegation were there, Senator 
Kennedy and others, and also we had Governor Paul Cellucci in 
attendance as well.
    Here, let me acknowledge the fact that we were frank in our 
discussions, and we were clear in our give and take. The 
report, which includes 34 recommendations, was publicly 
released thereafter. At the April 11 meeting, there was 
unanimous agreement, Mr. Chairman, among the Federal and State 
parties in attendance that we should move forward expeditiously 
to repair the breach of trust between Federal and State 
officials. Everyone also agreed that it was of the utmost 
importance to restore integrity and public confidence as it 
relates to this project.
    Now, I am sure that this hearing will also shed light on 
how we can continue to enhance our efforts in this regard, and 
so again I join Senator Kerry in saying to you, Mr. Chairman, 
thank you for affording us this opportunity. As stewards of 
Federal funds, the U.S. Department of Transportation has the 
responsibility to make certain that taxpayer dollars are being 
invested in the best and most efficient manner. We have 
developed a comprehensive strategy based on the recommendations 
of the task force to do just that as it relates to this 
project, to ensure that our oversight errors will not be 
repeated as it relates to this project. But, as importantly, to 
learn from our experience here to ensure that we do not make 
these kinds of oversight errors as it relates to other major 
projects of national and regional significance.
    Moreover, we will require the State to fully fund the 
recently announced cost increases, as well as any future 
overruns should they occur and, as Senator Kerry noted, and we 
will get into this a bit more, the State must also, in meeting 
this requirement, meet its obligation to ensure that an agreed-
upon State-wide balanced program and plan is also protected.
    So we thank you again, Senator Kerry and members of the 
delegation, in pressing forth on this point.
    Mr. Chairman, before getting into four or five of the 
specific recommendations, let me also say there is one other 
thing that we have done at the Department. In learning from our 
experience as it relates to the Central Artery project we are 
seeking to apply those lessons to the entire transportation 
enterprise. In this regard, I have directed all of the modal 
administrations within the Department to work with the Office 
of the Secretary in putting together a DOT-wide process to 
enhance our oversight and monitoring of major national and 
regional projects.
    In dealing with this matter, we will build on the work that 
is already underway within the Federal Highway Administration. 
Actually, this work was initiated even before receiving the 
final report of the task force. Here, within the Federal 
Highway Administration, we are focusing on improving oversight 
of all major highway and bridge projects by creating a major 
projects team.
    Well, this major projects team and our DOT-wide major 
projects initiative will assist all of our offices and all of 
our partners in dealing with risk assessment, oversight 
decisions, and areas of finance and the environment and program 
development. I want to begin by saying that we have learned 
from this experience, and we intend to ensure that all within 
the Department responsible for major projects in any mode will 
benefit from the lessons learned through this experience.
    Now, more specifically as it relates to the recommendations 
of the task force, one of the important task force 
recommendations was to change the State leadership of the 
project in parallel with a leadership change within the FHWA as 
it relates to our division office. I commend Governor Cellucci 
for his immediate and decisive action in this regard.
    After a briefing as it relates to the task force report, 
the Governor announced that Mr. Andrew Natsios would be the new 
chair of the Massachusetts Turnpike Authority, and I am pleased 
that Mr. Natsios is here today. I am also very, very pleased 
that within 3 days of his selection he was meeting with a 
senior leadership team from the Department that included our 
Deputy Secretary Mort Downey, FHA Administrator Ken Wykle, and 
our Deputy Administrator within the FHWA, Walter Sutton, who 
again led the task force effort that brought forth the 
recommendations.
    Also, I am pleased to note, Mr. Chairman, that Mr. Natsios 
intends to meet with Mr. Mead very, very soon, and I also look 
forward to meeting with him soon as well. In a nutshell, 
because of this decisive action, we have begun the process of 
repairing the breach between, or breach in the Federal-State 
relationship, and in rebuilding the integrity of the management 
of this important project.
    Second, the FHWA has already acted on the task force 
recommendation to withdraw the delegation of authority to 
accept annual financial plan updates for the Central Artery 
project from our FHWA division office in Boston. Now, that 
responsibility will be carried out and returned to the Federal 
Highway Administration headquarters offices.
    The headquarters is now also completing a comprehensive 
review of the project finance plan update submitted on March 
15, and will be responding to the State very soon in this 
regard.
    Let me make clear and state once again that in dealing with 
this particular issue, we will require the State to fully fund 
the recently announced cost increases, as well as any future 
overruns, should they occur. The plan must document that 
sufficient funding is available to complete the project, or the 
plan will not be accepted.
    As we continue to cooperate fully with the State to get the 
project completed, we will do so in a different way. We will 
trust, but we will also verify.
    Third, I know that an area of concern for the citizens of 
Massachusetts and also for the entire delegation, congressional 
delegation as well as the Governor, as well as those of us who 
believe in fairness, deals with whether the cost overrun as it 
relates to the project in Boston, whether that will threaten 
transportation funding for other areas of the State.
    We all share that concern, and to address this concern I am 
very pleased to note that the task force recommendation has 
been accepted that the Massachusetts Highway Department reach 
agreement with local officials on terms of a balanced State-
wide program and make this agreement a formal condition of its 
State transportation improvement program approval process.
    The FHWA will not approve and fund the State's 
transportation improvement program, nor continue to participate 
in the Central Artery project, unless there is an enforceable 
commitment to a balanced, State-wide program.
    Fourth, the FHWA is drafting a Central Artery/Tunnel 
project agreement and both of you have made reference to what 
is in writing and what is not in writing. This is again 
something we are moving forward on, and it will be an agreement 
that will be executed by the FHWA, the Massachusetts Highway 
Department, and the Massachusetts Turnpike Authority.
    This agreement will formalize the signers' commitment to 
implement the task force recommendations. And, by the way, I 
have not said this, but many of those recommendations include 
recommendations that were offered by the IG where appropriate, 
so I want to acknowledge that, Mr. Mead and Mr. Chairman and 
Senator Kerry. The document includes the requirement for an 
independent certification of all future finance plan 
information, and it also, and most importantly, requires that 
the Massachusetts Highway Department reach agreement with the 
local officials as it relates to a balanced State-wide highway 
and bridge program.
    Another issue of particular interest to this Committee is 
the question raised by the Department's IG about what is called 
the owner-controlled insurance program, specifically the 
appropriateness of keeping large insurance trust reserves after 
the year 2004, and the use of these reserves as credits in 
finance plan updates to reduce the current project cost total.
    We believe that owner-controlled insurance is an effective 
way of providing insurance coverage on a large project, and 
that benefits include not only cost savings but also improved 
safety. We agree, however, that unanswered questions remain 
concerning the level of insurance and handling of trust funds. 
FHWA is now in the process of finalizing a contract with an 
independent insurance consultant to review the Central Artery 
insurance program as a whole, and to assist the Department of 
Transportation in the development of a national policy on 
owner-controlled insurance programs, so here again, lessons 
have been learned from this experience.
    Also in response to our Inspector General and the task 
force recommendations, the State has agreed to use money within 
the insurance trust to pay the insurance premiums for the next 
2 years, and will not claim insurance program credits as 
offsets to the project's total current cost, and again, this is 
an insightful and commendable move on the part of the State.
    In closing, the Central Artery project, as I stated before, 
is one of the largest, most complex and technically challenging 
infrastructure projects ever undertaken, and when completed it 
will be a significant addition to our transportation 
enterprise. However, as I have stated before, just as this 
project sets new standards for engineering excellence, so, too, 
should it set new, positive standards for highway project 
management. You have my commitment, Mr. Chairman and Senator 
Kerry, and to all the members of your Committee who join you in 
this responsibility, you have my commitment that this important 
project will be completed in a manner that restores integrity 
and public confidence in our stewardship of the Federal aid 
highway program, and that the oversight lessons learned on this 
project will be used DOT-wide to monitor other major projects 
of national and regional significance.
    Again, Mr. Chairman, Senator Kerry, thank you for the 
opportunity to come before you to discuss important 
transportation concerns, and especially this particular 
project.
    [The prepared statement of Secretary Slater follows:]

        Prepared Statement of Hon. Rodney E. Slater, Secretary, 
                   U.S. Department of Transportation
Introduction
    Mr. Chairman, thank you for the opportunity to testify today on 
issues concerning the Boston Central Artery/Tunnel Project (CA/T).
    The Project is one of the largest, most complex, and most 
technologically challenging infrastructure projects ever attempted. 
When it is completed, it will be a vital and important addition to our 
transportation network.
    However, just as this Project sets standards for engineering 
excellence, so too should it set standards for highway project 
management.
    The Central Artery Project has suffered under a failed management 
system. No one is blameless for this failure. The State failed to fully 
disclose material facts about cost overruns. The Federal government 
failed to exercise independent and critical oversight.
    In the October 7, 1999 draft of the Department of Transportation's 
Office of Inspector General (OIG) report, the OIG warned that the 
Project was experiencing significant construction cost increases and 
that the Project's 1998 Finance Plan did not disclose these 
construction cost increases or contract awards that were exceeding 
budget. Despite these warnings, the Federal Highway Administration 
(FHWA) Division Office continued to rely on State cost data rather than 
undertaking an independent review.
    This failure of management led to the formation of the Federal Task 
Force on the Boston Central Artery/Tunnel Project. The Task Force was 
charged with analyzing the oversight process for the CA/T Project, 
reviewing the structure of the FHWA's Division Office, determining the 
effectiveness of reporting documents, and recommending changes to FHWA 
policy or procedures. The Task Force completed its work in early April 
and presented its findings and recommendations to FHWA Administrator 
Kenneth Wykle and me. Both he and I have reviewed this report, and we 
accept the findings and recommendations made.
    On April 11, I presented the Task Force's findings to the 
Massachusetts Congressional delegation and to Governor Paul Cellucci. 
The report, which includes 34 recommendations, was then publicly 
released.
    At the April 11 meeting there was unanimous agreement to move 
forward to repair the breach of trust between the State and the Federal 
government. Everyone agreed that it was of the utmost importance to 
restore integrity and public confidence in this project.
    As the steward of Federal funds, the Department of Transportation 
has a responsibility to make certain that taxpayer dollars are being 
invested in the best and most efficient manner. We have developed a 
comprehensive strategy, incorporating the Task Force recommendations, 
to ensure that our oversight errors will not be repeated on this 
project, or any other projects. Moreover, we will require the State to 
fully fund the recently announced cost increases, as well as any future 
overruns, should they occur.
Response to Task Force Recommendations
    The Task Force consisted primarily of Federal employees familiar 
with the highway assistance program but not directly involved in 
oversight of CA/T to date. In its report, the Task Force faulted 
Massachusetts for breaching its trust with the FHWA and others by 
``intentionally withholding knowledge of the Project's potential cost 
overrun.'' The report also faulted FHWA for failing to maintain a 
sufficiently independent relationship with CA/T Project leadership to 
adequately fulfill its oversight role. The Task Force report offers 
solid recommendations that will help improve fiscal accountability, 
advance the CA/T Project toward successful completion, and lead to a 
sound financial investment. FHWA Administrator Wykle and I are 
committed to full implementation of the recommendations.
Changes in Management Structure and Reporting
    One important Task Force recommendation is to change the leadership 
of the CA/T Project in parallel with the leadership change that FHWA 
made in the FHWA Massachusetts Division. The FHWA reassigned its 
Division Administrator and brought in a new Acting Division 
Administrator, Paul Lariviere.
    I was particularly pleased that Governor Cellucci acted immediately 
after the briefing on the Task Force report to announce that Andrew 
Natsios, would be the new Chairman of the Massachusetts Turnpike 
Authority, the agency managing the project. In addition, I was 
extremely pleased that Mr. Natsios, just three days later, met with DOT 
Deputy Secretary Mortimer Downey, FHWA Administrator Wykle, and FHWA 
Deputy Administrator Walter Sutton, to continue the process of 
restoring integrity to the Federal/State relationship on this Project.
    The FHWA has also already acted on the Task Force recommendation to 
withdraw the delegation of authority to accept annual Finance Plan 
Updates for the CA/T Project from the FHWA Massachusetts Division 
Administrator and return the approval authority to FHWA Headquarters. 
FHWA Headquarters is now completing a comprehensive review of the CA/T 
Project Finance Plan Update, submitted on March 15, 2000.
Statewide Transportation Program
    I share the concerns that many Massachusetts citizens have raised 
about whether the cost overruns in Boston will threaten the share of 
federal transportation funding for other areas of the State. Therefore, 
I was particularly happy to accept the Task Force recommendation that 
the Massachusetts Highway Department (MHD) reach agreement with local 
officials on the terms of a balanced statewide program and make this 
agreement a formal condition of its State Transportation Improvement 
Program (STIP) approval. The FHWA will not approve and fund the State's 
transportation improvement program, nor continue to participate in the 
Central Artery Project, unless there is an enforceable commitment to a 
balanced statewide program.
Major Projects Team
    Even before the Task Force report was released, FHWA Headquarters 
initiated actions to improve oversight, not only on the CA/T Project, 
but on all major highway and bridge projects. FHWA has created a Major 
Projects Team to improve the Headquarters administration and oversight 
of large construction projects, in order to ensure efficient use of 
Federal resources and to minimize project delays. A major project is 
defined as a project in which a Finance Plan is required by the 
provisions of the Transportation Equity Act for the 21st Century (TEA-
21) and/or those projects designated by FHWA that are extremely complex 
or controversial. A framework has been established for project 
administration and oversight, and the responsibilities of the Major 
Projects Team have been defined. While the FHWA Division Offices will 
remain responsible for traditional Federal-aid oversight 
responsibilities, the Major Projects Team will assist the Division 
Office with risk assessment and oversight decisions in the areas of 
finance, environment, and program development. The Team's duties 
include preparing guidance for administration and oversight of major 
projects, for innovative contracting proposals, and for use of an Owner 
Controlled Insurance Program (OCIP). The Team will also oversee the 
implementation of relevant recommendations from General Accounting 
Office (GAO) and OIG audits of major projects. In addition, the Team 
will review project estimates and will provide an independent review of 
the initial Finance Plan for a major project and its annual updates.
    This enhanced oversight of major projects has applicability to all 
the Department's modal administrations. In fact, for some time we have 
been tracking at a senior management level the largest transportation 
infrastructure projects--generally those over $1 billion in value--and 
reporting key information on a bimonthly basis.
Insurance Issues
    The OCIP for this project is a consolidated insurance program 
undertaken by the Project owner, the Commonwealth of Massachusetts, to 
provide blanket insurance coverage to contractors, subcontractors, and 
design firms working on the CA/T Project.
    Studies have shown that a well managed OCIP, sometimes called wrap-
up insurance, can be cost-effective and, when coupled with a good 
overall coordinated project safety program, may reduce injuries and 
claims. The CA/T safety record has been excellent, with recordable 
accidents and loss time rates well below the national averages. A June 
1999 GAO audit report on ``Advantages and Disadvantages of Wrap-Up 
Insurance for Large Construction Projects,'' indicates that a wrap-up 
insurance program can save project owners up to 50 percent on the cost 
of traditional insurance, or from 1-3 percent of total project 
construction costs, depending on its size.
    As you know, our Inspector General raised concerns about the 
appropriateness of keeping large trust reserves after 2004 when it was 
expected that construction activity would be complete and loss exposure 
minimized, and about the use of credits in Finance Plan updates to 
reduce the total Project cost. If funds were allowed to remain invested 
in the insurance trusts until the program sunset in 2017, the 
anticipated balances to be returned to State and Federal funding 
sources could be substantial. The prior administration of the Turnpike 
Authority considered the balance to have resulted from expenditures for 
the CA/T Project and believed that the balance should, therefore, be 
allowed as a credit reducing the Project's final total cost. In 
response to our Inspector General and to Task Force recommendations, 
the State has agreed to use money within the insurance trust to pay the 
insurance premiums for the next two years and will not claim insurance 
program credits, that will not be available until the distant future, 
as offsets to the Project's total current costs.
    The Task Force also recommended that FHWA retain the services of an 
independent insurance consultant to review the CA/T insurance program 
as a whole and the risks associated with the Project, to identify an 
acceptable level of funding to manage those risks, and to assist the 
Department of Transportation in the development of national policy on 
OCIPs. FHWA has identified a consultant to assist with the review and 
is in the process of finalizing the contract. The consultant will 
submit a report by July 31, 2000.
Project Agreement
    The Task Force's final recommendation was that FHWA and the MHD 
enter into an agreement to formalize the recommendations in the report 
that are relevant to the working relationship between the parties. FHWA 
is in the process of finalizing the Central Artery/Tunnel Project 
Agreement to be executed by June 1, 2000, among FHWA, the MHD, and the 
MTA. The purpose of this agreement is to clarify funding commitments on 
the CA/T Project, to strengthen and clarify the FHWA oversight role, 
and to establish new reporting and verification procedures necessary to 
ensure accurate and full financial disclosures in the future. The 
document also requires that the MHD reach agreement with local 
officials on the terms of a balanced statewide program.
    This agreement formalizes the mutual commitment to complete the CA/
T Project, in consideration of which the signers agree to implement the 
Task Force recommendations for improving cost and funding oversight and 
information submissions, as incorporated in the agreement.
Improvements in Project Cost Reports
    The Task Force found neither the Project Management Monthly (PMM) 
nor the Finance Plan provides a clear, accurate, and timely picture of 
the total potential CA/T Project cost exposure or cash flow needs. All 
of the Task Force's specific recommendations for improved reporting of 
the funding revenues and outlays will be incorporated into future 
Finance Plan Updates. For example, in all future Finance Plan Updates, 
the CA/T Project management must provide certification by an 
appropriate independent consultant as to the accuracy of the 
information contained in the Finance Plan, This requirement for an 
independent certification is also included as one condition of the 
Project Agreement.
Project Background
    The Boston central Artery/Tunnel Project entails building or 
reconstructing about 7.5 miles (160 lane miles) of Interstate highway 
in the City of Boston, routing I-93 traffic through tunnels under 
Boston, replacing the I-93 bridge over the Charles River, and extending 
I-90 under Boston Harbor to Logan Airport. The Project will link air, 
sea, rail, bus, and subway facilities. It is expected to produce local 
and regional economic growth as well as environmental benefits, to 
reduce traffic congestion, and to improve traffic safety.
    The two main elements of the Project, replacing the elevated 
Central Artery freeway with a tunnel and building the Third Harbor 
Tunnel (now Ted Williams Tunnel), developed separately at the 
Commonwealth of Massachusetts's initiative. Congress established 
eligibility for Federal-aid funding for the combined CA/T Project under 
the Surface Transportation and Uniform Relocation Assistance Act of 
1987 (STURAA).
    Despite prior reservations about replacing the elevated Central 
Artery, from the moment Congress authorized this project, FHWA has 
cooperated fully with the State to get it built and to fulfill our end 
of the partnership arrangement. We will continue to do so, but on a 
basis of ``trust but verify.''
Federal-Aid Highway Program
    As a former Federal Highway Administrator, I am proud of the 
outstanding work the FHWA has done throughout its history to create the 
highway network that sustains our economic development, enhances our 
international competitiveness, and supports the freedom of movement 
that is an essential element of the American Way of life. The 
cornerstone of this accomplishment has always been the partnerships we 
have built over the years with State transportation departments. The 
Federal/State cooperative relationship was defined in the Federal Aid 
Road Act of 1916 and made permanent in the Federal Highway Act of 1921. 
The role of the States in this relationship is to select, plan, design, 
and construct transportation improvements. Their responsibilities 
include working with local governments to determine the best mix of 
projects, across the spectrum of modes and options, to meet their 
transportation needs, and to determine how funds will be distributed 
among projects within State boundaries. By law, the authorization of 
the appropriation of Federal-aid highway funds ``shall in no way 
infringe on the sovereign rights of the States to determine which 
projects shall be federally financed.'' \1\
---------------------------------------------------------------------------
    \1\ 23 U.S.C. Sec. 145(a) (Supp. 1999).
---------------------------------------------------------------------------
    The role of the Federal Government is to ensure projects undertaken 
with Federal funds are developed in compliance with Federal laws and 
requirements. This relationship has evolved over the years and today 
varies depending on the project. In accordance with changes in Federal 
law, we have modified our oversight approach to give State and local 
officials greater responsibility on projects off the National Highway 
System (NHS). However, the FHWA's oversight role on larger projects was 
enhanced under TEA-21. Section 1305(b) requires that projects with an 
estimated total cost of $1 billion or more submit an annual Finance 
Plan, based on detailed estimates of the cost to complete the project 
and on reasonable assumptions of future cost increases. The CA/T 
Project has had a Finance Plan required since the mid 1990's, long 
before the statutory requirement.
    Over the years, FHWA developed a strong Federal/State partnership 
for administering the Federal-Aid Highway Program, based on mutual 
trust, fairness, respect, cooperation and communication. In reviewing 
Finance Plans, FHWA continued to rely on the partnership concept, with 
the State remaining responsible for preparing the cost portion of the 
documents. As the Task Force Report concludes, in the case of the CA/T 
Project, our historic partnership failed. We are committed to restoring 
trust to this relationship.
Conclusion
    In conclusion, let me say that the Department of Transportation is 
dedicated to making sure that this important project is completed in a 
manner that restores integrity and public confidence in our stewardship 
of the Federal-aid Highway Program. We take our oversight 
responsibilities very seriously and have taken steps to ensure that 
past mistakes on this project will not be repeated.

    The Chairman. Thank you, Secretary Slater. Mr. Mead, 
welcome back.

  STATEMENT OF HON. KENNETH M. MEAD, INSPECTOR GENERAL, U.S. 
                  DEPARTMENT OF TRANSPORTATION

    Mr. Mead. Thank you, Mr. Chairman, Senator Kerry. I first 
want to say that it is a real privilege to be here, and 
especially a distinction to be at the table with Secretary 
Slater, because, as has been consistent with the entire 
relationship we have, I think that if you do a close reading of 
the Federal Highway Task Force report you will find that it is 
among the most candid and explicit self-critiques. It certainly 
is among the most explicit self-critiques I have seen in my 
time reviewing the Department, so it is truly a distinction.
    Also, I certainly appreciate the words about my Deputy, Ray 
DeCarli, who is retiring after 34 years. He is a public servant 
of great integrity and extraordinary skill, and I have asked 
him to extend, but at this point, after 34 years, I think he is 
practically working for free.
    [Laughter.]
    Mr. Mead. Let me get to the point here. I think the Central 
Artery project, as everybody has pointed out, is very important 
to Massachusetts, New England, and the United States. In fact, 
I am from New England, and anybody who has had to go through 
Boston over the years, before the artery, can see why they need 
to do something, and this is a major national project but it is 
also the most expensive highway project in the United States.
    Now, as shown in this chart, back in 1985 the artery was 
estimated to cost $2.6 billion. That cost may now be as much as 
$13.6 billion. The Federal share is understood to be about $8.5 
billion.
    In our draft report last October we reported on artery cost 
overruns and said if cost overruns continued another $140 
million would be added to the previously reported $10.8 billion 
cost. We also disagreed with an $826 million insurance credit 
that the project claimed it would receive in 2017. Why did we 
do this? We disallowed the credit because it was based on the 
improper retention of Federal funds for investment purposes. We 
concluded the cost of the project was about $11.8 billion, with 
the potential to go to around $13 billion back in October.
    In late October, the Highway Administration and the Central 
Artery officials vehemently rejected our warnings and findings 
and claimed that the cost increases were unlikely. ``Totally 
unsupported'' were among the words the Artery used to 
characterize our work.
    The Chairman. And who were those individuals, Mr. Mead?
    Mr. Mead. The letter was signed by the project director, a 
gentleman named Mr. Moynihan.
    The Chairman. Who is still working there, is that right?
    Mr. Mead. Yes. I do not know, though, who the individuals 
were who contributed to the specific content of that letter. I 
should hasten to add that, subsequent to the disclosures in 
February, Mr. Moynihan personally came to Washington. He met 
with me and I think in a very statesmanlike way extended an 
apology for this letter, and I would want to put that on the 
record.
    The Chairman. Did he issue a public apology?
    Mr. Mead. I guess I have just made it public.
    [Laughter.]
    The Chairman. No, I mean, he sends a letter that is 
distributed to all the media rejecting your findings, and then 
he comes to you and meets with you privately to apologize. 
There is a little bit of an imbalance there, but please 
proceed.
    Mr. Mead. I think they said publicly they thought the 
letter was overly vitriolic.
    Senator Kerry. What was the gap between receipt of the 
letter and the visit?
    Mr. Mead. Months. I believe we received the letter in 
December, or late October, in late October, and the visit was 
in--I believe in March.
    Senator Kerry. So only after the issue had become public?
    Mr. Mead. Yes, sir.
    Senator Kerry. Thanks.
    The Chairman. Go ahead.
    Mr. Mead. Their response, though, was so adamant. I mean, 
both the Highway Administration and the Artery coming back 
saying we were all wet, totally unsupportable, disagreement 
with recommendations. It just seemed so fundamental that we 
took the unusual step of not releasing the report and sending 
our staff back to revalidate the data.
    The Chairman. Could I give you a quote? ``Your draft report 
espouses a backward-looking management technique that is 
unworkable and shows a fundamental lack of understanding of how 
a multi-billion megaproject needs to be managed.''
    Mr. Mead. Yes. Those were also among the words used.
    The Chairman. I am quoting from the letter to you.
    Mr. Mead. Well, we went back to revalidate the numbers and 
we found the cost trends were not only continuing but were 
getting worse. For example, contract awards were exceeding 
budget by 38 percent rather than the 24 percent we found in our 
earlier audit work.
    We were just finishing up this work when on February 1, the 
Federal Highway Administration approved the Central Artery's 
finance plan. Later that very day, the Central Artery project 
manager surprised FHWA with the revelation that cost would go 
up by $1.4 billion. This was the very same day, as I said, that 
the Highway Administration approved, it turns out without 
analysis, the Artery's finance plan, which made no disclosure 
of these costs.
    Incredibly, this finance plan was approved, and it did not 
even say how much the project would cost. Now, most finance 
plans, you would think, would have some reference to what the 
cost of the project would be.
    The Chairman. Who signed off on that?
    Mr. Mead. I do not recall the official. It may have been 
the project manager. I do not recall specifically, sir. You 
mean in Washington?
    The Chairman. Yes.
    Mr. Mead. It would be the project manager for the Artery, 
who has since been reassigned.
    Well, we now know that senior Artery----
    The Chairman. Can I just clarify, the Federal project 
manager or the State project manager?
    Mr. Mead. The Federal project manager.
    Secretary Slater. And I should add here, if I may, that 
that is why the recommendation of the task force was so 
important to remove that responsibility and authority from the 
division office to the headquarters office so that we would 
have much more oversight on that particular process.
    The Chairman. Thank you.
    Mr. Mead. Well, we now know that the senior Artery project 
managers were well aware costs were increasing very 
significantly when they replied to our draft report and 
deliberately withheld that information. It is still open to me, 
Mr. Chairman, as to exactly when they knew of the magnitude of 
this increase. I am pretty reasonably certain they knew of it, 
the magnitude, back when the response to our report was filed, 
but this is a serious breach of their due-diligence duties to 
the citizens of Massachusetts and taxpayers in general, and the 
Federal Government.
    Now, how could this happen? I cannot speak to the inner 
workings of the Central Artery management. I can to the Federal 
Highways. Federal Highways has over the years viewed States as 
its partners, and that is fine so long as the partnership 
works. But they rely on trust and perform very little 
independent analysis of the data they are given. In the case of 
the Artery, the financial analyst assigned to the Massachusetts 
Division Office did not even review the project's finance plan.
    The alarming fact here, as the Secretary's task force 
pointed out, is that the Highway Administration's oversight on 
the Central Artery, which is what we are focusing on today, 
that oversight went beyond the Highway Administration's normal 
oversight efforts on large projects, so this is obviously an 
issue that transcends just the Central Artery.
    The Secretary used the words, ``trust, but verify'' and I 
think that captures in a nutshell the approach that should be 
taken. Unless that lesson's learned, the problems that have 
occurred on the Central Artery will likely be repeated not just 
on the Artery but on other large infrastructure projects.
    We have also recommended that the Highway Administration 
issue guidance on financial plans prepared by the States, and 
verify their accuracy. The current guidance, Mr. Chairman and 
Senator Kerry, is woefully inadequate. The Highway 
Administration initially disagreed with this recommendation. 
The Secretary directed that it be implemented. The key now is 
going to be follow-through.
    Now, let me speak to the matter of a balanced State highway 
program and the use of Federal funding for what is called 
``advanced construction.'' This is an important issue, and it 
was alluded to by both of you in your opening remarks, and of 
course the Secretary. The State has promised--this is not in 
law, but the State has promised that it will spend no more than 
half of its Federal apportionment on the Central Artery after 
2002. I think right now we are in the neighborhood of 65 to 70 
percent of the Federal apportionment, but after 2002 they are 
saying no more than half.
    The State has also committed, in addition to not spending 
more than half of its Federal apportionment, to spend at least 
$400 million to maintain a balanced State program. Now, I think 
the State needs to define exactly what a balanced program 
means. For example, does it include snow removal, and State 
Highway Administration costs, or does all the money go to hard 
construction and hard maintenance?
    What is the particular mix that the State anticipates 
between Federal and State funds? And, are we talking about 
commitments, budget authority, actual cash outlays, or exactly 
what? I understand the principals are meeting on this, but it 
is very important, because 2 years from now people are going to 
say, well, we agreed to a balanced State program, and it is 
important that we have a benchmark that we are all on the same 
wavelength.
    Now, I want to mention this advance construction, which is 
very important to this issue. Under advance construction, 
highways authorize the State to proceed with work in advance of 
the State receiving its highway apportionment. The State pays 
for the work with its own or borrowed money--usually borrowed 
money--and then pays it back out of future Federal highway 
apportionments. If you see this chart, this shows what is 
happening here.
    It is like a credit card, where you make a charge and you 
pay it off with later salary payments you get. As shown in this 
chart, in reimbursing itself for nearly $1.8 billion of 
already-approved advance construction, Massachusetts has 
effectively encumbered nearly 50 percent of its Federal 
apportionment of Central Artery cost through the year 2011. 
That is, in fact, 7 years after the scheduled completion of the 
project. I do not think that fact is commonly known.
    Now, what do we think should be done about this? We think 
Congress ought to consider restricting the use of advance 
construction which encumbers future Federal highway 
apportionments to a more finite period, like 3 to 4 years, and 
that is not just for the Artery. I think it is a national 
issue, and Congress ought to also require DOT to ascertain that 
the State will have adequate funding for its entire highway 
system before it approves advance construction for a particular 
project like the Artery.
    Now, Mr. Chairman, a final topic I would like to address is 
the project's insurance program. We reported that the project 
overpaid its insurance premiums by about $130 million from 1992 
to 1997. The overpayment occurred in part because the first 3 
years' premiums were based on work plans that called for a 
large number of workers.
    Those plans did not materialize, but the overpayments were 
not returned to the project or the Federal Government. Instead, 
they were improperly deposited into the project's insurance 
trust accounts, and these were actually diversified investment 
accounts--invested in Disney World bonds and a whole variety of 
things.
    They used primarily Federal funds to generate profits that 
would total $826 million by 2017, when they would be returned 
to the State. The State was carrying the expected windfall as 
an offset to project costs. Effectively, what happened here 
was, the State wanted it both ways. They wanted the Federal 
money, they said, to pay insurance costs, but then said the 
money would not be needed for insurance and claimed it as a 
credit against the total cost of the project, thereby deflating 
by nearly $1 billion the cost of the project.
    We recommended that FHWA require the project to recover the 
$129 million in overpayments plus interest and dividends 
earned, which were in the neighborhood of another $30 million, 
and use the money for current project costs.
    The Federal Highway Administration finally agreed to do 
this. That, too, required intervention of the Office of the 
Secretary. On April 4, the project's insurance broker reported 
that the project had, in fact, used $68 million of the $130 
million on current project costs and was now auditing that to 
make sure.
    Now, there is one issue that remains outstanding, a very 
important issue. The Highway Administration has not yet issued 
a policy to limit Federal contributions to insurance reserves 
to the amount reasonably necessary to pay the deductible on 
incurred claims. In the case of the Artery, this issue involves 
somewhere in the neighborhood of $150 million to $200 million. 
That is over and above the $130 million that I was referencing 
before.
    Why? We need a policy on this. The policy is needed to 
ensure that projects do not attempt to draw down Federal funds 
for investment purposes under the guise that they are needed to 
pay insurance claims. It is that simple.
    So that concludes my oral statement, Mr. Chairman. Thank 
you very much.
    [The prepared statement of Mr. Mead follows:]

    Prepared Statement of Hon. Kenneth M. Mead, Inspector General, 
                   U.S. Department of Transportation
Mr. Chairman and Members of the Committee:

    We appreciate the opportunity to be here today to discuss the 
Central Artery/Ted Williams Tunnel Project (Project). This is the most 
expensive highway construction project in the United States, and one 
that is important to Massachusetts and all of New England.
    When initially approved in 1985, the Project was estimated to cost 
$2.6 billion. The latest cost overruns raise the cost to as much as 
$13.6 billion. The Federal share of that cost is expected to be more 
than $8.5 billion.




    In response to the latest cost increases, the Secretary directed 
the formation of a Task Force that returned a forthright and pointed 
report on the failure of oversight on the Central Artery. The Secretary 
briefed this report to Members of Congress and state officials in early 
April. The Task Force called for strong action to improve the Federal 
Highway Administration's (FHWA's) oversight of large infrastructure 
projects.
    We have issued 13 reports on the Project. Our audits have 
recommended improvements in the Project's cost management, its 
insurance program, the use of value engineering, and right of way 
acquisitions, among other things. Attached to our statement is a 
description of the findings of each of our audits.
    There have been several prosecutions involving the Project. 
However, no significant criminal activity has been found to date. The 
United States Attorney, Federal Bureau of Investigation, and Office of 
Inspector General (OIG) are continuing to evaluate various issues 
concerning the construction management and financial oversight of the 
Central Artery.
    Our testimony today will address:

   the continuing construction cost overruns we found on the 
        Project and how the lack of guidance from FHWA allowed Project 
        managers to avoid disclosing those overruns in the Project's 
        annual finance plans;

   the breach by Central Artery Project managers of their duty 
        to provide financial data to FHWA and OIG;

   the need for FHWA to perform critical, independent oversight 
        to protect the Federal investment in highway infrastructure 
        projects;

   how the use of advance construction could increase Federal 
        exposure on the Project and adversely impact the Massachusetts 
        statewide program; and

   the Central Artery managers' use of its owner-controlled 
        insurance program to draw down unneeded Federal funds for 
        investment purposes and status of efforts to recover past 
        insurance overpayments.
Central Artery Project Costs Have Mushroomed
    In our latest review of costs and funding on the Central Artery, we 
found that cost overruns had added $142 million to the previously 
reported $10.8 billion cost of the Project. Moreover, we predicted that 
continuing construction cost trends had the potential to add another 
$942 million to the cost of the Project. In addition, on May 24, 1999, 
we disallowed an $826 million insurance ``credit'' that the Project 
claimed it could receive in 2017 because we determined it was based on 
the improper retention of excess Federal funds for investment purposes. 
Therefore, we concluded the cost of the Project was $11.8 billion with 
the potential to rise to $12.7 billion.
    In late October 1999, FHWA officials and Central Artery Project 
managers firmly rejected the warnings in our draft report and claimed 
that future cost increases were unlikely. We sought to reconfirm our 
analysis, and found that the cost trends we had reported were not only 
continuing, but worsening, despite FHWA's and the Project's claims to 
the contrary. For example, our initial review found that contract award 
amounts were exceeding budget by almost 24 percent. In further 
investigations, we found that the latest awards had exceeded budget by 
38 percent.
    As we had warned, on February 1, 2000, Central Artery Project 
managers revealed that costs would go up by $1.4 billion, including 
over $900 million in additional construction costs. Besides the 
construction cost increases, the $1.4 billion included almost $500 
million of cost increases in design, right of way, project management, 
and work done for the project by utilities (``force accounts''). As we 
now know, Project managers were well aware costs were increasing 
significantly when they replied to our draft report in October 1999. 
They deliberately withheld that information. In cost reviews conducted 
to verify the increases announced by the Project, FHWA estimated the 
increases would actually total $1.7 billion to $1.9 billion, raising 
the expected ultimate cost of the Project to as much as $13.6 billion.
Central Artery Failure to Disclose Costs Was Unconscionable
    Not only did Central Artery managers fail to disclose cost trends 
in the 1998 and 1999 Finance Plans, they changed the reporting 
methodology to avoid disclosing the Project's cost problems. For 
example, the managers switched from comparing contract award amounts 
against budgets to comparing the award amounts against an ``engineer's 
estimate'' of market prices. As a result, the Project's 1998 Finance 
Plan did not disclose that contracts were exceeding budget by an 
average of almost 24 percent. The failure of Central Artery managers to 
disclose known costs in the Project's finance plans, to us during our 
review, or in response to our draft report, was a serious breach of 
their due diligence requirements.
    Project managers were able to manipulate the cost data reported in 
the finance plans because FHWA's guidance on finance plans is woefully 
inadequate to ensure complete and accurate financial reporting. 
Guidance on reporting of financial data is essential to avoid 
repetitions of such problems. We recommended that FHWA issue 
comprehensive guidance specifying minimum reporting requirements. In 
its response to our draft report, FHWA disagreed with the need for 
guidance, and stated, ``We do not believe it is desirable to be overly 
prescriptive as to what specific metrics are used.''
    However, on February 17, Secretary Slater overruled FHWA and 
directed that all our recommendations be accepted and implemented. At a 
minimum, FHWA's guidance should require that finance plans:

          1. Include the assumptions underlying both cost and revenue 
        estimates;
          2. Report how the Project is doing at staying on budget 
        (e.g., by reporting the ``actual cost of work performed'' and 
        comparing that figure to the amount that was budgeted for the 
        work);
          3. Clearly describe cost trends (e.g., provide the rate at 
        which cost increases are being incurred as work is performed; 
        explain how contract award amounts have compared to the budget) 
        and the potential impact of those trends on Project costs;
          4. Identify measures being taken to monitor and control costs 
        (e.g., value engineering);
          5. Identify sources of funding that can be used if costs rise 
        or other anticipated funding is not received;
          6. Identify significant changes to the scope of projects, and 
        the effect of these changes on the cost and capacity of the 
        project (costs reductions in which costs are simply moved to 
        third parties should be clearly explained); and
          7. Identify the grantee's plan for financing existing 
        operations during construction of new or extended segments, as 
        well as its plans for financing all operations, both new and 
        existing, once construction is complete.
FHWA's Alarming Lapse of Oversight
    FWHA's approach to oversight is to view the states as its 
``partners.'' As a result, it performs very little independent analysis 
of the data provided by the states. Because this approach failed in the 
case of the Central Artery, the credibility of both FHWA and the 
Project has been damaged and senior managers in both organizations have 
been removed from their positions. The delays in reporting the cost 
increases also prevented the involvement of Federal officials at an 
earlier stage when there may have been more options for addressing the 
cost problems.
    The lesson to be learned from the recent events is that FHWA needs 
to provide critical and objective oversight to protect Federal 
interests on large infrastructure projects. This situation could have 
been avoided if Federal officials responsible for the Project had 
closely examined the finance plans and independently verified data they 
were provided. FHWA did not even have the Project's revised finance 
plan reviewed by the financial analyst on the FHWA Massachusetts 
Division staff. A sobering aspect of the recent events is that the 
FHWA's oversight on the Central Artery went beyond that agency's normal 
oversight efforts. We believe FHWA should adopt a ``trust but verify'' 
approach, and recommended that FHWA independently verify financial data 
provided by the state.
    In response to our recommendations, the Secretary, to his credit, 
took strong action to improve FHWA's oversight and protect the Federal 
investment in this project. Most visibly, he directed the formation of 
the Task Force that returned a forthright and pointed report on the 
oversight of the Central Artery that the Secretary briefed to Members 
of Congress and state officials in early April.
Advance Construction Could Raise Federal Contribution to $9.5 Billion
    The state is using a financing tool called ``advance construction'' 
in which FHWA authorizes the state to proceed with work for which 
Federal funds are not currently available, pay for it out of state 
funds, and then reimburse itself out of future Federal highway 
apportionments. Currently authorized advance construction will leave a 
$1.8 billion balance to be reimbursed after the Project ends in 2004. 
In its 1999 Finance Plan, the state promises that it will spend no more 
than 50 percent of its Federal apportionment on the Central Artery 
after fiscal year 2002. Assuming moderate 2 percent increases in annual 
apportionments, the state could be spending half of its Federal 
apportionment reimbursing itself for Central Artery costs through the 
year 2011, or 7 years after the scheduled completion of the Project.




    Massachusetts has also indicated it may request approval for $936 
million more in advance construction on the Central Artery, and FHWA 
has indicated it may approve up to $222 million of that amount. That 
would add another year to the payoff period. If the full $936 million 
request is approved, it could extend the payoff into the year 2015, and 
increase the ultimate Federal contribution to the Central Artery to 
almost $9.5 billion.
    Massachusetts has also reiterated its commitment, as a condition 
for FHWA acceptance of the Central Artery finance plan, to maintain a 
``balanced Statewide Road and Bridge Program.'' Under this commitment 
the state is to spend at least $400 million (including both Federal and 
state funds) on road and bridge projects throughout the state. In the 
Department of Transportation Appropriations Bill for 1999, Congress 
expressed concern that, notwithstanding the state's commitment, 
programmed funding in the Massachusetts' transportation improvement 
program would provide only $16 million for interstate maintenance for 6 
years.
    We have two concerns. First, the continuing use of advance 
construction increases the Federal exposure on this Project. Second, 
notwithstanding Massachusetts stated commitment to ``balanced'' 
spending, dedicating half of the state's Federal apportionment to the 
Central Artery for such a long period may impair the state's ability to 
maintain and develop the highway system within the state.
    We suggest that Congress consider limiting the use of advance 
construction to amounts that can be converted within a specified time 
(e.g., 3 or 5 years after project completion) using a limited portion 
of the state's annual apportionment. We also suggest Congress establish 
that no advance construction may be approved unless FHWA ascertains 
that the state has demonstrated in its transportation improvement 
program that adequate funding will remain in each year not only to 
operate (e.g., mowing and snow removal), but to maintain and develop 
the highway system throughout the state (e.g., resurfacing, rebuilding, 
and new construction). The program should include specific funding 
levels and projects to meet the state's commitment. FHWA should then 
monitor the performance of the state at accomplishing the planned 
projects, and report on that progress annually.
Central Artery Overpayment of Insurance Premiums
    On May 24, 1999, we reported that the Project overpaid workers 
compensation and general liability insurance premiums by approximately 
$129.8 million dollars from 1992 to 1997 (Report Number TR-1999-104). 
The overpayment occurred in part because premiums for policy years 1992 
through 1995 were based on work plans that called for a large number of 
workers. Those plans did not materialize, but the premiums were not 
reduced to reflect the actual lower number of workers. The overpayments 
were deposited into the Project's insurance trust accounts as 
collateral against future claims. Although expected claims did not 
materialize (in part because the workers were not hired), trust levels 
were never adjusted to remove excess funds as required by Federal 
regulations. Instead, the funds were kept invested in a diverse 
portfolio of securities (e.g., Walt Disney, Wal-Mart, General Electric, 
and US Treasury notes).
    The state planned to keep the overpayments we identified, along 
with other excess funds, in the trust until the year 2017. According to 
the state, in 2017 it expected the trust fund balance to reach $826 
million. The state was carrying the expected credit as an offset to 
current Project costs. Massachusetts also indicated it planned to use 
the cash to fund other highway projects in the state when it received 
the money. We determined that the state cannot both claim it needs 
Federal money to pay insurance costs and that it will receive a return 
of $826 million from the investment of those funds.
    We recommended FHWA require the Project to recover the $129 million 
in overpayments, plus interest earned, and use the money for current 
Project costs. We also recommended that the balance of the trust be 
adjusted to appropriate levels on a regular basis, and that FHWA issue 
policy to ensure any future overpayments are immediately recovered and 
applied to current costs or returned to the U.S. Treasury. On September 
13, 1999, FHWA agreed with our recommendations.
    On April 4, 2000, the Central Artery's insurance broker provided 
information that indicated the Project has used $67.8 million of the 
past overpayments to make scheduled payments. FHWA and OIG are 
currently reviewing the documentation provided to support this use of 
the $67.8 million. We will continue to monitor the state's use of the 
past overpayments.
    FHWA has not yet issued a policy to limit Federal contributions to 
insurance reserves to the amount needed to pay incurred claims. FHWA is 
in the process of contracting for a consultant to advise it on the 
Central Artery insurance program and other insurance matters. FHWA's 
current target date for issuing the policy is July 31, 2000. The policy 
is still needed to ensure this and other highway construction projects 
do not attempt to use Owner Controlled Insurance Programs as a means of 
drawing down Federal funds for investment purposes.
Background
    The Massachusetts Central Artery/Ted Williams Tunnel Project is the 
most expensive highway construction project in the nation. Planning for 
the Project began in 1981, the Project was initially approved in 1985, 
and construction was authorized to begin in 1991. The Project is 
scheduled to be completed in 2004. The Project will replace Boston's 
deteriorating, elevated Central Artery (part of Interstate 93) with a 
modern underground expressway, and will extend the Massachusetts 
Turnpike to Logan Airport through the new Ted Williams Tunnel under 
Boston Harbor. Federal government reimbursements to the Massachusetts 
Highway Department for the program range from 80 to 90 percent of the 
costs of the Project. This is a significant project, not only for its 
role in New England's transportation infrastructure, but for the 
economic benefits and cost impacts it presents to residents of 
Massachusetts.
Central Artery Project Costs Have Mushroomed
    On October 7, 1999, we issued a draft report on the cost and 
funding of the Project to FHWA and to Central Artery Project managers. 
We found that continuing cost overruns had added $142 million to the 
previously reported $10.8 billion cost of the Project. We also 
identified that the Project was experiencing continuing increases in 
construction costs that it was offsetting with scope reductions and 
other cost containment measures.
    Our audit documented that construction contract awards on the 
Project were exceeding budget by almost 24 percent, and construction 
costs were increasing after award by over 21 percent. The financial 
data made available to us during our review covered the period from 
July 1, 1997 to April 30, 1999. That data showed construction costs 
increased by a total of $827 million, including more than 3,000 
individual contract changes. The Project had offset $638 million of 
those increases with money from its construction contingency accounts, 
as well as reductions in the scope of future construction work and 
other costs. We warned that, unless Project managers recognized and 
corrected these construction cost growth trends, there could be an 
additional $942 million in construction costs before the scheduled 
completion of the Project.
    We were concerned that, since the Project design is substantially 
complete, and contracts for remaining work are soon to be awarded, it 
was becoming increasingly difficult to identify additional cost 
reductions on the Project. Therefore, we warned that it was important 
for FHWA and Project managers to recognize the magnitude of potential 
future cost increases that could occur if the cost trends continued, 
and identify additional funding or scope reductions that could be used 
to offset future cost growth. We also noted that the Project was 
continuing to claim an $826 million ``credit'' to be received from its 
insurance program in 2017. On May 24, 1999, we reported that credit was 
not allowable because it was based on the improper retention of excess 
Federal funds for investment purposes. We concluded that the cost of 
the Project was no longer $10.8 billion, but stood at $11.8 billion 
with the potential to increase further.
    In late October 1999, FHWA and Project managers firmly rejected the 
warnings in our draft report and claimed that future cost increases 
were unlikely. We undertook to reconfirm our analysis, and found that 
the cost trends we had reported were not only continuing, but 
worsening, despite FHWA's and the Project's claims to the contrary. For 
example, during our review we found that contract awards were exceeding 
budget by almost 24 percent. When we went back to check the latest 
awards, we found they had exceeded budget by 38 percent.
    As we had warned, on February 1, 2000, the Project revealed that 
costs would go up by $1.4 billion, including over $900 million in 
additional construction costs. In addition to the construction costs, 
the $1.4 billion increase included almost $500 million of cost 
increases in design, right of way, project management, and work done 
for the Project by utilities (``force accounts''). As we now know, 
Central Artery Project managers were well aware its costs were 
increasing significantly when they replied to our draft report in late 
October 1999. They deliberately withheld that information.
Central Artery Failure to Disclose Costs Was Unconscionable
    The failure of the Central Artery to fully disclose cost 
information to us during our review or in response to our draft report 
was a serious breach of their due diligence requirements. State 
officials' claims that they chose not to reveal the cost problems until 
they could find a solution are unacceptable. Failure to promptly and 
fully provide cost data when asked by Federal officials may violate 
terms of their grant agreement that require the state to provide access 
to information and records. Moreover, the withholding unnecessarily 
delayed the time when other parties concerned with the Project, 
including state officials outside the Project as well as Federal 
officials and Congress, could act to address the rising costs.
    There are two primary reasons that Central Artery Project managers 
were able to hide the increasing costs. First they were able to 
manipulate the cost data reported in the finance plans because FHWA's 
August 1998 guidance on finance plans is inadequate to ensure complete 
and accurate financial reporting. Second, the FHWA Division Office did 
not critically and independently review information the state provided. 
FHWA's approach to project oversight is to view the grantees as 
``partners,'' and it operates on the presumption that it can trust its 
partner. Consequently, FHWA performs very little independent analysis 
to identify emerging problems.
FHWA Guidance Inadequate to Ensure Complete and Accurate Reporting
    Finance plans are essential tools that describe how projects will 
be implemented over time and identify project costs and funding needs. 
The Transportation Equity Act for the 21st Century requires recipients 
of Federal-aid funds for projects with an estimated total cost of $1 
billion or more to submit annual finance plans to the Secretary. FHWA 
issued guidance on finance plans in August 1998. Our reviews have found 
the quality of finance plans developed for highway projects depends on 
the project sponsor. To illustrate, we found that Utah's Department of 
Transportation developed a reliable estimate of costs and revenues to 
construct and fund the Interstate-15 Reconstruction Project in Salt 
Lake City.
    As our report revealed, the 1998 and 1999 Finance Plans for the 
Central Artery failed to disclose cost trends on the Project. To the 
contrary, we found the Central Artery actually changed its reporting 
methodology to avoid disclosing the magnitude of the Project's cost 
problems. For example, by switching from comparing contract awards to 
how much was budgeted for the contract to comparing the awards to an 
``engineers estimate'' of market prices, the Project's 1998 Finance 
Plan avoided disclosing that contracts were exceeding budget by an 
average of almost 24 percent. The Central Artery went so far as to 
eliminate the total cost of the Project from the October 1999 Finance 
Plan update it provided to FHWA in January 2000. Such manipulations 
were possible because FHWA's guidance established no uniform or minimum 
reporting criteria.
    Of particular concern to us is that, even after we had warned FHWA 
in October 1999 that costs were increasing and that the finance plans 
were incomplete, FHWA's managers did act to ensure complete financial 
reporting. In fact, FHWA did not even have the Project's revised 
finance plan reviewed by the financial analyst on the FHWA 
Massachusetts Division staff. FHWA accepted the Project's inadequate 
finance plan on February 1, 2000, with only a caveat that the Project 
should identify funding to meet a $500 million shortfall that FHWA knew 
about. Later that same day, the Central Artery announced the $1.4 
billion cost increase. It is incredible that FHWA would pay little 
attention to the warnings we provided, but accept without any analysis 
the finance plan submitted by the Central Artery.
    We recommended that the FHWA issue more comprehensive guidance that 
would specify minimum reporting requirements. We recommended that FHWA 
issue comprehensive guidance specializing minimum reporting 
requirements. In its response to our draft report, FHWA disagreed with 
the need for guidance, and stated, ``We do not believe it is desirable 
to be overly prescriptive as to what specific metrics are used.''
    On February 17, 2000, Secretary of Transportation Rodney Slater 
issued a press release in which he overruled FHWA and directed that all 
OIG's recommendations be accepted and implemented. At a minimum, 
finance plans should:

          1. Include the assumptions underlying both cost and revenue 
        estimates;
          2. Report how the Project is doing at staying on budget 
        (e.g., by reporting the ``actual cost of work performed'' and 
        comparing that figure to the amount that was budgeted for the 
        work);
          3. Clearly describe cost trends (e.g., provide the rate at 
        which cost increases are being incurred as work is performed; 
        explain how contract award amounts have compared to the budget) 
        and the potential impact of those trends on Project costs;
          4. Identify measures being taken to monitor and control costs 
        (e.g., value engineering);
          5. Identify sources of funding that can be used if costs rise 
        or other anticipated funding is not received;
          6. Identify significant changes to the scope of projects, and 
        the effect of these changes on the cost and capacity of the 
        project (costs reductions in which costs are simply moved to 
        third parties should be clearly explained); and
          7. Identify the grantee's plan for financing existing 
        operations during construction of new or extended segments, as 
        well as its plans for financing all operations, both new and 
        existing, once construction is complete.
Inadequate FHWA Oversight on Large Infrastructure Projects
    Since 1955, the Nation has made a significant investment in our 
National Highway System. Although the interstate highway system is 
virtually complete, FHWA is still responsible for overseeing more than 
$28 billion in annual funding to maintain and expand our national 
highways. Capable, independent Federal oversight is essential to 
protect the investment in the National Highway System. A sobering 
aspect of the recent events is that the FHWA's oversight on the Central 
Artery went beyond that agency's normal oversight efforts. This is not 
the only recent instance where FHWA failed to exert sound oversight. 
The creation of the new Federal Motor Carrier Safety Administration was 
a direct result of a continuing lack of effective oversight activity by 
FHWA.
    FHWA views its relationship with the state highway departments as a 
``partnership.'' In our opinion, FHWA's partnership approach to 
oversight relies too much on unsubstantiated information provided by 
project management officials. Therefore, on a larger scale, we believe 
FHWA should move to a ``trust but verify'' management approach that 
would focus less on project advocacy and more on critical and objective 
oversight to ensure the maximum benefit for all Federal transportation 
funding.
    The events surrounding the recent cost increases on the Central 
Artery Project illustrate what can happen when effective independent 
oversight is lacking. FHWA Division Office staff chose to rely on 
information from their state partners and rejected our October 1999 
warnings of potential construction cost increases on the Project and 
our call for better guidance on finance plans. Just 3 months later, on 
the same day FHWA accepted a revised finance plan from the Project, the 
Central Artery surprised FHWA by announcing a $1.4 billion cost 
increase.
    As a result both FHWA and Central Artery/Ted Williams Tunnel 
Project management are now faced with a loss of credibility. Senior 
managers in both FHWA and the state have been moved or removed from 
their positions. The delays in reporting the cost increases also 
prevented the involvement of Federal officials at an earlier stage when 
there may have been more options for addressing the cost problems. This 
situation could have been avoided if Federal officials responsible for 
the Project had closely examined the finance plans and independently 
verified data they were provided.
    FHWA has a duty to ensure the proper stewardship of Federal funding 
provided to the states. To ensure that the National Highway System is 
maintained and developed to the maximum extent possible with available 
funding, FHWA officials must actively seek to keep abreast of the 
progress of projects and programs in the states, and to independently 
verify information they are provided. FHWA must not wait for problems 
to emerge before acting. FHWA must not lose sight of the Federal goals 
it is responsible to achieve, and must temper its reliance on state 
partners with judicious independent oversight. Our recommendation to 
FHWA was that the FHWA Division Office be required to independently 
verify the data provided by the state.
    In response to our recommendations, the Secretary, to his credit, 
took strong action to improve FHWA's oversight and protect the Federal 
investment in this Project. Most visibly, he directed the formation of 
the Task Force that returned a forthright and pointed report on the 
oversight of the Central Artery that the Secretary briefed to Members 
of Congress and state officials in early April. Senior FHWA managers 
were reassigned to provide fresh leadership to the Project. The 
Secretary also directed FHWA to revise its policy on financial 
reporting. At the Secretary's direction, FHWA is reviewing its project 
oversight process. Based on the results, FHWA should strengthen its 
oversight program.
Advance Construction Could Raise Federal Contribution to $9.5 Billion
    In addition to monitoring the current use of funds, FHWA must also 
monitor the impact of large projects on states' cash flow and long-term 
financial commitments. One financing tool that can have a long-term 
impact is the use of advance construction. Under advance construction, 
FHWA authorizes a state to proceed with work for which Federal funds 
are not currently available, pay for it out of state funds, and then 
``convert'' the cost to Federal by reimbursing itself out of future 
Federal highway apportionments. FHWA's approval does not increase the 
current funding available to the Project, nor guarantee that future 
Federal apportionments will be forthcoming. However, there are no time 
limits on how long the state has to convert these costs to Federal 
funds.
    We have noted that the amount of advance construction FHWA has 
already authorized will prove to be a long-term drain on the Federal 
funding provided to the state from the Highway Trust Fund. Additional 
approvals of advance construction hold the potential to further 
increase the Federal cost exposure on the Central Artery.
    We examined how long it may take the state to reimburse itself for 
the advance construction that FHWA has already approved. The Central 
Artery's 1999 Finance Plan notes that, as of January 2000, the 
Massachusetts' outstanding balance of approved advance construction was 
$2.9 billion, of which $2.8 billion was related to the Central Artery. 
Estimates in the 1999 Finance Plan indicate that about $1.8 billion of 
the Project's advance construction balance will remain outstanding at 
the conclusion of the Project in 2004. The 1999 Finance Plan also 
promises that, after 2002, Massachusetts will spend no more than 50 
percent of its Federal apportionment on the Central Artery. Assuming 
the state's apportionment rises by a moderate 2 percent annually after 
2003 and the state's annual obligation limitations remain at 87 percent 
of the apportioned amount, the state could be spending half of its 
Federal apportionment on the Central Artery through the year 2011, or 7 
years after the Project is scheduled to be completed.




    Moreover, according to the Project's 1999 Finance Plan, 
Massachusetts plans to request approval for $936 million more in 
advance construction on the Central Artery. FHWA has indicated that the 
Department may approve up to $222 million of the requested amount. If 
an additional $222 million is approved, it will add another year to the 
payoff period. If the full $936 million request is approved, the 
Federal contribution to the Central Artery will eventually total almost 
$9.5 billion when all those costs are reimbursed out of future Federal 
apportionments, and it will extend the payoff period for advance 
construction into the year 2015, which is 11 years after the Project's 
scheduled completion.




    Massachusetts has also reiterated its commitment, as a condition 
for FHWA acceptance of the Central Artery finance plan, to maintain a 
``balanced Statewide Road and Bridge Program.'' Under this commitment, 
the state is to spend at least $400 million (including both Federal and 
state funds) on road and bridge projects throughout the state. In the 
Department of Transportation Appropriations Bill for 1999, Congress 
expressed concern that, notwithstanding the state's commitment, 
programmed funding in the Massachusetts' transportation improvement 
program would provide only $16 million for interstate maintenance for 6 
years.
    Advance construction can serve a valid purpose in allowing states 
to manage their cash flow to accomplish costly projects in a timely 
manner. However, excessive or irresponsible use of advance construction 
can place a long-term burden on the funding provided to maintain the 
nation's highway system. We are concerned that the continuing use of 
advance construction increases the Federal exposure on this project. In 
addition, we are concerned that committing half of the state's Federal 
apportionment to the Central Artery for such a long period may impair 
Massachusetts' ability to maintain and develop the entirety of the 
National Highway System within the state.
    It is FHWA's duty to ensure that the National Highway System is 
maintained and developed. Meeting that responsibility is critical to 
the continued economic growth of the nation, as well as to achieving 
the safety and mobility goals of the Department. FHWA has delegated to 
each state the responsibility for implementing a highway program, and 
requires the states to develop transportation improvement programs to 
define how they will accomplish that responsibility. If Federal funds 
remaining after advance construction conversions in future years are 
inadequate to maintain and develop the National Highway System roads in 
the state, future Massachusetts taxpayers and the Congress will be 
faced with difficult choices for funding the state's highway program.
    To avoid the potential for further Federal exposure on this 
Project, as well as to prevent other states from spending future 
apportionments to the extent seen on the Central Artery, we suggest 
Congress consider limiting the use of advance construction. For 
example, Congress could limit advance construction to no more than the 
state can convert in a specified time (e.g., 3 to 5 years after project 
completion) using a limited portion of the state's Federal 
apportionment. We also suggest Congress establish that no advance 
construction may be approved unless FHWA ascertains that the state has 
demonstrated in its transportation improvement program that adequate 
funding will remain in each year not only to operate (e.g., mowing and 
snow removal), but to maintain and develop the highway system 
throughout the state (e.g., resurfacing, rebuilding, and new 
construction). The program should include specific funding levels and 
projects to meet the state's commitment. FHWA should then monitor the 
performance of the state at accomplishing the planned projects and 
report on that progress annually.
Central Artery is Applying Past Overpayments to Current Premiums
    On May 24, 1999, we reported that the Project overpaid workers 
compensation and general liability insurance premiums by approximately 
$129.8 million dollars from 1992 to 1997 (Report Number TR-1999-104). 
The overpayment occurred in part because premiums for policy years 1992 
through 1995 were based on work plans that called for a large number of 
workers in order to complete the Project by 1998. Those plans did not 
materialize. Consequently, because premiums are based on the number and 
type of workers employed, the premium estimates were too high. However, 
the premiums were not recalculated to reflect the actual lower number 
of workers.
    The overpayments were deposited into the Project's insurance trust 
accounts as collateral against future claims. The expected claims did 
not materialize, in part because the workers who would have filed the 
claims were never hired. However, trust levels were never adjusted to 
remove excess funds as required by Federal regulations. Instead, the 
funds were kept invested in a diverse portfolio of securities (e.g., 
Walt Disney, Wal-Mart, General Electric, and US Treasury notes).
    The state planned to keep the overpayments we identified, along 
with other excess funds, in the trust until the year 2017. According to 
the state, in 2017 it expected the trust fund balance to reach $826 
million. The state was carrying the expected credit as an offset to 
current Project costs. Massachusetts also indicated it planned to use 
the cash to fund other highway projects in the state when it received 
the money. We determined that the state cannot both claim it needs 
Federal money to pay insurance costs and that it will receive a return 
of $826 million from the investment of those funds.
    We recommended FHWA require the Project to recover the $129 million 
in overpayments, plus interest earned, and use the money for current 
Project costs. We also recommended that the balance of the trust be 
adjusted to appropriate levels on a regular basis, and that FHWA issue 
policy to ensure any future overpayments are immediately recovered and 
applied to current costs or returned to the U.S. Treasury.
    Although they initially agreed with their state partners and 
rejected our recommendations to recover the overpayments, on September 
13, 1999, FHWA agreed with our recommendation to require the Central 
Artery to recover and use past overpayments on the Project. FHWA 
proposed allowing the Project to use the balance of the overpayments 
and accrued interest to pay the premiums for policy years 1999/2000 and 
2000/2001. OIG and FHWA also agreed to allow credit for any ``past 
use'' of overpayments to pay premiums between the end of our audit and 
the date of the agreement. Finally, FHWA agreed to issue guidance to 
ensure insurance reserves for owner-controlled insurance programs do 
not exceed allowable amounts, and that any premium adjustments are 
immediately used for other approved costs or returned to the Federal 
government.
    Information provided by the Central Artery's insurance broker on 
April 4, 2000, indicates the Central Artery has used excess reserves to 
make scheduled payments of:

   $12.3 million on August 1, 1999;
   $13.2 million on December 1,1999; and
   $13.2 million on February 1, 2000.

    The state also is claiming ``past use'' credit for

   an $8.5 million reduction in the Project's 1997/1998 
        premium;
   a payment of $7.2 million made with funds from the trust on 
        August 1, 1998; and
   a payment of $13.5 million on December 1, 1998.

    The state's claimed use of past overpayments is $67.8 million to 
date. FHWA and OIG are currently reviewing the documentation provided 
to support this use of the $67.8 million.
    FHWA has not yet issued a policy to limit Federal contributions to 
insurance reserves to the amount needed to pay incurred claims. FHWA is 
in the process of contracting for a consultant to advise it on the 
Central Artery insurance program and other insurance matters. FHWA's 
current target date for issuing the policy is July 31, 2000. The policy 
is still needed to ensure this and other highway construction projects 
do not attempt to use Owner Controlled Insurance Programs as a means of 
drawing down Federal funds for investment purposes.
    Mr. Chairman, this concludes our statement, I would be pleased to 
answer any questions.
                                                         Attachment
                      department of transportation
                      office of inspector general
          Audit Coverage of Central Artery/Ted Williams Tunnel
Report on Current Costs and Funding of the Central Artery/Ted Williams 
        Project
(Report Number TR-2000-050, February 10, 2000)

        The review objectives were to determine the current cost and 
        funding of the project and evaluate the Massachusetts Turnpike 
        Authority's 1998 finance plan. We determined that the cost of 
        the project as of April 30, 1999, was $11.8 billion rather than 
        the $10.8 billion shown in the project's 1998 finance plan. 
        Furthermore, if construction costs are not controlled or 
        offsetting cost reductions are not identified, the potential 
        existed for costs to increase by another $942 million.

        We recommended the Federal Highway Administrator require 
        project managers to: 1) identify specific additional funding or 
        cost reductions to meet the funding shortfall, and 2) locate 
        additional funding or cost reductions (i.e., scope reductions 
        or potential cost savings) to offset potential future cost 
        increases. We also recommended that FHWA: 3) revise its 
        guidance for reporting financial data to include specific 
        reporting criteria, and 4) require that projects disclose 
        significant changes to the project scope in their annual 
        financial plans. Finally, in light of the failure of FHWA to 
        identify the impending cost increase on the Central Artery, we 
        recommended that FHWA require the Massachusetts Division: 5) 
        perform reasonable independent validation of all project status 
        and cost data before agreeing with or making decisions based on 
        information provided by the Massachusetts Turnpike Authority. 
        FHWA concurred with all of our recommendations.
Overpayments of Premiums for Central Artery Project's Owner-Controlled 
        Insurance Program
(Report Number TR-1999-104, May 24, 1999)

        The audit objective was to determine whether the workers' 
        compensation and general liability portions of the program were 
        effective in reducing the overall cost of the project's 
        insurance. We identified overpayments of Federal funds 
        (including accrued interest) totaling $150 million. We 
        recommended the FHWA: 1) recover the $150 million Federal share 
        of the premium overpayment and interest earned related to 
        payments made through 1997, as well as, any further 
        overpayments and interest that have since accrued; 2) determine 
        actual insurance requirements annually and ensure overpayments 
        involving Federal funds are recovered; and 3) review its policy 
        for insurance reimbursement and establish guidelines to ensure 
        future overpayments of insurance premiums are recovered.

        FHWA has agreed to the following: 1) The premium adjustments 
        and interest related to these adjustments will be used to make 
        scheduled Owner Controlled Insurance Program (OCIP) worker's 
        compensation estimated premium payments due for the next policy 
        year, starting November 1, 1999, and for the next policy year 
        beginning November 1, 2000. 2) All remaining premium 
        adjustments in excess of the amount needed to make the payments 
        specified in above item #1, plus any amount of the adjustments 
        already used to make premium payments for policy years 1997-98 
        and 1998-99, will be immediately returned to the project and 
        used to pay project costs, or credited to the State's Federal-
        aid account. 3) FHWA will issue a policy on insurance programs 
        that ensures the Federal share of premium adjustments on 
        highway projects is immediately applied to other project costs 
        or credited to the State's Federal-aid account, and that 
        reserve accounts do not exceed allowable amounts.
Report on the Central Artery/Ted Williams Tunnel Project
(Report Number: TR-1998-109, April 3, 1998)

        Our objective was to audit the cost and financing for the 
        Central Artery/Ted Williams Tunnel Project. Based on our 
        analysis of historical project costs, we determined that the 
        project cost could increase to $11.2 billion, if stringent cost 
        containment methods are not enforced. This increase is based on 
        potentially higher-than-budgeted costs for change orders, 
        contract awards, and consultants.

        We made 4 recommendations for the Federal Highway 
        Administrator. First, instruct the State to aggressively pursue 
        cost-containment goals. Second, closely monitor the State's 
        progress toward achieving its cost-containment goals. If these 
        goals are not met, and project costs rise above the current 
        estimate, FHWA should promptly require the State to identify 
        additional sources of revenue and notify the appropriate 
        Congressional committees of the situation. Third, ensure the 
        State carries out the balanced transportation infrastructure 
        program statewide, as specified in its finance plan for the 
        project. Finally, continue to submit periodic updates of the 
        State's finance plan to the Office of Inspector General for 
        review.

        We also made two recommendations to the Secretary of 
        Transportation. First, determine if project cost estimates 
        should include the costs and credits from owner-controlled 
        insurance for projects in which it is used. If those costs are 
        to be included, the Secretary should instruct the Operating 
        Administrations to issue appropriate guidance. Second, 
        determine if project cost estimates should include the interest 
        expense of grant anticipation notes. If those costs are to be 
        included, the Secretary should instruct the Operating 
        Administrations to issue appropriate guidance and develop a 
        methodology for assessing their effects on the feasibility of 
        proposed and future projects. FHWA concurred with the 
        recommendations.
Management Advisory Memorandum on Relocation of Utilities, Central 
        Artery/Third Harbor Tunnel
(Report Number R2-FH-7-025, August 12, 1997)

        The audit objective was to evaluate FHWA oversight of costs 
        associated with the relocation of utilities on the project. Our 
        Management Advisory Memorandum notes our concern that FHWA had 
        continued to rely on the State's oversight, despite the State's 
        emphasis on its own interest, as noted in our prior audits on 
        the project and again in the relocation of a electrical power 
        company substation. In addition, we reaffirmed our longstanding 
        position that Federal funds should not be used to pay for 
        inefficiencies and diseconomies resulting from local project 
        decisions not supported by demonstrated need. In our opinion, 
        Federal participation was not justified. We recommended FHWA 
        reconsider its participation in the costs for the electric 
        company's substation, and increase its oversight of relocation 
        of other utilities on the project. The recommendations have 
        been closed out.
Quality of Construction, Central Artery/Third Harbor Tunnel
(Report Number R2-FH-7-007, December 19, 1996)

        The audit objective was to evaluate the FHWA oversight of the 
        project's testing procedures to ensure construction was 
        completed in accordance with applicable specifications. We 
        found that FHWA provided limited oversight of the project's 
        testing procedures. Weaknesses were found in the project's 
        quality of workmanship, disposition of failed materials, 
        implementation of the Massachusetts Highway Department's 
        Materials Manual, and completion of material documents and 
        reports.

        We recommended the FHWA Administrator: 1) instruct the FHWA 
        Massachusetts Division to strengthen oversight of project 
        testing procedures to ensure construction materials used in the 
        project are in accordance with applicable specifications; 2) 
        not participate in project costs caused by inferior 
        workmanship, and seek reimbursement from the State for any 
        Federal funds already provided for this purpose; 3) emphasize 
        the need for strict compliance with project testing procedures 
        and pertinent regulations, including receipt of credits for 
        failed materials, and do not participate in project costs 
        resulting from overriding contract provisions; 4) require the 
        State to direct Bechtel Civil Inc./Parsons, Brinckerhoff, 
        Quade, & Douglas Inc. (Consultant) to provide the Consultant's 
        Technical Services Department the necessary independence and 
        support to perform effective testing of project construction 
        materials; 5) require the State to ensure that the Consultant 
        responds to Disposition of Materials in a timely and effective 
        manner; 6) ensure that the Massachusetts Division reviews and 
        formally approves all changes to the Materials Manual prior to 
        implementation; and 7) require that, prior to certification, 
        the State ensure that material closeout reports include 
        necessary documentation for all materials that have been tested 
        and incorporated into the project, and review such 
        documentation for compliance with contract specifications. FHWA 
        concurred with the recommendations.
Personal Property Management, Central Artery/Third Harbor Tunnel
(Report Number: R2-FH-6-015, May 1996)

        The audit objective was to evaluate FHWA's monitoring of the 
        State's control of personal property purchased by the 
        consultant for the project. We found that FHWA did not provide 
        effective monitoring to ensure the State maintained proper 
        control over personal property. We found $677,165 of project 
        property was not recorded accurately, $39,151 of stolen items 
        was not properly reported, and accountability was not 
        established for more than $500,000 of property.

        We recommended that the FHWA Administrator: 1) instruct the 
        Massachusetts Division to provide effective monitoring to 
        ensure the State maintains adequate control over personal 
        property purchased for the project; 2) require the State to 
        designate a properly trained asset manager or coordinator for 
        the project to ensure the consultant uses, manages, and 
        disposes of property in accordance with State laws and 
        procedures; 3) ensure project procedures are strengthened to 
        resolve discrepancies in inventory records, provide complete 
        and accurate physical inventories, and tag property upon 
        receipt; 4) require the State to furnish us a copy of the 
        consultant's reconciliation for project property that could not 
        be located where recorded and property that did not appear on 
        inventory records for the locations where the property was in 
        use; 5) require the State to direct the consultant to establish 
        and maintain a theft log for the project, immediately report 
        stolen property, notify State Police of thefts, and provide 
        adequate safeguards against unauthorized removal of property 
        from project premises; 6) ensure the State directs the 
        consultant to perform physical inventories of project property 
        purchased by subconsultants/subcontractors and establish and 
        maintain accurate inventory reports for such property; 7) seek 
        reimbursement for sales tax and other related costs 
        unnecessarily paid by the consultant and require the consultant 
        to avoid such costs in the future by making purchases through 
        the State Purchasing Agent, whenever possible, or use the tax 
        exempt status provided by the State; and 8) not participate in 
        the additional $2.6 million sales tax, if assessed.

        FHWA concurred with the recommendations.
Management Advisory Memorandum on Emergency Rescue Equipment and 
        Services for Central Artery/Third Harbor Tunnel
(Report Number: R2-FH-6-001, October 1995)

        The Advisory conveyed our concerns that the State of 
        Massachusetts acquired costly emergency rescue equipment and 
        services for the CA/THT Project without coordinating 
        requirements with other organizations to avoid potential 
        duplication. We found that, due to lack of effective 
        coordination and thorough analysis of requirements, there was 
        unnecessary duplication of costs and Federal participation was 
        not justified for the State's acquisition of emergency rescue 
        vehicles, equipment, training for 250 firefighters, and other 
        related services for the CA/THT Project.

        We recommended that the FHWA Administrator: 1) seek 
        reimbursement for the cost of non-CA/THT Project use of 
        emergency rescue equipment and services; (2) not participate in 
        future purchases of emergency rescue equipment and services 
        which exceed reasonable and necessary costs; and (3) not 
        participate in recurring costs for salaries, training, and 
        other operational expenditures which exceed reasonable and 
        necessary amounts.
Construction Contract Changes and Extra Work Orders, Central Artery/
        Third Harbor Tunnel
        (Report Number R2-FH-5-019, July 27, 1995)

The audit objective was to evaluate the adequacy and effectiveness of 
FHWA oversight of construction contract change orders and extra work 
orders on the project to ensure the reasonableness of pricing and 
proper justification for changes. We found that FHWA lacked assurance 
that $2.2 million of change orders were properly justified prior to 
approval, and FHWA did not process approvals for up to 7 months. We 
recommended the FHWA Administrator: 1) require the State to establish 
and document what constitutes a non-major change order, and, until such 
definition is established, approve all change orders prior to the start 
of work; 2) require the State to submit major change order requests 
before effective dates and assign priority to review of major changes; 
3) document advance approval for emergency or unusual conditions and 
provide formal approval as soon thereafter as practicable. FHWA 
concurred with the recommendations.
Management Advisory Memorandum on use of Police Details on Central 
        Artery/Third Harbor Tunnel
(Report Number R2-FH-5-012, May 19, 1995)

        The advisory informed the Federal Highway Administrator of 
        OIG's concern that Massachusetts was using police details 
        exclusively to direct motorists at construction sites. These 
        details, which use off-duty police for a minimum payment of 4 
        hours per assignment, cost the project more than would civilian 
        flagmen. Moreover, no other state required 100 percent police 
        details for traffic direction. We recommended that FHWA not 
        participate in the cost of the police details.
Relocation Assistance Activities, Central Artery/Third Harbor Tunnel
(Report Number R2-FH-4-022, July 6, 1994)

        The audit objectives were to evaluate FHWA's oversight of 
        relocation eligibility determinations, appropriateness of 
        acquisitions and use of relocation estimates, propriety of 
        mover selections, inspection process to ensure standards were 
        met, and actual relocations to determine whether they were 
        carried out in accordance with Federal regulations. We found 
        weaknesses in FHWA's monitoring of acquisitions, using 
        appropriate relocation estimates, and accomplishing actual 
        relocations in accordance with Federal regulations. Resource 
        availability and inadequate guidance limited FHWA's oversight. 
        FHWA was not aware of a relocation costing $15,000, and the 
        project incurred $54,100 in excess relocation claims and 
        $10,500 in unsupported and ineligible relocation costs. During 
        the audit, FHWA officials agreed to take appropriate action to 
        ensure relocations are carried out in accordance with Federal 
        regulations.
Right-Of-Way Acquisition, Central Artery/Third Harbor Tunnel
(Report Number R2-FH-4-011, March 10, 1994)

        The audit objective was to evaluate FHWA administration and 
        oversight of right-of-way (ROW) acquisition activities. We 
        found that due to insufficient FHWA oversight, the 
        Massachusetts Highway Department (State) unnecessarily acquired 
        a $13 million building and $11.8 million of easements and 
        leasehold rights. We recommended the FHWA Administrator ensure 
        that Federal funding for ROW is limited to acquisition of 
        property necessary to the final ROW. Furthermore, when the 
        State makes ROW acquisition related decisions based on local 
        political and economic reasons, when feasible and less costly 
        alternatives exist, the Division should limit the Federal share 
        to those costs involved in the lower alternatives. FHWA agreed 
        with the recommendation.
Value Engineering, Central Artery/Third Harbor Tunnel
(Report Number R2-FH-3-027, January 13, 1993)

        The audit objective was to evaluate the effectiveness of FHWA 
        administration and oversight of the value engineering (VE) 
        program. We found that although $400 million in savings 
        resulted from value engineering, an additional $100 million 
        could have been achieved if FHWA and the State had thoroughly 
        and objectively considered technically feasible, but 
        controversial, value engineering recommendations.

        We recommended the FHWA Region 1 Administrator: 1) encourage 
        the Division to provide sufficient resources to ensure VE 
        reports are reviewed and finalized promptly; 2) advise the 
        Division to assist the State in resolving management consultant 
        problems timely, so that proper emphasis can be given to 
        finalizing VE reports; 3) encourage the Division to share the 
        project's VE Program Manual with other regions; 4) reemphasize 
        current VE policies and ensure the Division thoroughly and 
        objectively reviews all technically feasible VE 
        recommendations; and 5) direct the Division to seek a higher 
        share from the State for those recommended savings lost because 
        of an arbitrary rejection by the State. FHWA agreed with the 
        recommendations.
Consultant Services, Central Artery/Third Harbor Tunnel
(Report Number R2-FH-1-196, September 17, 1991)

        The audit objectives were to evaluate the adequacy of internal 
        controls, including direct charges to Federal-aid projects, and 
        use of the Massachusetts Department of Public Works (MDPW) pre-
        award audit function to ensure proposed consultant overhead 
        rates were supported and consultant accounting systems properly 
        accumulate costs by project. We also identified weaknesses in 
        the State's external audit function that impaired its ability 
        to objectively report findings and ensure that project costs 
        were reasonable and proper. We recommended that the FHWA 
        Regional Administrator: 1) withhold all Federal participation 
        in State audit costs for the project until the independence 
        issue is resolved; and 2) require the external auditor to 
        report directly to the MDPW Commissioner and ensure undue 
        pressure is not placed on the external auditor by MDPW 
        management. FHWA agreed with the recommendations.

    The Chairman. Thank you very much, Mr. Mead.
    Mr. Secretary, is there a cap on the Federal share of the 
project costs?
    Secretary Slater. Mr. Chairman, there is a cap. It is true, 
though, as you have noted, and as Senator Kerry noted, that it 
is not in the statute or necessarily in writing. However, the 
agreement that we are fashioning right now, crafting now, will 
include that kind of specific language. There is the cap, and 
it is based primarily on what the judgment was, the snapshot 
was of the project costs, I guess back in 1995, when there was 
a lot of discussion in the Congress about the national 
commitment to this project.
    Because of the leadership of the Massachusetts delegation 
we were able to come to the understanding that there would be a 
Federal cap and that the amount would be roughly $8.5 billion. 
Up to this point, I think about a little in excess of $5 
billion has already been expended on the project.
    The Chairman. Well, I guess I should ask Mr. Mead, do we 
need legislation? Do we need language? Do we need a written 
agreement? In other words, is the present situation sufficient? 
Can the Committee and the Congress be confident that there is 
indeed an enforceable cap on expenditures?
    Mr. Mead. The present situation is not sufficient. Either 
the principals have to sign a written agreement, or I would 
recommend you either require written agreement in so many days, 
or then you go on to incorporate into legislation, and I would 
couple that, whatever the cap is--I have heard the $8.5 billion 
figure mentioned.
    I would couple that, though, with an understanding of what 
we mean by a balanced State program--because in the State of 
Massachusetts there is a contention that too much money is 
going to this Artery, and what about the rest of the State? The 
point I was trying to make through this chart is that the 
future Federal highway apportionments have been encumbered to 
the tune of about 50 percent for a number of years, all the way 
to 2011, I believe. That is why the State needs to have this 
balanced program, and I would include that in any written 
agreement or legislation, sir.
    Secretary Slater. Mr. Chairman, if I may, just to continue 
the line of reasoning, I totally agree with Mr. Mead that a 
part of any agreement should include the parameters for 
defining a State-wide program, a balanced, State-wide program. 
During his remarks, he made reference to the fact that we are 
actually working with the parties now to come to the common 
understanding of what a balanced program would be and how we 
define that, and he is absolutely correct that there is some 
disagreement, some may argue considerable disagreement about 
that. But, I do think that we can get to some common 
understanding, some common ground, on this question, and I do 
believe that it can be captured in an agreement that all of the 
parties will sign, and that was a recommendation of the task 
force, and I think we can accommodate the important interests 
that are being expressed as it relates to this question.
    The Chairman. Thank you.
    Mr. Secretary, when you were Administrator of the FHWA, you 
and your Deputy, Jane Garvey, instituted a plan to control cost 
growth on the Central Artery/Tunnel project. As a part of the 
plan, you announced you would devote appropriate resources to 
monitoring oversight of the project. The DOT's Project Office 
within the Massachusetts Division Office offered full staffing, 
and we were told unprecedented initiatives in a project of this 
size for the FHWA. Why did the Department fail to identify the 
recent breakdowns, given the fact that FHWA was fully staffed 
and fully aware of the cost overrun problems with the 
megaproject?
    Secretary Slater. Well, Mr. Chairman, there you do 
underscore a number of important facts. First of all, it is 
true that I have been involved in this project now for the 7 
years I have been a part of this administration, first as 
Federal Highway Administrator, and then more recently as 
Secretary. Also, I did have the good fortune of being assisted 
in that regard by Administrator Garvey, who is currently our 
FAA Administrator, who was then our Deputy Administrator in 
Federal Highways.
    Mr. Chairman, at that time we did put together I think 
clearly the pieces, but I have to admit that at that time I 
believe we thought that just more people would solve the 
problem. The crux of the issue here deals with how those people 
deal with one another. And, that is why during my remarks, I 
made reference to the fact early on that what we have tarnished 
here, and tarnished in a significant way, is the Federal-State 
partnership that has existed since 1916, and it is just a 
matter of all of the parties trusting one another.
    Now, clearly, we trusted. I do not think we did enough to 
verify and, unfortunately, I think because of this experience 
we have learned that you have to do that. And, if I may, let me 
make reference to one particular point that was probably the 
most alarming to me, and I know it captured the attention of 
the Governor when we were meeting with the congressional 
delegation, and that is when we revealed to him that based on 
the report, and here I want to quote, the task force faulted 
Massachusetts for breaching its trust with FHWA and with others 
by, ``intentionally withholding knowledge of the project's 
potential cost overrun.''
    So at the end of the day, the point I wish to make here is 
that however many people you have involved, at the end of the 
day you have to have the trust that causes people to just put 
it on the table. If there is a cost increase, you just admit 
that, deal with it, and move forward, and if it takes coming to 
the Congress or going to the American people, I think people 
can understand that, with inflation and with things that happen 
that are unexpected.
    But, when you intentionally withhold information, and then 
you belatedly sort of throw it in the mix because for whatever 
reason you think you are about to be discovered, or whatever, 
you throw it in the mix, that is something that is 
unconscionable, and I have used that language in expressing my 
response to what has occurred.
    But at the end of the day, as I said in my remarks earlier, 
no one is blameless here. I am willing to shoulder the 
responsibility that I have as it relates to this issue. I am 
pleased with the way the task force carried out its 
responsibility. Administrator Wykle selected the right person 
to lead that effort. That task force did their job. We now 
engage the State. The Governor has responded, has put in place 
a leadership team that I think will do a wonderful job, that 
team has already engaged members of my staff in an effort to 
repair the breach and, as I noted, will be meeting with Mr. 
Mead before the end of the week.
    So I think we have learned a lot from the experience. It 
was a costly lesson. That is why I think it is important that 
the lesson be used to not only enhance our oversight and our 
relationship as it relates to this project. We have to use the 
lessons learned here as it relates to the entire transportation 
enterprise, whether that is in transit, or maritime, or 
highways, aviation, whatever, and we intend to do so.
    The Chairman. Finally, Mr. Secretary, there have been a 
number of critical reports over the years, the DOT IG, 13 
reports, GAO, 5 reports, and Massachusetts State Artery, 11 
reports. These reports express great concern. The FHWA 
basically in a blanket fashion rejected these recommendations 
and these concerns. Obviously, it was wrong in doing so. I 
guess my question is, is there some change you have made so 
that when these reports are made by the IG and others, that the 
people responsible just do not reject them out of hand, as has 
apparently been the case here.
    Secretary Slater. Well, Mr. Chairman, there again I think 
you make a very important point, and it has forced us to take a 
more introspective view of our operation, but not only in FHWA, 
and I underscore this. I think it requires us to look at our 
dealings with our partners and stakeholders across the 
transportation enterprise, and that is why I led with my 
comments about how we are setting up a process for doing so.
    In that regard, our Assistant Secretary for Budget, Jack 
Basso, has been monitoring a lot of our major projects, and he 
will be tasked with leading the DOT-wide effort to build on 
what is going on within FHWA as it relates to the major project 
team, so I think at the end of the day we are going to have 
what we need there, but let me just end my comments here by 
saying that I have got a lot of confidence in Administrator 
Wykle and his administration of FHWA.
    When I had the opportunity as Secretary to make a 
recommendation to the President I recommended General Wykle 
because of his more than 30 years of experience in the Armed 
Services handling major and significant projects. He has been 
personally involved in a number of our recent engagements, 
Somalia, Haiti and the like and, as a part of the TRANSCOM 
operation where, as you know, Mr. Chairman, moving troops and 
equipment sometimes can be a matter of life and death. He 
served with distinction.
    He has done a good job, I think, over the time that he has 
been within the agency, reshaping it, and I believe that 
clearly with this experience as well, that he and the agency 
and the entire Department, that we are all poised to raise the 
level of our performance as we say, ever skyward, ever higher 
in this, the first year of a new century and a new millennium.
    So we would just ask, Mr. Chairman, if you and Senator 
Kerry and the members of the Committee would just continue to 
keep the pressure on, work with us, help us sometimes in 
acknowledging the quality work of the IG and others who serve 
oversight responsibilities, that at the end of the day we are 
going to see the kind of performance that we all seek.
    The Chairman. Well, thank you, Mr. Secretary. It is just 
stating the obvious, but the reason we have Inspectors General 
is because we expect them to be listened to, and in this case 
they were routinely ignored over the years, and that is 
unfortunate. I hope that you can make policy changes that will 
prevent that repetition.
    I am fully aware that a lot of the effectiveness is 
directly affected by the relationship between the Secretary and 
the IG, and I note that you and Mr. Mead have an excellent 
relationship. I hope that we will not have a repetition of 
ignoring the good work--the obviously good and accurate work 
that was done by the IG's office, as well as the General 
Accounting Office.
    Senator Kerry.
    Senator Kerry. Mr. Chairman, thank you very much. Let me 
just try to see if I can get a few other points pinned down and 
followup on the Chairman a little bit. First of all, Mr. 
Secretary and Mr. Mead, thank you very much for your 
exceedingly candid and very direct and, I think, helpful 
comments with respect to this process.
    Mr. Secretary, you have done the brave thing and, to some 
degree in Washington, unusual thing and not tried to point 
fingers everywhere else, but at home. I think you have 
shouldered some blame here yourself, and that is important, but 
I will emphasize, because I think it is important, that you 
have taken steps out of this not just to deal with Boston, but 
to deal with national policy, which is a reflection of the 
breach of trust that you have experienced.
    I mean, your experience was that there was this 
relationship that kind of nicely went along for a long period 
of time, probably a little too sweet and a little too nice for 
a long period of time, and in effect you learned the hard way, 
but you have learned a lesson that you can apply to the rest of 
the country, which is that it cannot just be a trust any more 
because of what has happened here.
    Mr. Mead, when did your first sort of warnings take place? 
I am not clear on that. When did you first start to weigh in 
that there was sort of a conglomerate view that there were some 
problems?
    Mr. Mead. We saw at the beginning of 1999 that things were 
going in the wrong direction by magnitudes, and I think in any 
IG relationship with its Department--it is just a general 
philosophy--it is important that you begin to explore those 
issues with the Secretary and others before you go out with a 
report.
    Senator Kerry. But that is when you first focused, is that 
correct?
    Mr. Mead. Yes, sir. That is when it became apparent that 
there were real problems here, and quantifying them and doing 
the necessary audit work was what took place in the succeeding 
months, and also on the insurance program, which is 
extraordinarily complex, just understanding that and 
understanding how it was working. So that is what was unfolding 
in 1999, and by October we had issued this report.
    Senator Kerry. But as the Chairman pointed out, there were 
a slew of reports prior to that which had not been heeded.
    Mr. Mead. Yes, for several years before that.
    Senator Kerry. Is that what sort of brought you into it, in 
a sense?
    Mr. Mead. Well, actually, in my confirmation hearing before 
this Committee I was reminded by several of the Members to stay 
on top of the big infrastructure projects like the Central 
Artery, and did so. Before that I was at GAO, and we were 
staying on top of the Central Artery then.
    Senator Kerry. So let me now see if we can pin you down a 
little bit, Mr. Secretary, on an issue that every Member of the 
delegation is concerned about, and we have talked about 
privately, and we have talked about at the delegation meeting, 
and it has been raised here again today, and that is this 
question of the State-wide program.
    I just want to understand, the IG has underscored what a 
number of us have been concerned about, which is this question 
of what we are measuring. Is it commitment? Is it budget 
outlay? Is it cash outlay? Is it authority, advertising? I 
mean, there are a whole lot of ways to say, well, we have got a 
big program here, so I want to make sure that we are on the 
same page as we go out of here.
    TEA-21 created a process by which we were supposed to 
really have a negotiation between State and local officials, 
and the Federal Government would sign off on it. But the 
process to date has been effectively that a funding target is 
put out, and that is it. Are you now in negotiations in a way 
that will confirm precisely the terms and understandings of all 
parties with respect to the State-wide program?
    Secretary Slater. Senator, we are in those negotiations, 
and the objective is to come to that kind of understanding.
    Senator Kerry. And will that understanding be part of the 
formal written agreement which is reached when you finally sign 
off on a financing plan?
    Secretary Slater. Maybe not the details of the 
understanding, but clearly the reference to a State-wide plan 
agreed to by the parties. I mean, the agreement may be more 
general than the actual understanding, and that could be 
referred to in the overall document as an addendum.
    Senator Kerry. Well, I ask this because the IG has just 
made a recommendation to us with respect to potential 
congressional limits being placed that would, in fact, 
congressionally mandate a relationship there. My preference 
would be to avoid having the Congress have to do that, and 
clearly you could have the parties enter into a formal 
agreement which would preclude the need for Congress to do 
that, correct?
    Mr. Mead. Yes, sir.
    Senator Kerry. You certainly see that as one viable option?
    Mr. Mead. I hope it does not come to legislation. It seems 
to me that if the parties can get together, with a document of 
some clarity, that they can agree to in writing, then why 
should Congress have to pass legislation?
    Senator Kerry. Well, I can give you 100 reasons why I would 
hope we would not. So I think it is in all parties' interests 
here, particularly Massachusetts, to see if we could not get 
this into an agreement so that everybody is clear. Because if 
that does not happen, what all of us are hearing as we go 
around the State and meet with mayors and regional planning 
officials, et cetera, are their concerns about the disparity 
between what they are being told is in the pipeline and what 
they see and what they are actually getting.
    So do you think--I mean, would you embrace that, Mr. 
Secretary, as a way to try to approach this?
    Secretary Slater. Senator Kerry, that is exactly the way we 
would like to approach it, and I listened carefully to Mr. 
Mead, and he did say either-or. His objective is to lead us to 
the end that is desired. We believe that we can get there 
through the process that has been put forth in TEA-21. It was 
actually in ISTEA and then enhanced, with our lessons learned, 
in TEA-21.
    Here, though, let me also just repeat some language from my 
testimony which shows how we would seek to create the kind of 
clear understanding and assurance that we seek on this point. 
While we may not include all of the details in the financial 
plan or the agreement that we are now working on, it would 
capture the essence and the spirit of the agreement. When it 
comes to the State's regularly submitted State transportation 
improvement plan, that is where we can go into all of the 
details, and here we have considerable authority when it comes 
to approving such a plan.
    And, I want to repeat what I said in my testimony as it 
relates to how we would respond to this question. FHWA would 
not approve and fund the State's transportation improvement 
plan, nor continue to participate in the Central Artery 
project, unless there is an enforceable commitment to a 
balanced, State-wide program. We want to be very clear in 
communicating to all of the parties what our action will be if, 
in fact, there is no agreed-upon State-wide balanced program 
that is included in the State transportation improvement plan 
that is approved by us on a regular basis. And so there will 
always be the opportunity for us to become involved in the 
process.
    Now, as I say this, our desire is not to be overly involved 
here, because that is something to be dealt with at the State 
and local level. But clearly we have an oversight 
responsibility, and that has been underscored most dramatically 
as it relates to this project. And so, with major projects, 
projects of national and regional significance, I think it 
appropriate that we have more of an involvement to ensure 
integrity of the management of those projects.
    Senator Kerry. Well, I appreciate that very much, and I 
think that would be by far the best way to go and a helpful way 
to proceed here, and so I encourage you to try to pin those 
details down.
    Mr. Mead. Senator Kerry, may I say something else while you 
are on this balanced State program that I would urge people to 
reflect on.
    The $400 million figure that you have heard, that was 
starting to be bandied about before the passage of TEA-21, and 
I would have to ask myself, from Massachusetts, why was that 
figure not increased once the TEA-21 levels were increased for 
your State, and what about the implications of inflation? 
Certainly the Artery's cost years reflect those. What about the 
rest of the State?
    So the $400 million figure, I personally would not view 
that as embedded in concrete.
    Secretary Slater. Senator, if I may, let me just say that 
all of these considerations are being taken into account as we 
work with the parties to try to come to the common ground, but 
Mr. Mead is correct in raising the question, and we are doing 
that in these discussions.
    Senator Kerry. Well, I applaud that, and again you have 
asked sort of the pregnant question, so to speak, and that is 
it. Why isn't it increased, and I think that is exactly the 
problem we are facing in distribution, and the Chairman, in his 
question about the allocation, is expressing the concerns of 
all of us. We passed TEA-21 for a purpose, and I was in the 
center of that debate back in 1995 and 1996 when we were trying 
to get that last tranche of funding, and there were 
representations made on the floor based on all of the facts and 
figures we were given again as a matter of trust in that 
partnership.
    I do not want to belabor this, but obviously none of us 
want further surprises, and the expectation of the public is 
going to be, well, Okay. We have had this big hiccough in the 
process, but the folks are going to get a handle on this now. 
They are going to really level with us, and we are going to 
know exactly what is coming down the road.
    Have we done that, and can we do that at this point in 
time? Can we say both to the Committee, to the people and the 
country, and particularly to the taxpayers of Massachusetts, 
where we see the outer limits of cost on this project, and I 
want to emphasize, without penalizing the critical upsides of 
what this project was supposed to deliver?
    I mean, there is a reason we voted for this on the floor of 
the Senate, and part of that reason is the promise of X number 
of acres of open space and so forth. We do not want to see this 
project now somehow cutting back on those virtues that are the 
real assets that brought us to support it in the first place in 
order to somehow cut corners, and so I think we have got to 
factor in completing this project as promised, and what is that 
cost now on the table? That is the question I would ask.
    Mr. Mead. I think the answer to your question is a double 
yes. I believe that for the duration of this administration, 
that the ship at the Artery has been set on the right course. I 
have actually had three conversations with Mr. Natsios before. 
I have not met him in person until today. But I am really 
encouraged by his attitude, his commitment to the project.
    I do think, sir, that you are going to face increasingly 
pressures to cut back on the project, because the opportunities 
for cost-savings are decreasing with each passing day as you 
approach the completion date, and we noticed some of that in 
our last review. We also noticed a tendency in the Artery's 
cost report to try to shift costs to other places in the State, 
or in the city, so I would watch that.
    I am nervous about whether--taking this beyond Artery, that 
we need to move forward smartly to apply this to the other 
large infrastructure projects in the country. Also, there are 
only a few months left in this administration, so we want to 
continue this beyond that.
    Senator Kerry. I just wanted to follow up on that. When you 
mention that, I suddenly get a little concerned, and I trust 
you folks are going to be. I met with Mr. Natsios yesterday. I 
have great admiration and respect for him. He is a very capable 
person, and he is a person of candor, and he will tell it like 
it is, so I am confident in his ability to build the 
relationship of trust with you. The question is sort of where 
we are heading in terms of the pressure that you have just 
talked about. We are not going to resolve it here today, but I 
am glad it is on the table. I think we all need to take note of 
it.
    There have been some questions, and I am not going to dig 
into this deeply now, but some of us who sort of sit on the 
outside of this who are accountable to the public for it are a 
little bit surprised at some of the level of cost-plus 
contracting in this. I wonder if the relationship of Bechtel 
and Parsons Brinckerhoff, and they will be represented later, 
has been a subject of your scrutiny. Is that unusual, or is 
that normal on a project of this kind, to have that kind of 
open-endedness?
    Mr. Mead. I think it is somewhat unusual. I recall 4 or 5 
years ago there were questions about the number of Bechtel 
employees on this project--950, I think it was. They are now 
reporting that there are 620 Bechtel employees on this project, 
but I understand also that 200 over that were shifted to the 
rolls of the MTA. I understand Chairman Natsios is going to be 
asking some questions about what these people are doing.
    I am disappointed that I did not hear anything from Bechtel 
about these cost increases. With 600 people, I would assume 
that some of them must have had a clue as to where the costs 
are going. But I understand also their position. They are a 
contractor, not a contractor to me or the Federal Highways 
Administration. They are a contractor to the project, and I 
would like to know whether they protested what was being 
disclosed by the Artery, and I know the Secretary would, as 
well.
    Secretary Slater. That is true.
    Senator Kerry. Fair enough. Thank you, sir.
    Secretary Slater. Mr. Chairman, were you going to go to Mr. 
Mead? The question was asked of both of us, and I just wanted 
to make one or two comments about it, if I may.
    The Chairman. Sure.
    Secretary Slater. First of all, let me join the chorus of 
voices expressing pleasure with the fact that Mr. Natsios is 
now on board. I mentioned that he has met with senior leaders 
of my team already. That was within days of his coming on 
board. Again, the Governor's action in bringing him on board 
was immediate and decisive. We commend that.
    We do believe that the repair of the breach of trust is now 
underway, but we have got some ways to go here, and I want to 
acknowledge that, but clearly we are off to a good start. I am 
very pleased that he will be coming before the body and, while 
I will not be able to stay around and hear the exchange, I will 
definitely look to the record and study it and be guided by it, 
so I want to make that point.
    Let me also say that I agree wholeheartedly with Mr. Mead 
in his comments that we have to learn from this experience 
through our oversight activities as it relates to major 
projects across the transportation enterprise, and we are 
committed to doing just that, and I want to underscore that yet 
again.
    And then finally, in dealing with the matter of other 
parties and their roles in this process, I will be looking to 
the record to see the discussion that will go back and forth 
with the representatives of Bechtel and others who will come 
before you as well, because at the end of the day everybody who 
is a part of the partnership has a responsibility to the 
credibility of that partnership, its integrity, and the trust 
that is supposed to be present, that is, the public sector 
partners but also the private sector partners as well.
    And you should know that we continue to look at this matter 
from all vantage points, and looking at the responsibilities of 
all the players. So, while the discussion up to this point has 
focused primarily on our relationship with the State, we are 
looking at our relationship with companies that enjoy the 
benefits of transportation contracts not only in Boston but in 
other communities around this country, and we are very, very 
interested in how they view that responsibility and their 
responsibility to the parties that are a part of that 
partnership.
    Finally, Senator, as it relates to your concerns about 
whether this project as we close it out, and our concern for 
costs, whether we will resort, then, to looking at 
transportation as we have in the past, as just a matter of 
giving us a straight line from one point to another, with no 
consideration for the communities involved.
    We are definitely committed to resisting that kind of 
impulse, because the nature, the value, the significance of 
this project speaks to its impact on mobility, but also its 
impact on safety, its impact on the natural and human 
environment, its impact on economic development and trade. 
These are all goals of the Department of Transportation, as we 
work with others to invest properly transportation resources, 
and as both of you know, as men who have served in uniform, 
there is also the national security issue that comes into play 
as well when investing transportation dollars.
    So at the end of the day we do not want to resort to 
looking at transportation in a traditional concrete, asphalt, 
and steel sense without any consideration of its impact on the 
quality of life and livability of communities, and I just want 
to state that for the record.
    The Chairman. Thank you, Mr. Secretary.
    Finally, before you go, given the chart that Mr. Mead 
showed about the continued cost escalation of this project, I 
feel that the legislative cap should be written into law. I 
wondered if you agreed, Mr. Mead.
    Mr. Mead. I think you could do it either through a written 
agreement that states what it is and exactly what it means, or 
you could do it through legislation. Regarding the cap, I would 
draw a distinction between a balanced State program and whether 
you put that into law versus a cap. I think the two are 
related. A cap would be easier to put into law, but I don't 
think you necessarily have to put it into law if you can get 
the right parties to agree that this would be the maximum.
    The Chairman. What if the cap is broken, as it already has 
been on several occasions, and it is only an agreement? I mean, 
I want people held responsible in more ways than just a 
violation of the agreement. There are incredible things that 
have taken place here. Because there was no real law-breaking, 
so far we have wasted money and time and I am just concerned 
that agreements were broken. How many agreements have there 
been in the past?
    Senator Kerry. Mr. Chairman, can I just say I agree with 
you that we need to have an understanding with respect to 
precisely what the Federal dollar is going to be on this. But 
what you are pointing to when you say the cap has been broken 
in the past, in point of fact the Congress has voted an 
additional amount of money each time.
    And what happened was, I mean, there is a long, long 
history here, and I remember going through it with Senator 
Helms and Senator Symms, the long history of change, of 
environmental requirements, of design changes, plus inflation, 
and I am not diminishing the fact that these other questions 
are out there, but we have voted to authorize and appropriate a 
specific amount of money. That has not yet been spent. That is 
not yet exceeded.
    In fact, the drawdown on that is going on at this time. The 
project is about 60 percent, 60-plus percent completed in 
construction, the design is 98 percent completed, and so in 
point of fact there is a clear understanding of the road to go.
    If you had a contractual agreement now, where the State of 
Massachusetts signed specifically with Federal Highway as to 
the liability for any cost and precisely what Federal dollars 
were spent, you would have the first actual formal legally 
binding agreement between the parties as to ultimate cost. We 
are the ones that have changed the expenditure to date.
    The Chairman. Except the reason we changed the expenditure 
was because of the cost overruns. If we had had a legislated 
cap we might not have had this incredible increase from $2.5 
billion to now $13.5 and even more. So I would like to work 
with you to come up with something fair, but I think the 
taxpayers deserve a law that says at some point this has to 
stop. This has to come to an end. Sixty percent completion, and 
we have already had a $10 billion overrun.
    I cannot do the math, but if that kind of overrun continues 
we are talking about a $20 billion expenditure, and that is 
unbelievable. When you look--and I will be glad to review the 
Congressional Record--every time we appropriated more money 
authorized and appropriated more money, that was going to be 
the last time.
    I would be glad to review the Congressional Record with 
you, but every single time we appropriate and authorize more 
money those requesting the money say, Okay, this is it, don't 
worry, this ought to do the job, and every time it did not. 
Whether it was environmental reasons, or inflation, or lack of 
assessment as to the real estate costs for the right of way, 
all of those reasons are good and valid reasons, but I think if 
we had had a law that said, Okay, at this point we stop, then 
Congress would have had to act to overturn a legislative action 
and not change an agreement.
    Senator Kerry. I understand, Mr. Chairman, and I agree with 
you, but let me just say to you the reason it is moot is as 
follows. Senator Kennedy and I both on the floor of the Senate 
agreed with Senator Helms and others that this was the last 
time we were coming to the floor to ask for money, and the 
State of Massachusetts agreed at that point in time that these 
were the final figures of what they would request from the U.S. 
Government, and so in effect there is a cap.
    No one in the U.S. Congress is going to vote for more money 
for this except perhaps the Massachusetts delegation, and we 
are going to get soundly beaten.
    The Chairman. Again, in all due respect, if the tunnel is 
90 percent complete and the state does not have the funding, I 
doubt if anybody is going to support stopping the project at 
that point.
    Senator Kerry. But that is where--and you will hear this 
from Andrew Natsios. The State of Massachusetts is fully 
prepared, and they have said so through the Governor, to assume 
the cost of completion beyond what the Federal commitment is to 
date.
    The only issue today really is, what is the appropriate 
apportionment in terms of the TEA-21 money so that the Artery 
is not sucking up the money that the rest of the State wants 
for its projects, and the Secretary has made a firm statement 
that that will be included in this fix.
    Mr. Mead. The amount of the Federal share, this $8.5 
billion we are hearing about--I do not believe before all of 
these disclosures that I heard a firm figure of what the 
Federal contribution would be. It was talked about in very 
circuitous terms. For example, we will make sure we have a 
balanced, State-wide program of $400 million a year, or we will 
not--we will make sure that after 2002 no more than 50 percent 
goes to the Artery, and if you go through the gymnastics of 
that math, maybe you can get to $8.5 billion, but I think the 
$8.5 billion is a figure of very, very recent vintage I had not 
heard before.
    The Chairman. Again, finally, the resources of the State of 
Massachusetts are not infinite. I mean, I know it is a very 
wealthy State, but if these cost overruns continue along the 
way that they have been tracking with only a 60-percent 
completion, I do not know how the State of Massachusetts could 
afford it.
    Senator Kerry. The Governor is proposing a $1.4 billion tax 
cut over the next several years, so clearly he could afford 
something.
    The Chairman. Well, I just think--I mean, I have made my 
point. I do not mean to be argumentative on this issue, but I 
think that Mr. Mead's point here that, we all of a sudden come 
up and say, Okay it is going to be $8.5 billion, but based on 
what? I think at this time we have incomplete information.
    Secretary Slater. Mr. Chairman, first of all I want to say 
that I think you express a sentiment that we all share, and 
because of that, what I would like to offer--and this is based 
primarily on the comment that Mr. Mead made that we could 
handle it either way. You could have the cap expressed in 
legislation, or you could handle it with a public statement and 
agreement that all of the parties sign to, or sign on to.
    What I would like to do is to say that today we clearly 
understand your sentiments. If we could work with you, Senator 
Kerry, and others who you would identify along with Mr. Natsios 
and others who have a responsibility here, in an effort to just 
make clear that when we sign such an agreement that we all mean 
it, and that we commit our organizations to it, if at the end 
of the day you would be satisfied with that, that is the way we 
would prefer to do it.
    The Chairman. What is wrong with having it written into 
law?
    Secretary Slater. Well then, nothing. Nothing, really.
    The Chairman. Then why would you have an objection to doing 
both? We are talking about the largest public works project in 
the history of this country. We are talking about at least $10 
billion in overruns, in addition to the original cost 
estimates, whatever the reasons were, and somehow you are 
reluctant for us to write into law something we can tell the 
taxpayers of Arizona and the other states which are funding 
this project, or at least a significant part of it, that the 
cost has been capped.
    Secretary Slater. Well, all I am saying is that at the end 
of the day we may do that.
    The Chairman. At the beginning of the day we may do it with 
an amendment on an appropriations bill.
    Secretary Slater. If I may, though, let me just close with 
this point. I think the most significant thing about this whole 
experience is that the parties who were clearly in the same 
room and working together in years past allowed something very 
bad to occur. They lost a sense of commitment to one another, 
where they would bring even unpleasant news to the table. 
Partnerships do that, and I think that for the benefit of the 
partnership we have to get a signed agreement with the parties 
where they commit to an end.
    We may have coupled with that legislation that also deals 
with parts of that agreement, but for the benefit of the 
relationship that was significantly tarnished, those parties 
need to themselves take an action that is public and that is 
recognized for what it should represent, and that is a 
commitment to be up-front and forthright in dealing with each 
other, and to bring trust back to a process that requires it, 
and so that is all I am saying.
    The Chairman. Senator Kerry and I have worked together on 
many issues I am sure we will be able to work this one out. I 
do not want to take too much time on it.
    Senator Kerry. Mr. Chairman, I want you to feel good at the 
end of this hearing. There is a cap in effect today. As long as 
you are in the U.S. Senate, I am sure we are not going to 
pass--I am confident we are not going to pass additional money 
and, in effect, we have already appropriated the amount we are 
going to pay for it.
    The Chairman. But Mr. Mead just testified he is not sure of 
that fact.
    Senator Kerry. Mr. Mead said he did not have a number, but 
they are willing to put it into a legal agreement.
    Secretary Slater. We are willing to do that, but let us be 
clear, now. I do not want to be light about this, but the 
Senator has demonstrated that there are other opportunities 
beyond the U.S. Senate, and we all are here, as we are here 
now, and the objective is to try to do what we can now to put 
in place a process that goes on even after we leave our 
individual post, and so I think that is our goal.
    The Chairman. Again, I have confidence that because of our 
long relationship, that we will be able to work something out 
with the assistance of Mr. Mead and Senator Kennedy and others, 
so I thank you very much.
    Our next panel is Mr. Andrew Natsios, Chairman, 
Massachusetts Turnpike Authority, Mr. Richard Thomas, Senior 
Vice President, American International Group, Mr. Matthew 
Wiley, Project Manager, Bechtel/Parsons Brinckerhoff Joint 
Venture, and Mr. Richard Dimino, who is the President and CEO 
of Artery Business Committee.
    Chairman Natsios, we would like to begin with you. Welcome 
before the Committee. We would like to congratulate you for 
your willingness to take on these very difficult 
responsibilities as Chairman of the Massachusetts Turnpike 
Authority. We thank you for sharing your thoughts and vision 
with us today, and please proceed. The written statements of 
all the witnesses will be made a part of the record if you so 
desire.

           STATEMENT OF ANDREW S. NATSIOS, CHAIRMAN, 
MASSACHUSETTS TURNPIKE AUTHORITY, ACCOMPANIED BY MICHAEL LEWIS, 
                ACTING PROJECT DIRECTOR FOR THE 
                          CA/T PROJECT

    Mr. Natsios. I would like my written statement to be a part 
of the record, but I will shorten parts of it and expand other 
parts. Good morning, Chairman McCain and Senator Kerry. I would 
like to thank you for the opportunity this morning to answer 
questions you may have about the Central Artery/Tunnel Project, 
more commonly known as the Big Dig.
    With me today is Michael Lewis, who is the acting project 
director. Matt Wiley is the project manager for Bechtel/
Parsons, management consultant to the project.
    I might add, the second day I took over as chairman I 
removed the top six people at the Turnpike Authority, the 
director of administration, facilities manager, the legal 
counsel, the public spokesperson, and the project director, Pat 
Moynihan. Pat Moynihan will be with us 6 more months because I 
needed someone with institutional and project memory to tell me 
what happened the last 9 years for continuity's sake, but he 
has no management authority. He is simply an advisor to me.
    So there is a new team in place. I brought people from my 
office in Administration and Finance with me, and I will bring 
people from the outside and from other regulatory agencies of 
State government who I have confidence in to provide the 
leadership for this project in the future.
    I want to state as clearly as I can, Mr. Chairman, that we 
will follow the principle of complete transparency in providing 
information to you, the public, and the executive branch, even 
if that information is painful.
    Let me introduce myself. I have been serving as Secretary 
for Administration and Finance for the Commonwealth of 
Massachusetts. The Governor asked me on April 11, less than a 
month ago, to accept the position as chairman of the 
Massachusetts Turnpike Authority and head of the Central Artery 
project.
    My former position does not have an equivalent, per se, in 
Washington, but it is a combination of the head of OMB, the 
Secretary of the Treasury, the Office of Personnel Management, 
and the General Services Administration all rolled into one, so 
it is a very powerful position, often called the Deputy 
Governor. Over the last 80 years the position has existed, and 
it is the command and control center of State government to 
control spending.
    I am a staunch fiscal conservative. My 12 years in the 
legislature will show that in my voting record. I think I voted 
for every tax cut and against all but one budget. I take a dim 
view of cost overruns--of excessive spending.
    I voted and debated against this project twice while I 
served in the legislature. I thought then it would be too 
expensive. However, it is 60 percent done. There is a big hole 
in the center of Boston. It must be finished, finished properly 
so that 50 or 100 years from now people will say it was done 
well, and it is good for the city, and it has stood the test of 
time. We must ensure the money we have already spent has not 
been spent in vain over the past decade.
    I was also responsible for all capital projects, for 
controlling debt finance, and managing the billion-dollar bond 
cap we have on borrowing money in the Commonwealth. We have the 
third healthiest economy in the United States. We have a 2.6 
percent unemployment rate, the lowest in 30 years. We have a 
$1.4 billion surplus in the State stabilization fund and in the 
capital management reserve fund we have $150 million, and we 
have about $250 million from the proceeds of the tobacco 
settlement that we have put in trust as well.
    I mention this to assure you that we are not looking--let 
me say this clearly, Mr. Chairman. We are not looking for any 
additional Federal assistance to finish the Central Artery 
project. You have received no letters, we have made no calls, 
asking for more money. It is our problem, we are going to fix 
it, because it is our fault this took place.
    While the Federal Government has management oversight, we 
are running the project, and we accept the responsibility for 
what has happened. The Governor and legislature are currently 
devising a plan to finance the recently revealed Big Dig cost 
overruns. None of those plans ask for any additional Federal 
assistance. We proposed a plan when I was Secretary, through 
the Governor, and the House and the Senate have each approved 
plans. It is now in conference and they are meeting, as we 
speak, to work out the differences.
    About three-quarters of our plan is either in the House 
plan or the Senate plan. I say that only to show that there is 
a large amount of common agreement as to how we are going to 
fix this problem. The plan we have proposed, which I will 
discuss later in more detail, will fix the problem with a large 
contingency fund should there be further cost problems in the 
future, which I hope to avoid.
    In early 1996, when the Governor and legislature decided to 
transfer supervision of the Artery project construction from 
the State to the Massachusetts Turnpike Authority, which has 
independent authority in its legislative charter, its own 
budget system, its own personnel system, and its own revenue 
sources, the rules and regulations, which I had control over in 
A&F, that apply to State agencies do not apply to the 
authority. That decision was made by the executive branch and 
by the legislature.
    The legislation passed. I am not sure I would have voted 
for it the way it was, but it was decided; we are 60 percent 
completed. I think the MTA governing system may have some 
problems with it, but the decision was made and I respect that.
    There is a point to be made here, however. You asked about 
accountability systems. The decision to transfer the project to 
the Turnpike Authority was in part made to facilitate 
construction, because State rules and regulations do cost more 
money. They increase the level of accountability, but they also 
reduce efficiency and extend the amount of time it costs to do 
things.
    We sometimes see efficiency and accountability as the same 
thing. They are not, and if you carry one or the other too far, 
they affect the other in a negative way. If you are too 
efficient, you will reduce accountability. If you are too 
accountable, and you go too far in controlling things, then you 
can reduce the efficiency of it. I think there is a balance. I 
am not sure we have it, but that kind of debate I am not sure 
took place.
    I went back over the legislative and media records when 
this happened, and the focus was on transportation, not on 
governance systems. As it stands now, the artery project is 60 
percent constructed and 98.6 percent designed. Seven of the 117 
contracts have yet to be awarded. 50 contracts have been 
entirely completed, and the rest are in progress.
    We will conduct cost analyses, review construction and 
management contracts, and make sure oversight is thorough. 
There will be no surprises on my watch, Mr. Chairman.
    Even before I was named turnpike chairman, as A&F Secretary 
I hired the firm of Deloitte and Touche to conduct an 
independent review of the project. That is ongoing now. I will 
appoint an outside expert on the insurance facility to review 
the owner-controlled insurance program and an outside expert to 
examine the project's construction management contract with 
Bechtel/Parsons. I might add some of the finest engineering 
schools in the United States are located in Massachusetts, 
which is going to help the process of finding some experts.
    I have also brought in a transition team composed of senior 
civil servants from Administration and Finance who came with 
me, seven of them. They are the comptroller, the head of the 
State personnel system, the State budgeting system, the State 
purchasing system. Each has spent the last 3 weeks going 
through an entire review of the entire management structure and 
processes of personnel and budgeting systems of both the 
turnpike and the Central Artery to see what management changes 
need to be made.
    While I await the results of these reviews, I have set 
underway--my initial assessment is that the Central Artery/
Tunnel project appears from a construction and engineering 
point of view to be well-run and well-engineered. I say that 
appears, because the reviews are not entirely in yet. These 
reviews will tell, I think, the true story of the project, and 
whatever is in them you will see, and the public will see.
    I have three immediate objectives that I have set for 
myself. The first is to restore the project's credibility. This 
is paramount. We need to win back through deeds, not just 
words, the trust of the public, the Members of Congress, and 
the Federal Highway and Transportation officials.
    Second, and this is my expertise, is public finance, to 
bring the project's management and finances back on track.
    Third, I just want to say--Senator Kerry mentioned this--
the thing that excites me and interests me in this project is 
the restoration plan for the 30 acres above the Artery that are 
in downtown Boston that will add to Boston's reputation as one 
of the great cities of America.
    Certainly it is the most historic, and I have a firm 
attachment to the history of the city and to what it has done 
with that land, because other parts of Boston that have been 
built over the years were done very well, and as a result of 
that have enormously improved the economic power of Boston as 
the central economic engine of New England. We want to continue 
that.
    Let me also add, Mr. Chairman, there has been a debate with 
the Inspector General over the question of whether the 
insurance fund, as it builds up between now and 2017, should be 
used as a credit against the bottom line cost of the project.
    When I was at Administration and Finance, I prohibited the 
staff from using that credit in the bottom line figure, 
because--(I have to say, this argument has never been used 
publicly even by the Inspector General) but if you want to use 
the figure $900 million which will be in the fund in 2017, you 
need to discount that in todays dollars, or 2005 dollars, when 
the project is done.
    The value of money deteriorates over time because of 
inflation: this is called the present value of money. If you 
want to use 2017 dollars, you must discount the number back to 
what the money was worth in 2005, which is probably around $300 
million. We cannot use a figure that far into the future to 
discount a project that is going to finish in 2005, unless you 
increase the value of the project to what inflation will cause 
it to be if it were built in 2017. That calculation, which is 
fundamental to public finance, was never done, so it has been a 
fictional credit in my view. We never accepted it in A&F.
    We had wars with the Turnpike Authority over this issue. We 
included the credit in our bond disclosures, but as a separate 
item. We refused to add it into the computation, so the people 
buying our bonds could see that there are two separate figures.
    So I have told the staff, do not use the credit again in 
calculating the value of the project while I am in charge of 
the project, because it is not a legitimate calculation from a 
pure public finance point of view. I am a purist in these 
matters.
    Let me talk briefly about the project to build Interstate 
93 through the city and extend the Mass Turnpike under South 
Boston and the Boston Harbor to Logan International Airport. 
The project's complexity and size are enormous, as, I know you 
know, is the cost. The project draws a steady stream of 
awestruck engineers and construction experts from all over the 
world who marvel at the engineering techniques, many of which 
are the first to ever be used in the United States.
    They have been used in Europe extensively, but the 
technology has not been transferred, until this project, to the 
United States. This innovation transfer will affect the 
construction of other projects in the United States, perhaps 
not of the same size and cost, but those techniques may save us 
money and may improve the quality of the engineering of other 
projects of some size in other parts of the country.
    The oldest city in the Northeast, in fact perhaps the 
oldest city in the country, will have the newest infrastructure 
when the Artery project is completed at the end of 2004, if the 
project is completed on time.
    The modernization of Logan Airport, which will cost about 
$5 billion and is about 50 percent done, the construction of a 
new convention center, which is just to begin and will finish 
by 2005, and the installation of the new water and sewer system 
for Greater Boston, which serves 43 percent of the population 
of the State, which is two-thirds done, will have all been 
completed.
    We did a study at Administration and Finance to determine 
what the level of the state's investment in infrastructure has 
been in the last 10 years. We found an astonishing thing.
    In our study, we found that the State has, since 1992, 
spent $18 billion in State funds on infrastructure projects. 
And an additional $1.8 billion in State funds for the Central 
Artery.
    We have a 5-year capital plan that did not exist when I was 
in the legislature. We had only annual plans. We now have a 5-
year plan. We now know what we are going to spend money on 
across the State in all our public infrastructure projects. The 
projects are listed by name and title, how much they are going 
to cost, and we are going to spend between now and 2005 another 
$17 billion in State funds, for a total of $35 billion.
    And when you include the extra $1.8 billion for the Central 
Artery that we spent earlier, we will spend $37 billion for 
public infrastructure: for courthouses, new prisons, 25 percent 
of the schools have been reconstructed in the decade of the 
1990's, 40 percent of the libraries--the biggest investment in 
libraries since Andrew Carnegie built them earlier in the 
century in Massachusetts, for sewer and water projects, for the 
Logan Airport, for the convention center, and for the State-
wide road and bridge project.
    There has been a huge investment, the largest in the 20th 
Century. I am a little partisan here. It was done under a 
Republican administration, and the purpose of it, with 
legislative support was to invest in the infrastructure. We had 
the oldest and most deteriorated infrastructure in the country, 
because we date back to the early 17th Century. Some of the 
roads in Massachusetts literally are that old.
    I think that is a desirable thing. Massachusetts is a model 
for other older States in the country with the same sort of 
aging infrastructure. The notion that all of this is coming 
from the Federal Government is not accurate. The only big 
project where most of the money, or a large part of it, comes 
from the Federal Government is the Big Dig.
    All the rest of it is almost entirely State funded, which 
is why we have the fourth or fifth highest per capita debt, 
public debt of the 50 States. We did not waste the money. We 
spent it on this massive investment.
    I might add also--I have heard this debate about the State-
wide road and bridge. We can talk about that, but I have to 
say, I have to manage the bond cap for the state. We do not 
borrow more in the general obligation bonds than $1 billion a 
year. We will spend now, this year, $617 million on State-wide 
road and bridge projects.
    The debate over this has been affected by the insatiable 
appetite by local government, building trade unions and 
contractors to build all this infrastructure. Everybody sees it 
and they say, I want my project moved up. I want it built 
faster, I want it built nicer, I want it bigger, and as a 
result the leadership in the House and Senate and managers in 
the executive branch have been promising projects without 
looking at the 5-year plan.
    The Chairman. Mr. Natsios, you are telling me things I am 
not interested in.
    Mr. Natsios. Let me just finish by saying, I thought 
Senator Kerry might be interested because he raised the issue.
    The Chairman. He is responsible for all of it. Go ahead.
    [Laughter.]
    Senator Kerry. Thank you, Mr. Chairman.
    [Laughter.]
    Mr. Natsios. Let me just conclude in a paragraph, Mr. 
Chairman, that I am happy to answer your questions, and I want 
to emphatically state that it is our intent to open this up. We 
have a tunnel under the Boston Harbor that will withstand the 
weight of the water in Boston Harbor. We now have a project I 
hope that will withstand public scrutiny.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Natsios follows:]

          Prepared Statement of Andrew S. Natsios, Chairman, 
                    Massachusetts Turnpike Authority
    Good morning, Chairman McCain and other members of the Committee. 
Thank you for giving me the opportunity to answer any questions you may 
have about the Central Artery/Tunnel Project, more commonly known as 
the Big Dig. With me today is Michael Lewis, acting project director.
    Before I begin, I want to state as clearly as I can that we will 
follow the principle of complete transparency in providing information 
to you, the public, and the Executive branch.
    Let me introduce myself. I had been serving as the Secretary for 
Administration and Finance for the Commonwealth of Massachusetts when 
the governor asked me on April 11, less than a month ago, to accept the 
position of chairman of the Massachusetts Turnpike Authority and head 
of the Central Artery Project.
    As Administration and Finance Secretary, I was the governor's 
advisor on fiscal and economic matters. I had oversight of the state 
agencies whose federal counterparts are the General Services 
Administration, Office of Personnel Management, Office of Management 
and Budget, and the Treasury Department.
    I also supervised capital projects and debt finance, so I speak 
with assurance about the Commonwealth's fiscal health, which is quite 
good. Our stabilization fund has a balance of $1.4 billion, and when 
you calculate the value of all reserve funds available to state 
government in Massachusetts, the total reaches about $4 billion. A 
recent study by the Center on Budget and Policy Priorities indicates we 
have among the highest reserves and are among only eight states in the 
nation that can weather a recession as severe as the 1990-91 downturn 
without cutting spending or raising taxes.
    I mention this to assure you that we are not looking for additional 
federal assistance to finish the Central/Artery Project. The 
Legislature and Governor are currently devising a plan to finance the 
recently revealed Big Dig cost overrun, and none of those plans asks 
for any additional federal assistance. This cost overrun is our problem 
in Massachusetts, and we will pay the bill for it. I'll get into some 
detail on this shortly.
    In early 1997, the Governor and Legislature decided to transfer the 
supervision of the Artery Project construction from the state to the 
Turnpike Authority, which is an independent authority with its own 
legislative charter. The Turnpike Authority has its own budget and 
personnel systems. The rules and regulations that apply to state 
agencies do not apply to the Authority, which means the executive 
branch in Massachusetts has less oversight of the Authority--and this 
project--than it would have of a state agency.
    The decision to transfer the project to the Turnpike Authority was 
made, in part, to facilitate construction. Had control of the project 
remained in the hands of state government, the project could have taken 
longer to build, which usually has cost implications. There is a 
balance point between efficiency and accountability that is not always 
easy to locate.
    As it stands now, the artery project is 60 percent constructed and 
98.6 percent designed. Just seven of 117 contracts are yet to be 
awarded, and 50 contracts have been completed. We will conduct cost 
analysis, review construction and management contracts, and make sure 
oversight is thorough. There will be no surprises on my watch. Even 
before I was named Turnpike Chairman, as ANF Secretary, I hired the 
firm of DeLoitte & Touche to conduct an independent review of the 
project. I will appoint an outside expert on insurance to review the 
Owner Controlled Insurance Program, and another outside expert to 
examine the project's construction management contract with Bechtel 
Parsons.
    I have also brought on a transition team composed of experts in 
various management disciplines from ANF to review the Turnpike 
Authority, where I have frozen non-Central Artery/Tunnel Project hiring 
and the award of new contracts.
    While I await the result of various reviews I have set underway, my 
initial assessment is that the Central Artery/Tunnel Project appears to 
be well run and well engineered from the construction point of view. 
These reviews will tell the true story of the project, and whatever the 
story is, we will get it out in public view.
    I have three immediate objectives to put the project back on 
course:

          1. To restore the project's credibility. This is paramount. 
        We need to win back through deeds, not just words, the trust of 
        the public, members of Congress, and Federal Highway and 
        transportation officials.
          2. To bring the project's management and finances back on 
        track.
          3. To formulate a restoration plan for the ground above the 
        artery that will add to Boston's reputation as one of the great 
        cities of American, certainly its most historic.

    Let me talk briefly about this project to build a new underground 
Interstate 93 through the city and to extend the Massachusetts Turnpike 
under South Boston and Boston Harbor to Logan International Airport. 
The project's complexity and size are enormous, as are its cost. The 
project draws a steady stream of awe-struck engineers and construction 
experts from all over the world that marvel at the engineering 
techniques being employed. Here is just one instance: Workers are now 
laying in place huge tunnel sections cast inside a dry dock and then 
floated into position before being placed precisely by computers and a 
global positioning system on sunken concrete foundations.
    For practically seven days a week, and nearly 24 hours a day, 
digging the path for the new underground artery goes on underneath the 
existing elevated Central Artery, yet the city of Boston is alive for 
commerce, recreation and the daily activities of city life.
    The oldest city in the Northeast will have the newest 
infrastructure when the artery project is completed at the end of 2004. 
By the following year, the modernization of Logan Airport, the 
construction of a new convention center, and the installation of a new 
water and sewer system will be concluded. Between 1992 and 2005, some 
$35 billion in state funds will be expended on these and other 
statewide infrastructure projects including the construction of new 
schools, libraries, and repairs to roads and bridges. Of that $35 
billion, some $4 billion in state funds will have gone to the Big Dig, 
little more than 10 percent.
    How do we propose to pay for the project's cost overrun? Gov. 
Cellucci and Lt. Governor Swift have instructed me to follow four 
principles in designing the state bailout plan:

   No tax increase

   No damage to the state's credit rating

   Build a contingency reserve fund to handle any future 
        shortfall

   No proposals that mobilize interest group opposition

    A final finance plan should be forthcoming in the next two weeks, 
drawn from common elements in separate plans proposed by the 
Massachusetts House, Senate and Governor. Two-thirds of the 
administration plan is contained in both the House and Senate plans, so 
there is a great deal of common ground and we are confident a viable 
plan will be in place. This plan will cover the $1.4 billion cost 
overrun and also create a sizable contingency reserve to be used to 
offset future possible overruns or other transportation needs in the 
Commonwealth.
    I want to conclude my presentation with a pledge to give you my 
thorough cooperation. We will follow the principle of complete 
transparency in providing information to you, the public and the 
Executive branch. I hire people with the utmost integrity, and then let 
them do their jobs in an open manner.
    I will be happy to take your questions now, and very much 
appreciate the opportunity to testify before you today. Again, I wish 
to state as emphatically as I can my intent to open this project up. We 
have built a tunnel that can withstand the weight of Boston Harbor; now 
we will run a project that can withstand public scrutiny.

    The Chairman. Thank you, Mr. Natsios. I do appreciate that 
additional information. I visit your State quite often, and I 
am incredibly impressed not only with the infrastructure but 
the beauty and the preservation of culture and history, which 
has made it a magnet for people from all over the country who 
became part of our country in a much later period such as the 
one I represent. I think you should be very proud of what has 
been done and what continues to be done in the State of 
Massachusetts. Mr. Thomas.

STATEMENT OF RICHARD L. THOMAS, SENIOR VICE PRESIDENT, AMERICAN 
                   INTERNATIONAL GROUP, INC.

    Mr. Thomas. Good morning, Chairman McCain, Senator Kerry. I 
am here testifying today on behalf of American International 
Group and, as you may know, AIG is a leading U.S.-based 
international insurance organization, and the largest 
underwriter of commercial and industrial coverages in the 
United States.
    I have been an executive with the AIG Companies for 15 
years, and am currently its chief underwriting officer, and 
have been involved periodically in the insurance program for 
the Central Artery/Tunnel project since its inception. I 
request that the statement that we prepared for the Committee 
be placed in the record, and I will keep my remarks today very 
brief.
    Senator Kerry. It will be placed in the record as if read 
in full.
    Mr. Thomas. Thank you.
    As requested, I would like to address my remarks this 
morning to the specific concerns raised over the purpose and 
performance of the insurance program developed for the Central 
Artery/Tunnel project. While there have been many reports 
circulating about the project's budget and management issues, 
it is important to underscore that the insurance component of 
this enormous effort has been making a positive contribution. 
To date, the project safety record and resultant cost-
efficiencies have exceeded our initial expectations and have 
demonstrated the benefits that can be derived from carefully 
designed and implemented insurance programs.
    The Central Artery/Tunnel project is one of the largest, 
most complex highway transportation projects ever undertaken. 
As you know, it involves hundreds of contractors, 
subcontractors, and thousands of workers in a wide multitude of 
tasks associated with all of the different aspects of the 
construction.
    Not surprisingly, the development and procurement of an 
efficient and effective insurance program was a priority for 
the Massachusetts Highway Department from the outset. To that 
end, MHD formed a committee in 1991 whose purpose was to create 
the bid specifications to solicit competing proposals for an 
insurance program from the insurance industry and to select the 
insurance company and proposal that best achieved the 
objectives of MHD at the most favorable price.
    That committee specified an owner-controlled insurance 
program. An OCIP is a program in which all contractors and 
subcontractors working on the project are covered by a single 
policy coverage structure procured by the owner, thereby 
avoiding redundancies and inefficiencies that would result in a 
multitude of policies purchased individually by contractors and 
subcontractors from different insurers.
    As is typically the case, the OCIP for the project was 
designed to cover both workers compensation and general 
liability. The RFP was issued to the insurance industry by the 
Committee, which included a representative of a knowledgeable 
insurance broker who had been retained by MHD. Five carriers, 
five insurance companies, including AIG, submitted proposals, 
and AIG was selected as the winning bidder in part given its 
extensive experience in underwriting OCIP programs.
    In its proposal, AIG agreed to commit substantial resources 
to assist MHD in its safety program. AIG has had safety 
consultants onsite from the inception of the program, working 
side-by-side with professionals engaged by MHD, the project 
manager, and the major contractors. Also in response to the 
RFP, AIG included substantial elements of self-insurance in the 
structure so that MHD's ultimate insurance costs would be based 
on the success of the project's safety program.
    The terms of the insurance program have been memorialized 
in a series of agreements that were negotiated with the advice 
of counsel for all parties and were signed by the Commonwealth 
of Massachusetts, Bechtel/Parsons, the project manager, and a 
subsidiary of AIG.
    The terms of the agreements were fully disclosed to the 
Federal Highway Administration and various State agencies 
involved in the project. These agencies have been kept fully 
informed of the performance of the program both from an 
insurance and financial perspective through regular reports and 
frequent communication. In addition, AIG made the appropriate 
filings and received approval from the Massachusetts Department 
of Insurance.
    From the perspective of public and worker safety and cost 
control, AIG's insurance program has been a success. Of 
greatest importance, due to the combined efforts of AIG, MHD, 
the project manager, and its many contractors and 
subcontractors, the safety record associated with this project 
has been extraordinary. We take, though certainly share great 
pride in the fact that the number of workers and members of the 
public who have sustained serious injuries in connection with 
the project has been exceptionally low.
    As a result, the costs associated with the program have 
also been favorable to MHD. In its original projections, AIG 
forecast that the cost of workers compensation and general 
liability insurance over the lifetime of the project could 
exceed $900 million.
    Because of the impact of the safety program, and 
administrative reforms of the workers compensation system that 
were implemented by the Commonwealth during the course of the 
project, the ultimate cost of the program for insurance will 
most likely be significantly less than originally budgeted. 
Indeed, if current trends continue, the probability exists that 
the ultimate cost could be 40 to 50 percent less than our 
original estimates.
    In addition, these reductions in cost are also due in part 
to the fact that on two occasions in 1996 and in 1998 MHD and 
AID renegotiated certain terms of its original agreement. AIG 
agreed to modifications that reduce the project's maximum 
contractual liability to losses, and increased MHD's share of 
the investment income, and reduced the amount of certain fixed 
cost elements of the insurance plan, thereby materially 
improving the economic terms of the program for MHD.
    Again, I would like to emphasize that the insurance program 
for the project has been a success to date. While it is 
impossible to predict the final results of the program at this 
juncture, it is certainly our goal that it will continue to 
produce benefits both in terms of safety and cost efficiency.
    I would like to thank you for the opportunity to appear 
before you today, and welcome any questions that you might 
have.
    [The prepared statement of Mr. Thomas follows:]

    Prepared Statement of Richard L. Thomas, Senior Vice President, 
                   American International Group, Inc.
    My name is Richard Thomas and I am here testifying on behalf of 
American International Group, Inc. AIG is the leading U.S. based 
international insurance organization and the largest underwriter of 
commercial and industrial coverages in the United States.
    As requested, I would like to address my remarks this morning to 
the purpose and performance of the insurance program developed for the 
Central Artery/Tunnel Project. While there have been many reports 
circulating about the Project's budget and management issues, it is 
important to underscore that the insurance component of this enormous 
effort has been a positive contribution. To date, the Project's safety 
record and resultant cost efficiencies have exceeded our initial 
expectations and demonstrated the benefits that can be derived from a 
carefully designed and implemented insurance program.
    The Central Artery/Tunnel Project is one of the largest, most 
complex highway transportation projects ever undertaken. It has 
involved hundreds of contractors and subcontractors and thousands of 
workers engaged in the wide multitude of tasks associated with a 
Project of this magnitude. Not surprisingly, the development and 
procurement of an efficient and effective insurance program was a 
priority for the Massachusetts Highway Department (``MHD'') from the 
outset.
    To that end, the MHD formed a committee in 1991 whose purpose was 
to create the bid specifications, solicit competing proposals from the 
insurance industry, and to select the insurance company and proposal 
that best achieved the objectives of the MHD at the most favorable 
price. That committee specified an Owner Controlled Insurance Program 
(``OCIP''). An OCIP is a program in which all the contractors and 
subcontractors working on the project are covered by a single master 
policy procured by the owner, thereby avoiding the redundancies and 
inefficiencies that would result from a multitude of policies purchased 
individually by contractors and subcontractors from different insurers. 
As is typically the case, the OCIP for the Project is designed to cover 
workers' compensation and general liability insurance.
    It should be noted that the OCIP was designed at a time that the 
Massachusetts workers' compensation market was experiencing a period of 
significant uncertainty and instability stemming from structural 
deficiencies in the workers' compensation system. These issues have 
compromised the validity of establishing adequate rates and produced 
large deficits in the States' residual market pool. Thus, in addition 
to the enormous challenges of creating a program to address the complex 
needs of this project, potential insurers also were confronted with the 
risks associated with a multi-year program design and coverage 
commitments in a highly uncertain environment.
    A Request for Proposal (RFP) was issued to the insurance industry 
by the Committee, which included a representative of a knowledgeable 
insurance broker retained by the MHD. Five carriers, including AIG, 
submitted proposals. AIG was selected as the winning bidder, in part, 
given its extensive experience in underwriting OCIP programs. In its 
proposal, AIG agreed to commit substantial resources to assist the MHD 
in its safety program, and AIG has had safety consultants on site from 
the inception of the program working side by side with professionals 
engaged by the MHD, the project manager, and the major contractors. In 
response to the RFP, AIG's proposal included substantial elements of 
self-insurance so that the MHD's ultimate insurance costs would be 
based on the success of the Project's safety program.
    AIG's proposal also included other features tailored to meet the 
specific needs of the MHD. AIG created a claims-adjustment unit in 
Boston dedicated to adjusting and managing claims solely for this 
project. AIG created a dedicated affirmative-action office to ensure 
compliance with EEOC guidelines and the Project's commitment to 
affirmative action. AIG also agreed that it would not have the right to 
cancel the program for its initial three (3) year period and would be 
obligated to provide a one year notice thereafter. Throughout the life 
of the program, the MHD would have the right to cancel the insurance at 
any time upon 30 days notice.
    Other terms of the agreement also reflected the vigorous 
negotiations among the parties. A trust was established to secure the 
funds that were allocated by the insurance plan to pay claims within 
the Project's self-insured retention. AIG and the MHD initially agreed 
that for funds held in the trust, up to the MHD's maximum premium 
obligation, all investment income would be split equally. This was 
memorialized in a written agreement negotiated with advice of counsel 
and entered into by the Commonwealth and AIG. In this agreement, AIG 
guaranteed the principal of all assets in the trust. As a result of the 
favorable loss experience on the program and the retention in the trust 
of return premiums due to the audit of actual expended payrolls, the 
terms of the agreement were modified in 1996, to be effective November, 
1995, so that the MHD received a greater share of the investment 
income.
    The terms of the insurance program were memorialized in a series of 
agreements that were negotiated with advice of counsel for all parties 
and were signed by the Commonwealth of Massachusetts, Bechtel Parsons 
(the project manager) and a subsidiary of AIG. The terms of the 
agreements were fully disclosed to the Federal Highway Administration 
and the various state agencies involved in this project. Those agencies 
have been kept fully informed of the performance of the program, both 
from an insurance and financial perspective, through regular reports 
and frequent communication. In addition, AIG made the appropriate 
filings with and received approval from the Massachusetts Department of 
Insurance.
    From the perspective of public and worker safety and cost control, 
AIG's insurance program has been a success. Of greatest importance, due 
to the combined efforts of AIG, the MHD, the project manager and its 
many contractors and subcontractors, the safety record associated with 
this program has been extraordinary. We take, though certainly share, 
great pride in the fact that the number of workers and members of the 
public who have sustained serious injuries in connection with the 
project has been exceptionally low.
    As a result, the costs associated with the program have also been 
extremely favorable for the MHD. In its original projections, AIG 
forecast that the cost of workers' compensation and general liability 
insurance over the lifetime of the project could exceed $900 million. 
Because of the impact of the safety program and administrative reforms 
of the workers' compensation system implemented by the Commonwealth, 
the ultimate cost of the program of insurance will most likely be 
significantly less than the amount originally budgeted. Indeed, if 
current trends continue, the possibility exists that the ultimate costs 
could be 40 percent to 50 percent less than the amount initially 
forecast.
    In addition, these reductions in cost are also due in part to the 
fact that, on two occasions, in 1996 and 1998, the MHD and AIG 
renegotiated certain terms of the original agreements. AIG agreed to 
modifications that reduced the Project's maximum contractual liability, 
increased MHD's share of the investment income, and reduced the amount 
of certain fixed cost elements of the insurance plan, thereby 
materially improving the economic terms of the program for the MHD.
    Again, I would like to emphasize that the insurance program for the 
Project has been a success. While it is impossible to predict the final 
results of the program at this juncture, it is certainly our goal that 
it will continue to produce benefits both in terms of safety and cost 
efficiency.

    The Chairman. Thank you very much, Mr. Thomas. Mr. Wiley.

 STATEMENT OF MATTHEW WILEY, PROJECT MANAGER, BECHTEL/PARSONS 
                   BRINCKERHOFF JOINT VENTURE

    Mr. Wiley. Mr. Chairman, Senator Kerry, I, too, would like 
my remarks entered into the record.
    The Chairman. Without objection.
    Mr. Wiley. My name is Matt Wiley, and I am the program 
manager for the Boston Central Artery/Tunnel's Joint Venture 
management team of Bechtel/Parsons Brinckerhoff. I am pleased 
to be here before you this morning to discuss the Boston 
Central Artery project, and to outline for the Committee the 
role of the joint venture.
    The joint venture between Bechtel and Parsons Brinckerhoff 
Quade and Douglas was established in 1995, and has served as 
management consultant for the Boston Central Artery project 
under contracts with the Massachusetts Highway Department and 
subsequently under the management of the Massachusetts Turnpike 
Authority.
    Mr. Chairman, Bechtel and Parsons Brinckerhoff together 
have nearly 200 years of experience in engineering and 
construction. These firms are proud of their longstanding 
reputations as pioneers in this business, and I can state 
unequivocally that they are proud of the work on this project. 
I can also state unequivocally that over the past 15 years this 
joint venture has met or exceeded all of its professional 
obligations.
    This is the largest and most complex highway project ever 
undertaken in the core of an American city. It has been an 
enormous technological and logistical undertaking, not only on 
the building of the infrastructure but in doing so while the 
people of Boston have gone about their daily business largely 
unimpeded by the construction activity around them.
    I would like to give you but one example. We are connecting 
the new Ted Williams Tunnel from Logan Airport to the Artery 
and Massachusetts Turnpike. This requires that we construct a 
four-lane tunnel underneath a main north-south rail line into 
Boston.
    There are over 700 train movements a day on this segment of 
track. We cannot disturb the track, which has very little 
tolerances for movement to avoid any possible threat of 
derailment, so we have frozen the ground to stabilize it 
through a very sophisticated set of cooling pipes, and are 
literally tunneling inch by inch through the unstable ground 
below the track at the same time we are pushing a huge four-
lane concrete jack box tunnel just behind our digging 
equipment. This is just one of many engineering feats that are 
being accomplished every day in Boston.
    The responsibilities of the joint venture program 
management team include preliminary design, design and 
construction management, financial planning and reporting. The 
vast majority of the design effort currently is associated with 
managing the section design contracts during construction.
    Our construction management activity involves management of 
the contractors performing the construction work from the 
detailed planning through the oversight of construction 
execution. It also includes contract administration, change 
order negotiation, cost and schedule monitoring, quality 
inspection and, as Dick said, overall project safety.
    Finally, we have the responsibility for project controls 
which includes estimating individual contract costs, monitoring 
individual contractor schedules, construction sequence planning 
and monitoring, and reporting on the overall project cost and 
schedule. We also prepare periodic total cost and schedule 
updates as requested by the client.
    If I may add as an aside, Mr. Chairman, I would like to 
highlight one particular component, and that is work place 
safety, as Dick commented on. Our goal is to see that every 
worker, every constituent goes home safely at the end of the 
day. To that end, the project has worked nearly 60 million 
person hours and have compiled a safety record that is 40 to 50 
percent better than the national average for lost time and 
recordable injuries.
    I would like to commend the thousands of men and women who 
have contributed to this achievement. Their safety record has 
also generated substantial savings for the project. The project 
has been recognized throughout for its high quality, 
innovation, and integrity. I would invite the Committee and its 
staff to come to see the project to view first-hand the modern 
engineering masterpiece that is being built for the citizens of 
Massachusetts and the Northeast region as a whole.
    The joint venture is fully committed to the Boston Central 
Artery project and to continuing to provide the highest quality 
professional services consistent with the reputation of its 
parent companies and the Commonwealth of Massachusetts. I thank 
you for the opportunity to appear before this Committee and 
look forward to answering any questions.
    [The prepared statement of Mr. Wiley follows:]

 Prepared Statement of Matthew Wiley, Project Manager, Bechtel/Parsons 
                       Brinckerhoff Joint Venture
Mr. Chairman and Members of the Committee:

    My name is Matt Wiley and I am the Program Manager for the Boston 
Central Artery/Tunnel's Joint Venture management team of Bechtel and 
Parsons Brinckerhoff.
    I am pleased to appear before you this morning to discuss the 
Boston Central Artery/Tunnel project, and to outline for the Committee 
the role of the Joint Venture.
    The Joint Venture between Bechtel and Parsons Brinckerhoff Quade 
and Douglas, Inc., was established in 1985, and has served as 
Management Consultant for the Boston Central Artery/Tunnel project 
under contracts with the Massachusetts Highway Department and, 
subsequently, under management by the Massachusetts Turnpike Authority.
    Mr. Chairman, Bechtel and Parsons Brinckerhoff together have nearly 
220 years of experience in engineering and construction. These firms 
are proud of their longstanding reputations as pioneers in this 
business, and I can state unequivocally that they are proud of their 
work in this project. I can also state unequivocally that over the past 
15 years, this Joint Venture has met or exceeded all of its 
professional obligations.
    This is the largest and most complex highway project ever 
undertaken in the core of an American city. It has been an enormous 
technological and logistical undertaking, not only in building the 
physical infrastructure, but in doing so while the people of Boston 
have gone about their daily business largely unimpeded by the 
construction activity all around them.
    I would like to give you an example. We are connecting the new Ted 
Williams Tunnel from Logan Airport to the Artery and Massachusetts 
Turnpike. This requires that we construct a four-lane tunnel under the 
main north-south railroad line through Boston. There are over 700 train 
movements a day on this segment of track. We cannot disturb the track, 
which has very low tolerances for movement, to avoid any possible 
threat of derailment. So we have frozen the ground to stabilize it 
through a very sophisticated set of cooling pipes, and are literally 
tunneling inch-by-inch through the unstable ground below the tracks at 
the same time that we are pushing a huge four-lane concrete ``jack-
box'' tunnel just behind our digging equipment.
    This is just one of many engineering feats that are being 
accomplished every day in Boston.
    The responsibilities of the Joint Venture Program Management team 
include preliminary design, design and construction management, and 
financial planning and reporting. The vast majority of the design 
effort is associated with managing the section design contracts during 
construction.
    Our construction management activity involves the management of the 
contractors performing the construction work, from the detailed 
planning through oversight of construction execution. It also includes 
contract administration; change-order negotiation; cost and schedule 
monitoring; quality inspection; and overall project safety.
    Finally, we have responsibility for project controls, which 
includes estimating individual contract costs; monitoring individual 
contractor schedules; construction sequence planning; and monitoring 
and reporting on overall project cost and schedule. We also prepare 
periodic total cost and schedule updates as requested by the client.
    If I may add an aside, Mr. Chairman, I would like to highlight one 
particular component, and that is workplace safety. Our goal is to see 
that every worker goes home safely at the end of every day. To that 
end, the Project has worked nearly 60 million person hours, and we have 
compiled a safety record that is 40 percent to 50 percent better than 
the national average for lost-time and recordable injuries.
    I would like to commend the thousands of men and women who have 
contributed to this achievement. Their safety record has also helped 
generate substantial savings.
    The Project has been recognized throughout for its high quality and 
innovation. I would invite the Committee and its staff to come to see 
the Project to view first hand the modern engineering masterpiece that 
is being built for the citizens of Massachusetts and the Northeast 
Region as a whole.
    This Joint Venture is fully committed to the Boston Central Artery 
Project, and to continuing to provide the highest quality of 
professional service consistent with the reputations of its parent 
companies, and the Commonwealth of Massachusetts.
    I thank you again for the opportunity to appear before your 
Committee this morning, and I look forward to answering your questions.
          * * * * *

    I understand from the Committee's staff that the Committee is 
particularly interested in my testimony to learn more about the 
following subjects:

   B/PB's Management Consultant role;

   Organizational approach to management of the project;

   B/PB's role in award of contracts; and

   B/PB's role in financial reporting.
B/PB's Management Consultant Role
    Since 1985, the B/PB Joint Venture has performed management 
consultant services under the terms of a number of successive 
contracts, called work programs, first with the Massachusetts 
Department of Public Works (through work program no. 9, dated June 24, 
1991) and then with the Massachusetts Highway Department (through the 
current work program, no. 14, dated June 26, 1996). In July 1997, the 
Massachusetts Turnpike Authority took over supervision of the Project.
    B/PB is responsible for the overall program management on the 
Project. This role has evolved over time and currently includes 
preliminary design, design and construction management and financial 
controls and planning. The current design effort is primarily involved 
in managing the section design contracts during construction phase 
services.
    Construction management comprises the bulk of B/PB's current 
responsibilities. This management of the contractors performing the 
construction work includes contract administration, change order 
negotiation, cost and schedule monitoring, quality inspection and 
overall Project safety.
    B/PB's Project controls work includes estimating individual 
contract costs, overall Project cost and schedule monitoring and 
reporting, construction sequence planning, and monitoring individual 
contractor schedules.
    B/PB also supports the MTA in the MTA's supervision of 
environmental, public affairs, legal, procurement, accounting and 
administration services for the Project.
The Organization of the Project's Management
    For the first 13 years of the Project, B/PB and the MHD (and later 
the MTA, when it took over the management of the Project) functioned as 
independent organizations, in some cases having duplicative or 
overlapping roles.
    The role of the MHD/MTA has throughout the Project's existence been 
to establish policy, provide general direction and guidance, oversee 
the B/PB's performance as the state's management consultant, and make 
all major decisions concerning the CA/T Project.
The Integrated Project Organization
    In 1997 and 1998, the Project's management was changed by the MTA 
to an Integrated Project Organization (IPO). The basic idea behind this 
structure was to provide for an orderly transition to having MTA 
operate the Project upon its phased completion. The IPO was adopted 
with the full concurrence of the FHWA and the approval of the 
Massachusetts State Ethics Commission.
    The concept was to have an integrated management structure where B/
PB and MTA would have ``counterparts'' in each functional area, along 
with a direct interface between the B/PB Program Manager and the MTA 
Project Director. Over time, functions have been and will be 
transferred so that the MTA will have sole management responsibility 
for them.
    Both Bechtel and Parsons Brinckerhoff have worked on many other 
major projects using an integrated project organization approach. Both 
companies have found that an integrated approach, like the one now in 
place on the CA/T Project, can be a very effective way to manage a 
major project.
    Under the Project's IPO, the MTA has at all times retained final 
responsibility and authority for the direction and management of the 
Project, including maintaining independent oversight over B/PB. At the 
same time, B/PB has remained professionally and contractually 
accountable to MHD/MTA and the Commonwealth for the quality and the 
performance of its management consultant services, as set out in the 
various work programs.
    The implementation of the IPO at the Project at no time impaired B/
PB's exercise of its independent professional judgment. Nor has it ever 
compromised B/PB's integrity or ethical standards in performing its 
professional obligations.
B/PB's Role in Award of Contracts
    B/PB's role in the award of contracts has two components. First, B/
PB has entered into a number of contracts in its own name with sub-
consultants. These sub-consulting contracts include engineering, 
conceptual design, and some management activities. Although these 
agreements with the subconsultants are in B/PB's name, they are 
reviewed and approved by the MHD.
    Second, B/PB also plays a role in the award of consulting and 
construction contracts by the MHD itself. For consulting contracts with 
the section design consultants, B/PB negotiates with and manages the 
design firm selected by the MHD. For construction contracts, B/PB 
prepares the requests for proposals (bids), analyzes the bids 
submitted, and then makes a recommendation to the MHD as to whether the 
low bidder is acceptable. Both consulting and construction contracts 
are entered into in the name of the MHD, but they identify B/PB as the 
MHD's management consultant and its representative for implementing the 
contract. I want to emphasize that although B/PB acts as the MHD's 
management representative for nearly all aspects of the MHD's 
contracts, the actual award of the work is solely the prerogative of 
the MHD.
B/PB's Role in Financial Reporting
    B/PB at all times provided MHD/MTA with all of the available 
information about the costs of the Project. Throughout its work on the 
Project, B/PB has met or exceeded all of its contractual and 
professional obligations for cost controls, consulting advice and 
reporting to MHD/MTA.
    All reasonably certain financial information and data are included 
in the Project Monthly Management (PMM) Reports and the Finance Plans, 
both of which were developed with the full participation and knowledge 
of our client, as well as the FHWA.
    The so-called ``up-down'' charts--which identified plus-and-minus 
future cost trends on the Project--were by their very nature 
speculative and not considered firm financial data. These materials 
were prepared by B/PB to provide a way for our client to identify the 
cost pressures and possible alternatives for resolving them.
Concluding Remarks
    The Committee staff has expressed an interest in soliciting B/PB's 
recommendations to avoid a recurrence of what has recently occurred on 
the Project with the announcement of the cost increases. This is a 
complicated issue involving inter-governmental relationships that I 
believe are beyond my expertise. However, B/PB's constituent companies, 
Bechtel and Parsons Brinckerhoff, would welcome the opportunity to 
participate in a dialogue with the appropriate governmental bodies in 
addressing these complex issues. We are certain other members of the 
engineering and construction industry would also welcome the 
opportunity to participate in such a dialogue.
    Thank you again for your interest in this vital Project. On behalf 
of the B/PB Joint Venture, I appreciate this opportunity to appear 
before the Committee.

    The Chairman. Thank you, Mr. Wiley. Mr. Dimino.

   STATEMENT OF RICHARD A. DIMINO, PRESIDENT AND CEO, ARTERY 
                       BUSINESS COMMITTEE

    Mr. Dimino. Thank you, Mr. Chairman. I want to thank you 
and Senator Kerry for giving me the opportunity to testify 
before you and the Committee today.
    As mentioned, my name is Richard Dimino. I am President of 
the Artery Business Committee, an organization established in 
1988 to represent the Boston business community in support of 
the Central Artery Project. The ABC, as it is known, was formed 
in recognition of the mutual interest among major area 
businesses to focus corporate support and help manage the 
ongoing impact of the Central Artery/Tunnel project. Today, 
ABC's active membership includes more than 60 companies and 
collectively over 100,000 employees that are working in and 
around Greater Boston.
    I am also testifying on behalf of the Greater Boston 
Chamber of Commerce, with which we are affiliated.
    As many of you know, the elevated highway that runs through 
the center of downtown Boston was built in the 1950's to 
accommodate 75,000 vehicles, commonly referred to as the 
Central Artery. This highway was built using State highway 
funds only. It does not meet State and Federal interstate 
highway standards. By the time that President Eisenhower and 
Congress instituted the interstate highway program that 
allocated Federal dollars to States for infrastructure 
investments, the Central Artery was built, and Massachusetts 
was not able to call on this Federal subsidy to assist in its 
construction.
    More recently, in the mid-to-late 1980's, because 
Massachusetts was not prepared to make use of the funds 
allocated under the Surface Transportation Act, the State 
returned the unused budget authority to the Government in 
accordance with Federal highway law.
    In fact, between 1983 and 1990, while $3.3 billion was 
apportioned to Massachusetts from the highway trust fund, only 
$1.9 billion was used. Thus, during those years Massachusetts 
was a donor to the highway trust fund and to the other 
infrastructure investments that were being made throughout the 
country, receiving 80 to 90 percent Federal assistance while 
our projects were still in the planning stages.
    Over the last decade, Massachusetts has been and continues 
to be in a position to receive and spend money allocated from 
the highway trust fund based on the TEA-21 allocation formula, 
it is possible that Massachusetts will be contributing as much 
as 30 to 40 percent of the project's final cost, while during 
the interstate completion program other States received as much 
as a 90 percent Federal contribution.
    Today, the Central Artery is in a state of great disrepair, 
carrying over 190,000 vehicles daily, more than double its 
capacity. Locally, more than 30 lanes of traffic converge into 
a six-lane deteriorating structure that is one of the most 
congested, polluted, accident-prone pieces of urban 
infrastructure in any part of the country.
    The Sumner and Callahan Tunnels crossing Boston Harbor to 
the airport, the Nation's twelfth largest airport, have proven 
inadequate and demanded a third harbor tunnel. Construction has 
been progressing, and several important milestones have been 
achieved on the Central Artery/Tunnel project since 1991.
    Now, as the project proceeds in its peak construction 
phase, it is critical that the State continue to receive its 
share of Federal highway dollars. I want to emphasize that even 
a temporary cut-off of funds will result in unrecoverable 
schedule delays and further cost increases. In addition, any 
withdrawal of the Federal participation in the grant 
participation notes program that the Commonwealth and the 
Federal Government has entered would also be serious impact to 
the Commonwealth of Massachusetts as well as our budgeting and 
future infrastructure investments.
    That being said, I have read the Federal Highway 
Administration's report on the Central Artery project, and 
believe it to be a comprehensive review of the project's 
management and cost. Boston's business community was 
disappointed to learn of the project's reported $1.4 billion 
overrun, and surprised by the audit's conclusion that the 
project's officials have deliberately misled the Federal 
Highway Administration overseers and the public.
    We were disappointed because the business community has 
been otherwise impressed by the project's sound construction 
management, excellent safety record, and success at keeping the 
city operational and economically viable during major 
construction. Our reaction is tempered by the knowledge that 
this project is truly unprecedented, an engineering challenge 
like no other, and every cost adjustment is rooted in the 
difficulty of those challenges.
    The ABC supports a number of recommendations put forth in 
the Federal audit report. Specifically, we support the new 
reporting and documentation and monitoring protocols, projected 
cost exposure and contingency budgeting, the significant 
schedule trend report, the annual bottom-up review of project 
cost, the requirements that relate to a balanced State-wide 
program, the project contingencies that were estimated in the 
audit report, as high as $480 to $500 million, and the notion 
that a Federal Highway/State Turnpike agreement be established 
relative to these recommendations.
    These recommendations, particularly those associated with 
financial reporting, monitoring and communications procedures, 
are essential to the immediate restoration of the project's 
credibility and public confidence. With new Federal leadership 
in place, and the established financial reporting and 
communications, the business community is confident the project 
can move forward and put the recent controversy behind it.
    Over the last 2 months, State leaders have identified 
resources totalling up to $2.7 billion to cover the project 
overrun, project contingencies, and support of our State-wide 
program. At this time, Massachusetts has the wherewithal to 
move forward with a financing strategy that will meet the 
Federal Highway Administration's approval and ease the mind of 
our critics. Our legislature is examining various combinations 
of resources, including the reinstatement of State licensing, 
and registering fees, and use of the State's surplus that will 
address the gap in the project's funding, and establishing a 
contingency fund to cover any future cost increases.
    The commitment of the Massachusetts legislature as 
indicated in recent correspondence to Secretary Slater is 
included in my testimony. We are committed to working with the 
legislators and Massachusetts Turnpike to adopt a State-wide 
transportation finance plan in accordance with the Federal 
Highway Administration's recommendations. We support the need 
for a balanced State-wide road and bridge program, and look 
forward to restoring confidence in the management of this 
remarkable project.
    In the long term, the project will provide a more efficient 
and safer highway system. It is essential that immediate and 
bipartisan efforts are made to resolve the Central Artery/
Tunnel project's fiscal challenges, and we look forward to 
working with congressional Federal leaders and the public. When 
all is said and done, however, we believe that the Central 
Artery project will serve in numerous cases as a model for 
other major cities across the country.
    One example already, the CA/T was the first megaproject to 
submit a finance plan to the Federal Highway Administration. 
This practice was later made statutory in TEA-21 legislation. 
This and other project first lessons learned will serve as 
important resources for other major infrastructure projects 
rebuilding in the middle of urban environments while trying to 
keep the city open for business.
    Speaking to you today on behalf of the business community, 
I am confident the project's new State and Federal leadership 
will restore the project's integrity and reach consensus with 
the legislature and the Governor on a financially feasible 
funding strategy that will see the project through completion.
    I want to thank you, Mr. Chairman, and Senator Kerry again 
for giving me this opportunity.
    [The prepared statement of Mr. Dimino follows:]
      Prepared Statement of Richard A. Dimino, President and CEO, 
                       Artery Business Committee
    Mr. Chairman, thank you for the opportunity to testify before you 
and the Committee members today.
    My name is Richard Dimino and I am the President of the Artery 
Business Committee (ABC), an organization established in 1988 to 
represent the Boston business community in its support of the Central 
Artery/Tunnel (CA/T) Project. The ABC, as it is known, was formed in 
recognition of a mutual interest among major Boston area businesses to 
focus corporate support and help manage the ongoing impact of the CA/T 
Project. Today, ABC's active membership includes more than sixty 
companies in the Greater Boston area that collectively employ over one 
hundred thousand people. Essentially, ABC exists as a means for the 
Greater Boston business community to articulate its interests to the 
CA/T Project's Management Team and ensure that they are represented 
throughout the duration of the Project. I am also testifying on behalf 
of the Greater Boston Chamber of Commerce of which we are affiliated.
    Our organization provides business advocacy and leadership for the 
CA/T Project and other major transportation and development issues of 
regional and statewide significance. We speak with an independent voice 
about goals and priorities for the Project--both during and after 
construction. These goals include: preserving the City of Boston's 
thriving economic base, providing the infrastructure to accommodate 
growth in the region in the 21st century, facilitating the development/
master planning efforts for the Central Artery corridor, and 
communicating a positive perspective on conducting business in the city 
through Project completion.
    As many of you know, the elevated highway that runs through the 
center of downtown Boston was built in the 1950s to accommodate 75,000 
vehicles. Commonly referred to as the ``Central Artery,'' this highway 
was built using State highway funds only and does not meet interstate 
highway standards. By the time President Eisenhower and Congress 
instituted the Interstate Highway program that allocated federal 
dollars to states for infrastructure investment projects, the Central 
Artery was built and Massachusetts was not able to call on this federal 
subsidy to assist in its construction. More recently, in the mid to 
late 1980s, because Massachusetts was not prepared to make use of the 
funds allocated to the Project under the surface transportation act, 
the state returned this unused budget authority to the government in 
accordance with federal highway law. In fact, between 1983 and 1990, 
while $3.3 billion was apportioned to Massachusetts from the Highway 
Trust Fund, only $1.9 billion was used. The difference was returned to 
the Fund for use by other states. Thus, during those years, 
Massachusetts was a donor state to the Highway Trust Fund, supporting 
infrastructure investment in other states across the country receiving 
80-90 percent federal assistance while our projects were still in the 
planning stages. Over the last decade, Massachusetts has been and 
continues to be in a position to receive and spend money allocated from 
the Highway Trust Fund. Based on the TEA-21 allocation formula, it is 
possible that Massachusetts will be contributing as much as 40 percent 
to the Project's final cost while, during the Interstate completion 
program, other states received a 90 percent federal contribution.
    Today, the Central Artery is in a state of grave disrepair, 
carrying over 190,000 vehicles daily--more than double its capacity. 
Locally, more than thirty lanes of traffic converge onto this six-lane 
deteriorating structure that is one of the most congested, polluted, 
and accident-prone pieces of urban interstate in the country. The 
Sumner and Callahan tunnels crossing Boston's harbor to its airport, 
the nation's twelfth largest, have proven inadequate and have demanded 
a third harbor tunnel to accommodate need and expand capacity. The need 
for new infrastructure in Boston is inarguable. The option to repair 
the current elevated structure rather than rebuild and modernize, while 
less expensive, would completely immobilize our economy for years and 
would leave Boston with the same antiquated, invasive structure and 
chronic gridlock. The CA/T Project has found a way to bring our 
regional infrastructure into the 21st century while protecting the 
environment, the economy, and the interests of residents, commuters, 
and tourists at every stage.
    Construction has been progressing and several important milestones 
have been achieved on the CA/T Project since construction began in 
1991. Now, as the Project proceeds through its peak construction phase, 
it is critical that the state continues to receive its share of federal 
highway dollars. I want to emphasize that even a temporary cut off of 
funds will result in unrecoverable schedule delays and further cost 
increases.
    That being said, I have read the Federal Highway Administration's 
Audit Report on the CA/T Project and believe it to be a comprehensive 
review of Project management and cost. Boston's business community was 
disappointed to learn of the Project's reported $1.4 billion overrun 
and surprised at the audit's conclusion that Project officials had 
deliberately misled FHWA's overseers and the public. We were 
disappointed because the business community has been otherwise 
impressed by the Project's sound construction management, excellent 
safety record, and its success at keeping the city operational and 
economically viable during major construction. Our reaction is tempered 
by the knowledge that this Project is truly unprecedented, an 
engineering challenge like no other, and every cost adjustment is the 
rooted in the difficulties these challenges present.
    By and large, the ABC supports the recommendations put forth in the 
Federal Audit report. Specifically, we support:

   new reporting, documentation, and monitoring protocols.

   projection cost exposure and contingency budgeting.

   the significant schedule trend report.

   an annual bottom-up review of project costs.

   requirements that relate to a balanced statewide program.

   Project contingencies as high as $480-500 million.

    These recommendations and particularly those associated with 
financial reporting, monitoring, and communications procedures are 
essential to the immediate restoration of the Project's credibility and 
public confidence.
    With a new state and federal leadership in place and new procedures 
established for financial reporting and communication, the business 
community is confident that the Project can move forward and put the 
recent controversy behind it. Over the last two months, State leaders 
have identified resources totaling up to $2.7 billion to cover the 
Project overrun, project contingencies, and support our statewide 
program. At this time, Massachusetts has the wherewithal to move 
forward with a financing strategy that will meet with FHWA's approval 
and ease the minds of our critics. Our Legislature is examining various 
combinations of resources, including the reinstatement of our state's 
license and registry fees and use of the state's surplus that will 
address the gap in Project funding and establish a contingency fund to 
cover any future cost increases. The commitment of Massachusetts 
legislators is indicated in recent correspondence to Secretary Slater 
and is included with my testimony. We are committed to working with the 
Legislature and the Massachusetts Turnpike Authority to adopt a 
statewide transportation finance plan in accordance with FHWA's 
recommendations that will address the Project's overruns, support our 
statewide road and bridge program, and restore your confidence in the 
management of this remarkable project.
    We must not forget that the Project is unprecedented in its scope 
and complexity. The Project requires that reconstruction of Boston's 
major and most congested highways must take place while keeping the 
city open and accessible for businesses, residents, and tourists. 
Shutting the city down during construction is clearly not an option. 
Maintaining Boston's infrastructure during what will total fourteen 
years of active construction reflects the engineering complexity of the 
Project's mitigation program. This program makes up roughly one third 
of the CA/T's overall cost and is essential to the city's survival 
during construction that, in years past, would have wreaked havoc on 
every business, merchant, and resident in it's path. The Artery 
Business Committee has worked in concert with CA/T Project staff to 
ensure that construction is not detrimental to the community, the 
environment, or to maintaining traffic movement.
    The Project has been a major catalyst for the Commonwealth's 
ongoing economic recovery in the region. In the short-term, billions of 
Project dollars are circulating through the local economy, creating 
thousands of jobs and generating business for hundreds of local 
companies. The Project is one of the region's largest employers, with 
more than 5,200 jobs currently attributable to construction and Project 
management. In addition, money spent on food, delivery, printing, and 
other support services is providing employment for another 4,000 
individuals. That's more than 9,000 employed as a result of the Central 
Artery/Tunnel Project.
    In the long-term, the Project will provide a more efficient and 
safer highway system to move people and goods throughout the Northeast. 
The CA/T Project is creating an intermodal transportation 
infrastructure, with links to air, sea, rail, bus, and subway that can 
support sustained economic growth well into the next century, helping 
to retain existing businesses and attract new companies to eastern 
Massachusetts.
    Some of the Central Artery/Tunnel Project's significant and wide-
ranging benefits can be measured by assessing the value of factors such 
as reduced travel times and greater accessibility, improvements to our 
utility infrastructure and reduced utility repair, environmental 
benefits, and improved economy in the region. In addition, the Project 
is creating more than 150 acres of new parks and open space, including 
27 acres where the existing Central Artery stands, 105 acres at 
Spectacle Island, and 40 acres in the New Charles River Basin. This 
planned open space through the heart of downtown represents an 
exceptional urban amenity which will increase the value of abutting 
real estate dramatically and will create an attractive corridor for 
downtown. Project improvements to the Boston area infrastructure has 
and will continue to generate significant real estate development 
projects throughout the city, including planned development in the 
South Boston waterfront district and the proposed Convention Center. 
Development of approximately one thousand acres of waterfront property 
in this district has been made possible by the Project with the 
increased access and mobility brought on by the addition of the Seaport 
Access Road and Ted Williams Tunnel to Logan Airport.
    The work is progressing in spite of the numerous construction and 
design challenges, and engineering ``firsts'' encountered by Project 
management that truly distinguish the CA/T from other large 
infrastructure projects. Despite doomsday predictions prevalent in the 
1980s, the Project is proving that it is possible to modernize a city's 
transportation system without shutting down the city. To the contrary, 
Boston continues to flourish and traffic continues to flow around CA/T 
construction activity. The Financial District and its sub-markets are 
experiencing single digit office vacancy statistics. The overall office 
vacancy rate of 2.9 percent represents a historical low, tourism has 
grown, and the hotel occupancy rate in Boston at more than 80 percent 
is higher than most other metropolitan areas.
    It is essential that immediate and bipartisan efforts are made to 
resolve the CA/T Project's fiscal challenges so that the it can 
successfully move forward. FHWA's audit report has made note of errors 
and omissions in the Project's financial reporting practices. Project 
leaders have appeared here today to assure you that they are committed 
to taking the actions necessary to repair their monitoring and 
communications protocol as well as their relationship with 
Congressional and federal leaders and the public. When all is said and 
done though, I believe the CA/T Project will serve as a model for other 
major cities across the country as each plans to rebuild its own 
highway infrastructure. The CA/T was the first mega-project to submit a 
finance plan to the Federal Highway Administration in 1995. This 
practice was later made statutory in TEA-21 legislation. This and other 
Project ``firsts'' and lessons learned will serve as important 
resources for other major infrastructure projects rebuilding in the 
middle of urban environments while trying to keep the city open for 
business and maintain economic vitality.
    Speaking to you today on behalf of Boston's business leaders, I am 
confident that the Project's new state and federal leadership will 
restore the Project's integrity and reach consensus with the 
Legislature and the Governor on a financially feasible funding strategy 
that will see this Project through completion. We look forward to 
continuing our partnership with Congressional, federal, and state 
leaders to advance completion of this project in a timely and prudent 
fashion. In the interim, it is our hope that no federal action is taken 
that would be detrimental to the Project's progress and, therefore, our 
regional economy.
    Thank you for the opportunity to testify today.
                               __________
                            General Court of Massachusetts,
                             Boston, Massachusetts, March 20, 2000.
Secretary Rodney E. Slater,
Secretary of Transportation,
U.S. Department of Transportation,
Washington, DC.

Dear Secretary Slater:

    This letter serves to confirm the commitment of the Massachusetts 
Legislature to work productively with the Federal Highway 
Administration (FHWA) and with Governor Paul Cellucci and his 
administration, including the Central Artery/Third Harbor Tunnel 
Project team, to provide a successful solution to the Project's current 
funding shortfall.
    As you are aware, Governor Cellucci has proposed legislation that 
offers some direction for covering the $1.4 billion cost overrun. 
Moreover, the Legislature has convened a Special Joint Legislative 
Committee to Study, Investigate and Ascertain the Cost of Completion of 
the Central Artery/Tunnel Project and the Statewide Transportation 
Program. This Committee has been working to assess the need for 
additional funding sources to simultaneously meet the current cash 
needs of the Project and provide for a reasonable and sustainable 
Statewide Road and Bridge Program.
    Our approach will continue to be a judicious one. We plan to 
identify additional funding sources, including possible contributions 
from third-party agencies, from cash reserves of the Massachusetts 
Turnpike Authority, from the state surplus, as well as from other non-
federal sources that could offer a defined revenue stream. We have made 
it a priority to find resources that can both meet the current needs 
and provide for contingencies.
    As part of this process, we are also anxious to see the results of 
the current federal review of the project. Since it is our 
understanding that this review will be completed by the end of March, 
it is our hope to have benefit of the information stemming from this 
federal review before taking final legislative action.
    In closing, we are well aware of the seriousness of the issue, as 
well as the importance of being fiscally prudent and responsive to the 
timeframe that has been established by FHWA. We are very sensitive to 
the need to provide adequate funding in a way that does not jeopardize 
the future of this important infrastructure project and we remain 
committed to successfully meeting the need.
    Thank you for your consideration of this matter.
        Very truly yours,
                               Thomas M. Finneran, Speaker,
                            Massachusetts House of Representatives.

                           Thomas F. Birmingham, President,
                                        Massachusetts State Senate.

                              Joseph C. Sullivan, Chairman,
                                 Joint Committee on Transportation,
                                              State Representative.

                                Robert A. Havern, Chairman,
                                 Joint Committee on Transportation,
                                                     State Senator.

    The Chairman. Thank you very much.
    Mr. Natsios, for several years, project managers had 
lowered the total cost of the project based on an assumption 
that you referred to in your opening statement. The project 
financing plan submitted to the Federal Highway Authority put 
the insurance fund credit in excess of $800 million. The 
Inspector General has determined that the project manager 
assumption was erroneous.
    The IG stated that the credit was based on, and I quote, 
unallowable retention and investment in excess Federal funds. 
The updated finance plan submitted to DOT on March 15 
acknowledges that project managers take seriously the IG's 
concern. Does the updated finance plan still assume the $826 
million credit is an offset to current project costs?
    Mr. Natsios. Let me ask Mike Lewis. That was submitted 
prior to my taking over, Mr. Chairman. I can say from now on it 
will not be included. Let me ask, does the updated finance plan 
include it?
    Mr. Lewis. It does not. The cash needs of the project were 
identified as $13.1 billion. It is an additional $1.4 billion 
over the previously identified cash needs of $11.7 billion, and 
that has been made very clear by the Federal Highway 
Administration and by the DOTIG, and certainly by Mr. Natsios. 
That will not be included in the final finance plan that is 
submitted by June of this year.
    The Chairman. Obviously, Mr. Natsios, you do not believe it 
is appropriate for a State to use highway funds for investing 
in a portfolio of securities.
    Mr. Natsios. No.
    The Chairman. And I have some confidence you will take 
steps to initiate the end of the misuse of these funds.
    Mr. Natsios. We will hire probably a person from a 
university who is an expert. We are looking at several of them 
now who are experts at one of the leading institutions in the 
country on insurance to review this whole facility and see what 
changes need to be made. I am an expert in finance, not in 
insurance. I have to just say that. So I have to seek outside 
counsel on that.
    The Chairman. Do you know how many lobbyists and 
consultants have been hired during the duration of the project, 
and at what cost, and has any of the Federal funding been used 
to pay for them?
    Mr. Natsios. We are just going through that now, and I have 
been somewhat astonished by the list. I terminated several last 
week, and I think I am about to sign eight more letters 
tomorrow to terminate the rest of them. I do not need any 
lobbyists, Mr. Chairman. I saw Members of Congress when I was 
here on foreign policy issues without a lobbyist for 10 years. 
I can do it now. The lobbyists may not be too happy about it, 
and that is true at the State level, too, and the public 
relations consultants. We do not need those, either.
    The Chairman. Would you submit for the record the lobbyists 
and consultants and the total cost over the course of this 
project?
    Mr. Natsios. I will.
    The Chairman. According to press reports, your predecessor 
secured a $200,000 severance package upon being dismissed as 
chairman. Do you have any information concerning that report?
    Mr. Natsios. Well, Mr. Chairman, I was asked to make the 
transition and frankly I would have taken a much harsher view, 
but we wanted to get the new leadership in, and put that behind 
us. It has been a practice at the State's authorities when they 
are firing someone to give them a year's severance package. In 
some cases people have gotten 2 years.
    He asked for 3 years. We gave him 1 year. That is our 
money. That is Turnpike money, it is not Federal money. Whether 
it was too much or not, I reacted in what I thought was the 
public interest in making the leadership change quick, speedy, 
and complete.
    The Chairman. Well, it is an interesting way of looking at 
things. Last week, a very troubling article reported about the 
project's purchase of a parking lot for disposing of dirt 
during construction, which was never even used by the project 
and ultimately returned to the original owner at a cost of some 
$50 million. Do you know who is responsible for that? First of 
all, is it accurate? Second of all, who is responsible, and why 
would any Federal funding be expended on such a thing?
    Mr. Natsios. Well, that goes back to 1991. That does not 
mean it is less legitimate, but I was somewhere in Somalia in 
1991. I would have to ask Mike Lewis if he can give us a review 
of the history of that.
    The Chairman. Mr. Lewis, and I guess included in your 
answer, would any effort be made to get some of that money 
back? I mean, it seems to me that somebody made a very nice 
windfall of about $50 million, got the property back, which is 
remarkable. I know real estate prices are quite high in 
Massachusetts, but $50 million for a vacant lot it seems to me 
is a little bit extravagant.
    Mr. Lewis. Mr. Chairman, I could respond to that. I think 
there were some inaccuracies in the Boston Herald report and I 
would like to clear them up if I can. It is a complex series of 
land takings that were done not just by the Central Artery 
project but there were separate takings made by the 
Massachusetts Highway Department for the reconstruction of 
Northern Avenue and the Evelyn Moakley Bridge across the four-
point channel.
    There were land takings made by the Massachusetts Bay 
Transportation Authority for the construction there, South 
Boston Pier's Transit Way project, all from the McCourt 
companies. There were also land takings by the Central Artery 
project for the construction of the South Boston Street System 
that was part of the design, the land area that was acquired.
    Of all of those takings, there was over 1 million square 
feet of land taken from the McCourt Companies, a combination of 
fee-takings as well as temporary easements. The parcel that was 
identified for what we called our materials processing 
operation was about 290,000 square feet of the million square 
feet, and it was taken in easement. It was an 8-year easement 
on that property for the purposes, the original intended 
purposes, of processing the over 10 million cubic yards of 
excavated material from the project that was identified in the 
1990 environmental impact statement.
    It was a site that was chosen back in 1990, prior to my 
coming to the project, because of its proximity to the work. 
Its proximity to what we call the South Boston Hole Road, which 
was a roadway that was built to access the work area without 
going through neighborhood streets, and it was underutilized 
area of the city. It was not near residents. It was felt for 
those reasons it was a good selection of land to be taken.
    The Chairman. But it was never used.
    Mr. Lewis. It was not used for its original intended 
purposes, that is correct. The project had identified the 
program to process the activated materials, and the original 
intention was, all the excavated material would be taken to 
this one site, be segregated, tested for its environmental 
constituencies, and then sent out for disposal, whether it is 
backfill, or if it was hazardous material----
    The Chairman. I think you are overanswering my question, 
Mr. Lewis. Are we going to get the money back or not?
    Mr. Lewis. I do not believe so, and the land, when the bids 
were opened on the material processing operation the project 
had estimated the total value of that operation to be about $60 
million. The low bid was $210 million. The decision was made to 
reject those bids. There was a clear difference of how that 
work was calculated, and the project decision was made to 
reject those bids and find a different way of handling the 
material.
    The property had already been taken, because we had to 
acquire the land before advertising the contract. We utilized 
that land at 290,00 square feet for a number of purposes not 
related to materials processing, including the replacement 
parking for other impacted parking that was done on the World 
Trade Center, and that in order to offset the potential 
exposure and damages to that parking impact, we actually 
located them on this property through 1998.
    All of that land was also used for many of the Artery 
contracts for construction laydown, which is a very valuable 
commodity in the city, so it was not used for its original 
purpose. That money was settled. All of the various--the land 
takings, the various State agencies of the McCourt properties 
were all taken under what is called the Omnibus Settlement 
Agreement by the Attorney General's Office of Massachusetts, 
and the Attorney General feels very strongly that the exposure 
in land damages of upwards of $140 million was very much 
reduced by the settlement and the additional payment made.
    I should also point out that--not that it is a mitigating 
factor, but over 60 percent of the payments made were actually 
statutory interest payments for the period of time between the 
original takings and the time the settlement was entered into.
    I apologize. That was a long answer.
    The Chairman. Thank you. I just--it is rather interesting.
    Mr. Thomas, how much does AIG receive annually under your 
contract agreement to manage the Central Artery OCIP?
    Mr. Thomas. The amounts we receive are calculated in terms 
of premium for the workers compensation and general liability 
program. It has varied through the years, depending on the 
project activity, but it's approximately in the area of $60 
million a year during the peak of the project work.
    The Chairman. And how much have you paid out in claims?
    Mr. Thomas. Right now we are holding--I don't know the 
answer to how much we have actually paid out to date, but we 
are holding in both paid and reserved amounts about 32 percent 
of what has been paid in.
    The Chairman. How much has AIG earned in interest dividends 
on the Federal funds in the investment accounts?
    Mr. Thomas. Well, on our total investment earnings since 
1992 for all funds in the collateral account are $18.3 million 
through year end 1999.
    The Chairman. In your experience, what is an appropriate 
reserve level for an OCIP?
    Mr. Thomas. Well, this is where the problem comes, sir, 
particularly with a project of this nature. Normally when we 
look at other insurance opportunities we have a historic 
picture of loss experience for that enterprise and we use that 
to predict the future. With a project of this type, obviously 
there is no prior history and so what we have to do is take the 
history of the various work classifications that would be 
involved and try to forecast based on that and based on the 
anticipated hazards of the project what the ultimate losses 
could be.
    So it is a little bit less of an actuarial exercise and 
more of an exercise in experience and judgment and then of 
course as the actual experience develops from the project, we 
are able to modify those projections based on the emergence of 
actual loss history.
    The Chairman. Well, when did your company first determine 
that trust levels in the project's insurance trust accounts 
were being held at levels higher than were needed as collateral 
against future claims?
    Mr. Thomas. At the end of 1995-96 we were concerned because 
of the slow buildup of actual construction work and actual 
payrolls expended, that we would be moving into the zone where 
we would actually hold more funds than the project was 
contractually obligated to pay under the terms of the program.
    The Chairman. Well, how and to whom did your company report 
that these fund levels exceeded the levels necessary?
    Mr. Thomas. We first expressed our concerns to the broker, 
Tom Shepherd, and later expressed our concerns to project 
management.
    The Chairman. And who directed you to continue to hold 
these funds in the investment accounts and did you express any 
concerns over this direction?
    Mr. Thomas. Well, as I indicated earlier, because of the 
slow development of actual contracts let and expended payrolls 
at the end of each annual period we do audits to determine the 
actual expended payrolls and convert that into the premium and 
we were generating return premiums in these early years which 
we, from the audit results, we informed the project of the 
return premiums.
    We were directed to deposit those or retain those in the 
collateral account because they anticipated a more aggressive 
ramp-up of work activity going forward into the future and so 
we made our concerns known to the project. They directed us to 
retain those amounts in the collateral account.
    You will also note from my testimony earlier that in 1996 
we changed the structure of the program from an investment 
point of view, so today AIG would only derive a share of the 
investment income from what we call the expected loss account, 
which was the portion of the funding that we're projecting to 
actually be required to pay losses and that all funding in 
excess of that, that we held in the collateral account, 100 
percent of that investment income accrued to the benefit of the 
project.
    The Chairman. Thank you. Mr. Wiley, from the joint ventures 
perspective, is the final cost of this project actually known?
    Mr. Wiley. I would answer that this way, Mr. Chairman. We 
have been heavily criticized over the past for establishing a 
number and then sticking to that number and----
    The Chairman. Criticized for establishing a number and 
sticking to the number?
    Mr. Wiley. Making comments publicly that it was 10.6 and 
not a penny more, and I would rather not get into that same 
position. I will answer it this way. I think we have done a 
credible job in estimating the to-go cost of the project and we 
forwarded that information to a number of different agencies, 
including the Federal Highway Administration, O'Brien 
Kreitzberg, who is an outside consultant, and Deloitte Touche. 
I believe we have a number that is achievable, but I am not 
going to sit here and draw a line in the sand, like has been 
done in the past.
    The Chairman. I guess I am not asking for a line in the 
sand. I just repeat the question. Is the final cost of this 
project actually known and if so, I don't know why we should 
keep it a secret from the American taxpayers.
    Mr. Wiley. I don't think we are keeping it a secret. As I 
said, I think the $13.1 billion estimate we came up for the 
total cash expenditure for the project is a legitimate number 
that we believe is capable of being made.
    Mr. Natsios. Mr. Chairman, if I could add since ultimately 
I will be held accountable for this, I asked Deloitte & Touche 
to take the number we are using, which is $13.1 billion and 
determine its accuracy. The number that the IG came up with, 
the number that the USDOT came up with in their audit report, I 
think they are three different figures. I told Deloitte Touche 
to come back to me and tell me what a reasonable estimate is, 
based on certain assumptions because I do not want to keep 
reconfiguring these figures. It makes people angry. It reduces 
our credibility. People think we are lying to them and I want 
the figure to be realistic. So when they come back with a 
figure, I will send you a copy and the Committee staff.
    The Chairman. When will that be?
    Mr. Natsios. That should be in the next couple of months. 
They are well into the effort now, but it is very time-
consuming because we are not looking at just our estimate, we 
are looking at how the number was derived by the IG and then by 
the USDOT in their audit.
    The Chairman. Mr. Wiley, were you aware of the $1.4 billion 
cost overrun and if so, did the joint venture ever raise 
concern with officials of MTA or FHWA warning of the rising 
cost of the projects?
    Mr. Wiley. I would say that up until the end of 1999 we 
were aware of a cost exposure of $1.4 billion. We were also 
aware of a cost offset of $1 billion, so the overall exposure 
that we saw at the end of 1999 was in the range of $3 to $4 
hundred million, which, as testified previously by a number of 
individuals, was to be a Turnpike or a Commonwealth of 
Massachusetts expenditure that would be covered.
    We presented all the information that we had to our client 
over time, the Massachusetts Turnpike Authority. We felt they 
were acting responsible in the way they were addressing not 
only the cost pressures up, but also the credits down, I think 
as commented previously.
    The IG started to express concerns with the insurance 
credit in 1999. In 1996, 97, 98, finance plans that included 
that insurance credit were approved by Federal organizations, 
by legislative organizations and so forth, so I think there was 
a time period where you had to look and say is that a 
legitimate insurance credit that treated the same manner as we 
have treated it for the last three or 4 years.
    The Chairman. I will ask again. Were you aware of the $1.4 
billion cost overrun?
    Mr. Wiley. We were aware there was an increase in cost to 
cash requirements on the project of $1.4 billion.
    The Chairman. And did you raise those concerns with MTA or 
FHWA?
    Mr. Wiley. We raised the increased cost concerns with the 
MTA, associated with the cost increases as well as the cost 
decreases.
    The Chairman. So Mr. Moynihan was aware and you raised 
these concerns with him when he wrote a letter to Mr. Mead that 
said your draft ``looking backward at management thinks is 
unworkable.'' It shows a lack of understanding of how a multi-
billion dollar megaproject needs to be managed.
    This is really one of the more remarkable letters, Mr. 
Natsios, that I have seen in my brief tenure in the U.S. 
Senate. We need constructive, sound criticism that will help us 
manage the work carefully. Unfortunately, the dated and 
inaccurate review you have produced does not fall into that 
category. I do not think I have seen a letter quite like that 
to the Inspector General. This was a letter dated October 29, 
1999 to Ken Mead in response to his IG report.
    Mr. Natsios. I think it was an outrageous and unacceptable 
letter. We were not shown that letter at A&F, but I have to say 
we had similar conversations in which we were told the same 
sort of thing, the same arrogant response that we did not know 
what we were talking about. I raised it myself to my 
predecessor at lunch in June of last year and was told I did 
not know what I was talking about or was told that my staff was 
incompetent or couldn't calculate.
    The Chairman. Mr. Wiley, the IG's findings state as 
construction management comprised the bulk of the B/PBs, can 
you explain how the costs have increased by $827 million from 
July 1997 to April 1999?
    Mr. Wiley. I would have to go back and look at the 
specifics associated with that, but off the top of my head, the 
majority of the costs are associated with events that occurred 
on the project. I think you mentioned earlier in some of your 
opening remarks or some of your comments, unforeseen site 
conditions and working through an old city, the 
interrelationship of a number of different contracts to try and 
achieve the shortest possible schedule and consequently, the 
least possible cost is what a lot of the increases are 
associated with, but we could put together an exact accounting 
of the dollars, if you so desire.
    The Chairman. Are there any financial penalties assessed 
against you for construction cost overruns?
    Mr. Wiley. In the past, there has not been, that I am aware 
of, any penalties assessed against us for cost overruns.
    Mr. Natsios. Mr. Chairman, if I could----
    The Chairman. Please, any of the witnesses who wish to 
comment at any time.
    Mr. Natsios. This is an issue we will be looking at when we 
review the Bechtel Parsons agreement.
    The Chairman. Mr. Dimino, I appreciate your testimony here 
today. I understand how important this project is to the State 
of Massachusetts, Boston, and the metropolitan area and I am 
obviously appreciative of the fact that the business community 
has been involved and committed to this project.
    I am sure that from your observing the hearings today, we 
have legitimate concerns and I do not think it is very helpful 
for us to continue to go back and back and review the mistakes 
that have been made, but in some respects, it is important that 
we do so, so that we won't repeat those mistakes in the future.
    My relationship with Senator Kerry and Senator Kennedy on 
this issue has been excellent. We are trying to hold a 
constructive hearing here. The media has done a remarkable job, 
the Boston Herald and the Boston Globe, in my view, as well as 
the television and radio stations in making a lot of these 
facts known to the people of Massachusetts and to this 
Committee and they deserve great credit. So I know that at the 
end of the day this will be a remarkable project which people 
will look at with awe and wonder and appreciation for hundreds 
of years.
    At the same time, I am sure you understand the obligation 
that many of us have and when people in charge of a project 
write this response to the Inspector General of the Department 
of Transportation, that is a remarkable situation. It is a 
degree of arrogance, in all candor, that I do not think I have 
experienced before. I mean, there is no factual rebuttal. It is 
just a blast and that kind of thing obviously denigrates the 
oversight role of the government, including the Inspector 
General.
    So this is really a bit disconcerting as to how those 
individuals who ran this project viewed the role of the Federal 
Government and the administration of American taxpayers' 
dollars and that is why we are having this hearing today.
    I am comforted, Mr. Natsios, that we can move forward with 
confidence and with optimism. At the same time, I want you to 
keep us informed and answer some of those questions and I will 
ask you to submit answers to some additional questions that I 
will submit to you in writing. I thank you for taking on this 
project. Did you want to respond to my comments, Mr. Dimino?
    Mr. Dimino. I just wanted to say, Mr. Chairman, that we in 
the business community appreciated the intervention of the IG 
and also the Federal Highway Administration and also the 
comprehensive and thorough audit of the report that was 
completed by the task force.
    We think that there are incredible lessons to be learned 
here. Unfortunately, some of them relate to some very adverse 
and negative-related activities that occurred prior to the 
audit report being completed, but we also believe that we are 
poised and positioned to go forward and get this project done 
in a way that will address those recommendations of the Federal 
Highway Administration report.
    We thank and we support and commend Chairman Natsios' 
candor and also his willingness to communicate with all of us, 
including Congress, of what is to take place as we go forward, 
both in terms of the financing, the programming and the 
management of this project. It is incredibly important. That 
kind of candor and openness and honesty is essential in terms 
of restoring the credibility of this effort and the trust of 
all of us.
    And as you mentioned before, Massachusetts is in a position 
to have a new central highway system. That system is well-
needed and well-deserved. Issues that relate to the public 
trust need to be dealt with directly and I appreciate your 
leadership and Senator Kerry's leadership in holding this 
hearing today.
    The Chairman. Thank you. Senator Kerry.
    Senator Kerry. Thank you, Mr. Chairman. I know we are 
getting late here and I won't take too long, but I do want to 
ask a few questions in a couple of areas.
    First of all, let me follow up on a question I did not 
quite understand on the insurance, Mr. Thomas. You were paid 60 
million for what period of time?
    Mr. Thomas. Well, the cost, as I said, the average 
insurance expenditure has been about $60 million a year for 
both the Workers' Comp. and general liability insurance for the 
project.
    Senator Kerry. The average expenditure of the project?
    Mr. Thomas. That is the initial payment into the program 
from which----
    The Chairman. Supposedly to cover contingencies, etcetera?
    Mr. Thomas. Correct.
    Senator Kerry. But that is a payment to AIG?
    Mr. Thomas. It's----
    Senator Kerry. Or is that held in escrow in a fund?
    Mr. Thomas. The Workers' Compensation component of that, 
some $40 million of that, 92 percent of that, 92 percent of the 
$40 or $42 million goes into the trust account and is held as 
collateral against future payments of losses.
    Senator Kerry. In each year that is paid in?
    Mr. Thomas. Yes.
    Senator Kerry. So beginning in what year was that paid in?
    Mr. Thomas. We started the Workers' Compensation component 
of the program in November 1992.
    Senator Kerry. And that has been paid in each year since 
when?
    Mr. Thomas. Since 1992 in varying amounts. I am giving you 
the rough average.
    Senator Kerry. You can't tell us today what the total 
amount paid out of this fund, AIG doesn't have that readily 
available.
    Mr. Thomas. No, it is available. I just do not have that 
number with me today.
    Senator Kerry. Can you give us a ballpark? What are we 
talking about? If you are talking about since 1992, that is 8 
years and 60 million, so that is about 480, is that correct, 
somewhere in there, $500 million? Ballpark, how much has been 
paid out?
    Mr. Thomas. I just don't know.
    Senator Kerry. Are we talking $10 million, $20, $200 
million? I mean, is it a big figure or a small figure.
    Mr. Thomas. It is a large number. I believe the paid loss 
is roughly 18 to 19 percent of the total loss estimate for that 
time period.
    Senator Kerry. That sounds like a very significant 
overpayment of insurance.
    Mr. Thomas. Well, in----
    Senator Kerry. In the tens of millions of dollars.
    Mr. Thomas. As I said earlier, the program was structured 
where the premiums were initially calculated based on the 
payroll estimates provided to us by the project.
    Senator Kerry. I know, but once you find out that that is 
not being paid out, then the actuarials change. It seems to me 
the relationship should have changed.
    Mr. Thomas. And it did, and we told the project that 
returned premiums were available to be paid to it and we were 
instructed to retain those returned premiums as collateral in 
the trust account.
    Senator Kerry. And the collateral was for what?
    Mr. Thomas. The collateral was to secure the future loss 
payments under the insurance program.
    Senator Kerry. Even though you knew you were not 
experiencing those levels of losses, or was that in effect a 
way by which they could, quote, invest the money or use it in 
the long terms of creative financing that was taking place as 
they used the insurance against the total cost? I mean, is that 
effectively what was happening?
    Mr. Thomas. I think that is the result of what was 
happening.
    Senator Kerry. But did you know that at the time?
    Mr. Thomas. No, what we were being told at the time was 
that the original work schedule had not materialized at the 
pace originally projected. In other words, contracts were being 
let at a slower pace than originally projected and that is why 
expended payrolls were less than originally projected and we 
were being advised that the pace would pick up and that 
adjustments would be made as we moved into the future.
    Senator Kerry. Well, just speaking for our taxpayers in the 
state, of which I am obviously one, I would be really 
interested in having Mr. Natsios sort of review this and get a 
sense of the appropriateness of this sort of relationship and 
where we stand today. I mean, you have got a great company. I 
know your company well and I am not placing you somehow. I 
mean, you did what you were told and the manager sort of 
directed you to do this, but I think somehow there may be some 
workout here or something that ought to be looked at.
    Mr. Natsios. Senator, if I could, we stopped payment on the 
worker's compensation premium.
    Mr. Lewis. Senator, we can give you many more, or more 
detailed answers in writing.
    Senator Kerry. Well, I understand, but you see, our 
taxpayers want to know that they have got value too.
    Mr. Lewis. I agree. We agree.
    Senator Kerry. I think that is part of the examination 
here. Incidentally, on the issue of the land takings, Mr. 
Chairman, it is my understanding--I do not understand it all 
yet, but I have looked preliminarily at it--that the reporting 
on that was not sort of a complete reporting in the sense that 
there were a whole bunch of packages involved in the allocation 
of how they found the pricing of the particular give-back was, 
in fact, not completely accurate. Is that fair, Mr. Lewis?
    Mr. Lewis. That is fair, Senator.
    Senator Kerry. So I think that also has to be examined 
further. Let me come back quickly and again, I do not want to 
lengthen this, but I do want to get some things firmly in 
print, so to speak, on the state-wide program, Mr. Natsios.
    You, as a former ANF chief and as now the person 
responsible for negotiating with the Federal authorities, are 
going to play a key role in this defining process for the 
state-wide program, because you have got your handle on what is 
happening in the state. You are probably the best person who 
could do it because you know exactly what is paid out in the 
state and what is being taken care of and what isn't, and now 
you know what you have got to negotiate with the Federal 
authorities.
    So can we have an assurance from you today that we can get 
clarity as to what will be contained in the exact definition of 
that program, and the mayors and regional planning authorities 
will know to a certainty in the next days where we are going.
    Mr. Natsios. Let me just tell you what we know with 
assurance now and what we will certainly know with assurance 
over the next few weeks. Secretary Sullivan--Kevin Sullivan, 
Secretary of the Executive Office of Transportation and 
Construction for the state is now discussing with the regional 
transportation committees this very issue.
    A lot of this is a debate over definitions. We are spending 
$617 million a year for state-wide road and bridge. We do 
include in that $100 million we send back to the cities and 
towns which they contract for repair to local bridges and 
roads. The State Contractors Association says I know that 
doesn't count. Well, I think it does count. It is spent on 
transportation. Those roads I drive every day in my home town 
of Holliston--the notion we can't include that in the 
calculation seems a little silly to me. We just spent $352 
million in surplus operating money, not borrowed, from the 
fiscal 1999 budget for the statewide road and bridge program.
    Some critics had said well, you didn't borrow the money 
even though you are spending it on contract, so if you didn't 
borrow the money that doesn't count. I said, wait a second. We 
spent the $352 million in the surplus from fiscal 1999 to go 
out to bid for specific contracts for state-wide road and 
bridge projects. The fact that it didn't come from borrowed 
money in the cap is, it seems to me, extraneous to the issue. 
So there are a lot of definitional issues that I think are a 
little bit silly, to be very frank with you.
    Senator Kerry. Well, in order to be resolvable, if they are 
silly, it seems to me that reasonable minds can come to that 
conclusion together. What is happening is clearly a lack of 
communication between these parties, and so there is 
misunderstanding. It is neither Senator McCain's responsibility 
nor mine to specifically define it here today. It is our 
responsibility to know that the directive of the Federal 
Government with respect to this is going to be fully carried 
out, and that is really what I am trying to pin down.
    Mr. Natsios. Let me add a second issue here beyond the 
issue of the definition of what should be included in the 
state-wide road and bridge calculation, because there is sort 
of a second debate: should we, in that figure, be including 
advertised construction--or actually expended dollars. Before I 
came as Secretary, apparently the practice was to advertise the 
project and then not build it for a year because there was so 
much pressure from mayors in cities and towns and legislators 
to build these projects. They would advertise, everybody 
thought once it was advertised it is going to be built. 
Sometimes the project wasn't built for a year.
    So I said, look, we have got to manage the cap. If we 
overspend the cap, we damage the state's credit rating. We had 
the fiftieth worst credit rating in 1990. We cannot go back to 
that. So I said, what counts in terms of the cap is not what 
you advertise, but what you spend. We will make a commitment to 
you that we will spend in construction, state and local, $400 
million. But in fact, we have been spending and we plan to 
spend over $600 million. So the second issue which we are 
dealing with now is to use as a definition the actual amount 
spent on advertised contracts, which I think is a much more 
accurate way of defining what you are actually doing, as 
opposed to what you promise to do when you advertise some 
thing.
    Senator Kerry. And I know that in the spirit of full candor 
and openness now, you certainly want to give full credit to the 
Senate President and the Speaker of the House for their wisdom 
in making sure that the libraries and the community centers and 
all of those things were in fact properly overriding the veto 
of the Governor so that you could come here and brag today 
about all these wonderful projects.
    Mr. Natsios. Actually, those projects, the Governor didn't 
veto, he signed them. There were other projects. Have to say 
some of them were pork barrel. There were statues of people. 
They were things that----
    Senator Kerry. Libraries?
    Mr. Natsios. Not libraries.
    Senator Kerry. The library was in fact vetoed and 
overridden. Water treatment facilities were vetoed and 
overridden. Community centers were vetoed and overridden.
    Mr. Natsios. Community centers are a question as to whether 
the state should be paying.
    Senator Kerry. But they are an important part of the 
infrastructure we are now talking about.
    Mr. Natsios. I wasn't here, Senator. I heard stories of 
debates over a lot of these things.
    Senator Kerry. You cut out at the right moment and you come 
back at the right moment. We like that.
    [Laughter.]
    Mr. Natsios. You always have to look, though, at the effect 
on our credit rating because we were near junk bond status in 
1990, which meant our interest rate was much higher and I am 
sure you will agree. There is agreement between the House and 
the Senate leadership with us on protecting the state's credit 
rating. Many of the legislative leaders are as conservative on 
borrowing money as I am and as the Governor is and so that is 
really not a big issue. That is the good thing about the 
debate, or the Conference Committee. There is no ideological 
debate about how to deal with the deficit.
    Senator Kerry. I agree with that. I am teasing you a little 
bit and I want you to go with the tease.
    But this I am not teasing you about and I want to ask you 
about it very specifically, and you and I have chatted about 
it. One of the reasons I supported this project at the outset 
was sort of the larger promise, and part of that larger promise 
is the open space.
    Some have been concerned where we might have been heading 
and now that we are under new leadership and as you begin this 
process, I would like to make clear that I will not accept and 
I would not continue to support the project if there were any 
sort of retraction from where we are supposed to be with 
respect to the open space commitment. I would like to hear your 
commitment today with respect to the open space, that there 
will be no retreat from the understanding of where we are in 
that.
    Mr. Natsios. When I first arrived back in Massachusetts in 
March 1999, I met with the Boston business community over this 
issue. I was intrigued by this because urban design is very 
important to me. Personally, it is something that excites me, 
historical restoration and renovation are very important. We 
are just about to begin the largest historical renovation of 
the State House in two hundred years, and I pushed that through 
as one my most important projects; a great historical piece of 
architecture in Massachusetts, the State House.
    So this meant a lot to me, and I read carefully the 
documents prepared by the citizens' groups, the community, the 
state, the Turnpike Authority. And the agreement in those 
documents was that twenty-five percent of the twenty-seven 
acres that remains--and there is a debate over whether to count 
the sidewalks as part of the twenty-seven acres--but generally 
speaking twenty-seven acres is available. And twenty-five 
percent of that, we have agreed, will have some development on 
it, which is to say, commercial or residential dwellings, that 
would be five to eight stories high. They can not be more than 
that for engineering reasons; the building would be over the 
artery and we can not build with very high buildings. The other 
seventy-five percent will be spent on gardens and plazas and 
parks and fountains, and there will be an atrium built with 
private money by the Mass. Horticultural Society, with a year-
round garden. Those sorts of things. I think that is our 
lasting contribution to the history of Boston, architecturally, 
what is done with that. It is not just that we keep it green, 
from my perspective, it has to be done the right way so that 
when people look back, they will say that the surface artery 
restoration was well designed, a legacy to the city. As you and 
I, when we walk through the Boston Public Gardens, can see, it 
is still one of the most stunningly beautiful parts of Boston. 
And I want the surface artery to be to remembered as something 
like the Boston Public Gardens, one of the great treasures of 
our city.
    Senator Kerry. Well we share a really common thought there 
and I could not agree with you more. I think it really is one 
of the enduring parts of the legacy of this project. And 
architecturally, I hope people are really going to get 
together, because architecturally what those buildings look 
like and how they work--I mean people come to Washington and 
they look around and they say, wow, this place is really 
beautiful, and one of the reasons it is really beautiful is 
that there is a law here. No building can be taller than the 
Capitol.
    I mean you look out across the vista of Washington and you 
suddenly see that abrupt transition across the river where you 
see what the rest of Washington could have been like if people 
had not had that kind of foresight. So that is really what is 
at stake here. And I will continue, as long as I am here, to 
insist on our raising the profile of that issue and thinking 
very carefully about it. And I might add, I hope that will 
extend as we go into the seaport area and the other part of the 
development.
    Final question area, and Mr. Chairman thanks for your 
patience. Mr. Wiley, let me begin by saying that you are part 
of a terrific company. And there are very few companies in the 
world that could have undertaken this project. Bechtel: I have 
enormous respect for their management capacity. The engineering 
feats that are being carried out on a daily basis here, I wish 
the public had a better understanding of all of them. They are 
stunning.
    And it is no small feat that so much of the business 
community of Boston has had so little disruption in the course 
of this. It is remarkable that you can drive the whole 
connections to buildings, the electrical lines, I mean the 
amount of things that have been moved without disruption is 
remarkable. The number of times offramps have been changed, but 
adequate signage is there and people can move. It is really 
extraordinary. And I think the management component of it that 
has sort of affected that on a daily basis deserves to be 
properly recognized.
    What I want to have your help on is this cost figure, and 
then one other question on this contracting process. But I do 
not accept this $13.1 billion figure. I want to be on record 
saying that today. And I do not want to have people talk pie-
in-the-sky, sort of process here. I will tell you why I do not 
accept it. Because right here I have the Federal report that 
Secretary Slater submitted to us which has been applauded for 
its candor, which says the following: the $13.4 billion figure. 
He is talking 13.4, you are talking 13.1. And his 13.4 says it 
is the total of the $10.8 billion pursuant to the last estimate 
plus $900 million in allowable credits, plus the $1.7 billion 
project overrun. Now, he then says, in addition, if inflation 
rates rise, as is the present trend--does anybody here believe 
inflation rates are not going to continue to rise? Okay. The 
estimate should be further adjusted to reflect this trend. That 
is further adjusted from 13.4. It then says, finally, further 
adjustments should be anticipated for litigation, 
vulnerability--I am not sure exactly what that means, maybe you 
can define that to me--environmental contingencies and other 
unforeseen events likely in a project of this magnitude. Now is 
he incorrect in warning us of that? Or are you being sort of 
safe in your judgment in keeping the figure down?
    Mr. Wiley. I do not think it has anything to do with 
keeping the figure down. I think we made the best estimate as 
we saw it from a project management standpoint of what the cost 
to go would be. I think as Chairman Natsios said, there are 
differences of opinion out there on whether the number is 13.1, 
13.4, 13.6. And we are in the process right now of getting with 
Federal Highway and with others to reconcile the number. They 
may have better insight than we do to some of the issues that 
you identified there. We will, as the Chairman said----
    Senator Kerry. Can I ask you a question?
    Mr. Wiley. Sure.
    Senator Kerry. As a project manager--and I say this again, 
reflective of everything I have said, I do not take a word of 
it back--but should you not, as a project manager, as the 
direct sort of supercontractor, have a better sense of that 
than the Federal people who are going to have to check all 
those figures anyway?
    Mr. Wiley. And as I said, Senator, I think we made the best 
estimate, and we believe in the number that we put together.
    Senator Kerry. But they are already laying out 
contingencies that come to a higher figure.
    Mr. Wiley. I can not comment on all of the different 
organizations that have made their estimate of what the future 
cost of the project--I can only comment on the estimate that we 
put together. We believe it is a credible number for completion 
of the project.
    Senator Kerry. And does your estimate include cost 
overruns?
    Mr. Wiley. Our estimate includes some monies in there for 
contingencies in the area of project change allowance and in 
other areas, but it is not----
    Senator Kerry. Does your estimate--I am sorry, go ahead.
    Mr. Wiley. I was just going to say it does not include a 
large contingency for the unknowns.
    Senator Kerry. And there will be some, correct?
    Mr. Wiley. There could well be some based on unknowns.
    Mr. Natsios. Can I just add something here?
    Senator Kerry. Let me complete this before you do. Does 
your estimate of 13.1 include all offramps, access, park, all 
those components? Is that contained in it?
    Mr. Wiley. It includes the entire scope of the project.
    Senator Kerry. And that includes the tear down of the green 
overhead monster itself?
    Mr. Wiley. Correct.
    Senator Kerry. Okay. I am sorry, Mr. Natsios.
    Mr. Natsios. Let me just talk about the financing package 
even though I am not in the executive branch anymore. When I 
was Secretary of Administration and Finance we designed the 
package. We took the $1.4 billion deficit figure and we created 
a financing package. And at this point in the conference 
committee basically we were securitizing about 100 million 
dollars in revenue from licensing and registration fees.
    The lifetime licenses were supposed to go into effect March 
1, which produced 45 million dollars in additional revenue that 
was not in the Highway Fund. And then we went to lifetime 
registration some years ago. We have cancelled--we have not 
cancelled those, but they are on the table for discussion. 
Together, those two fees would produce 100 million dollars in 
revenue if the legislature approves it, and they are discussing 
it seriously, which we could securitize, which is to say, 
borrow against, over 30 years. That will produce 1.3 billion 
dollars worth of funds. Then we have 200 million dollars in 
cash that the Turnpike can use legally for the project, another 
65 million is coming from the Massachusetts Port Authority they 
have agreed to give us, which comes up to 1.565 billion dollars 
in cash now.
    In addition, and I want to got through the details and I 
can send the staff a copy of it. We have included the most 
innovative debt reduction plan in the country. We expect 500 
million dollar surplus in the budget this year. There is 150 
million dollars in capital reserves, 650 million--we are going 
to pay down our highest-end debt, highest interest debt. And 
the savings, in principal and interest, over the next 5 years 
will go into a reserve fund and that will amount to 800 million 
dollars that we save over 5 years. That 800 million dollars is 
our contingency fund, our reserve against other liabilities 
above the 1.4 billion dollars that we are borrowing now for.
    The legislature is debating now how much of the 800 million 
dollars to put aside additionally for statewide road and bridge 
projects. That is the debate.
    Senator, I have to say that your debate in the other 
election about paying down debt I used very effectively 
privately. I said Senator McCain is in favor of it and the 
President is in favor of it. It is a bipartisan thing. I, 
frankly, as a conservative, like the idea of paying debt down. 
It will be the largest in the history of the fifty states if we 
do it, but it creates this contingency by all the savings each 
year, that will have an added effect of an insurance policy 
against further overruns. Not from Federal money, not from 
anybody else's funds, but from state resources. The Senate 
approved it, the House has agreed to it, the Governor is 
enthused about it. I think that contingency is a very important 
part of this.
    Mr. Lewis. If I could just add to what Mr. Wiley commented 
on earlier. Absolutely all of the components of the project are 
included in that 1.4 billion dollars, which totals up to 13.1. 
Service restoration, all the parks in east Boston, the 
restoration of Spectacle Island, Charles River Parks, all the 
finishes that we have committed to absolutely are in there.
    In addition, the project did identify in its finance plan a 
potential increase, a range, beyond the 1.4 and therefore 
totaling 13.1, of an additional $220 million, if, it is more of 
a pessimistic exposure, because we identified in our finance 
plan the risk of an additional $220 million above that. Now the 
Federal Task Force report ranged it a little bit higher than 
what we did. We have included both our range in our monthly 
reporting, financial reporting, as well as the Federal Highway 
Task Force range of potential cost increases.
    And that is now included in our monthly report and that is 
something that Chairman Natsios has instituted and we have 
conducted and we will conduct every month; a meeting that I 
lead. And we had our first one last week where we invite not 
just the Federal Highway, we invite the DOTIG. We invite the 
State IG. We invite the State auditor's office. We invite the 
Attorney General's office. We invite representation from both 
the House and the Senate and we invite representation from the 
Governor's office. And that meeting will be held every month, 
the third Thursday of every month at a defined location, where 
we will present all of the vital statistics of the project on a 
monthly basis to that whole audience and then that report is 
also posted on our website. So this is in the interest of 
absolute and full disclosure as we go forward with the project.
    Senator Kerry. And I assume at any moment that you might 
perceive a variation from these estimates, and people will know 
that.
    Mr. Lewis. That is absolutely true.
    Senator Kerry. Well I am encouraged by that and I think it 
is a shame that it took what it took to get there to do that. 
It should have been ongoing, and that should have been in the 
process, but I am very encouraged by it, and I think Mr. 
Natsios, in a short period of time you have moved appropriately 
to get a handle on this thing. I think it is very encouraging 
to people to be able to hear that. I assume, Mr. Wiley, that I 
know you are contracted--not to the Federal Government--you are 
contracted to the management and it is my understanding that 
you folks did, in fact, call attention to the management and 
raised concerns about overruns.
    Mr. Wiley. That is correct.
    Senator Kerry. Could you just answer Mr. Mead's observation 
with respect to contracting--the cost plus?
    Mr. Wiley. As far as the contract we had with the State, it 
is not an abnormal method of contracting. I think if you went 
around the United States or around the world, for that matter, 
you would see very similar types of contracts to the ones we 
have here, utilized by other agencies, institutions, for 
implementation of projects this size.
    The Chairman. Cost plus?
    Mr. Wiley. Correct.
    The Chairman. Well then I would allege that all over the 
world there are projects that are experiencing overruns such as 
you are, and there should be some financial penalty to be paid, 
because you signed contracts that are based on assumptions, and 
when those assumptions are wrong and it costs more taxpayers' 
dollars, somebody should be held responsible, rather than just 
proceeding on. We went through this debate on defense back 
about fifteen years ago, and we stopped doing it, because of 
the incredible cost overruns we were having with weapons 
systems and ship construction, etcetera.
    So if that is satisfactory to you, business as usual, these 
kind of continued cost plus contracts, that is fine. But there 
should be some penalty associated with people not being able to 
fulfill their contractual obligations. So I do not know if I am 
familiar with contracts worldwide, but I do not know of many 
places in the world that would submit or accept this kind of 
performance.
    Mr. Wiley. Can I just comment on that, Senator, and I do 
not wish to be argumentative. But I think you have to look at 
the situation. You commented yourself the original estimate in 
1985 was 2.6 billion dollars. There were a certain set of 
ground rules established with that estimate. Over half of the 
increase between that 2.5 billion dollars, 2.6 billion dollars 
and the 10.8 billion dollars that was established in 1995 was 
escalation. And it was a rule, back in that timeframe, that 
escalation was not included as part of the cost estimate of the 
project.
    Additionally, the other fifty percent of that is mostly 
associated with scope that has evolved on the project, not due 
to the management consultants' performance, not due to the 
management consultants' decisions. Scope has increased on the 
project. I take it very seriously. We have done a good job of 
managing that project. We have kept cost as minimal as possible 
and looked at every opportunity to reduce cost. I think, as 
Senator Kerry pointed out, we have kept the city of Boston open 
and running and I take great pride in the job we have done 
there and as long as the rules stay the same, we can give you 
an estimate of the cost to complete the project. When rules 
change, the costs change.
    The Chairman. Rules change when there is no incentive for 
the scope and other aspects of the costs not to continue to 
expand and expand and expand. It is a fundamental aspect of the 
free enterprise system and economics. If there is no penalty 
associated with increased costs why not lay on increased costs. 
After all, you are not responsible for it. You should be held 
responsible. And when the scope is increased, you should have 
said, wait a minute. This is going to exceed our contract by X 
amount of dollars. This is phenomenal.
    This cost overrun--there is no penalty associated with the 
cost overruns, it is just an open-ended incredibly increased 
cost project, the largest in the history of this country and it 
continues to grow and grow because there has been no 
disincentive for doing so. I am sure that keeping Boston open 
is a wonderful thing. I am sure that doing all the things that 
have been done and the scope being expanded is a wonderful 
thing. But in 1985, it was supposed to cost 2.5 billion 
dollars. Now we do not even know if its going to cost thirteen 
point something. The taxpayers deserve a lot better than that. 
A lot better than that. And part of it is cost plus contracts, 
for which there is no incentive for you to keep the costs down.
    Senator Kerry. If I can just--I have asked my last question 
and I just wanted to make a final comment in response to what 
you said, Mr. Chairman, and I agree with you about the 
fundamentals of what drives it. But I do want to be fair, as I 
think we all need to be, and thoughtful, about the project 
itself.
    In fairness, indeed it changed from 2.5--my greatest 
concern is the change from the 1995 time when we sort of passed 
off on the final tranche and what has happened since then. But 
Congress also understood full well precisely what the scope 
issues were, precisely what the change of the environmental 
requirements were, design requirements. And they changed from 
the initial concept until we made our last agreed upon 
expenditure. We understood, we in a sense embraced, the U.S. 
Congress embraced and ratified that vision change.
    But I think the contracting since then, once we knew that 
and once some of the design was further along and we knew some 
of the difficulties of either dredging, or the state--of the 
moving X,Y, or Z. I do believe your concern is entirely 
legitimate as to what has happened since that point in time, 
and I think we are obviously going to have to continue. I know 
Mr. Natsios is reviewing that now.
    The most important thing is that we are really seeing a 
kind of effort now that I think people have wanted for a long 
time; a cooperative, open and diligent effort to get to the 
bottom of everything, and I am really quite confident that we 
have the ability to do that and all of us are going to try to 
work hard together to try to make sure we do.
    Thanks, Mr. Chairman, very much, for this hearing.
    The Chairman. Thank you, Mr, Natsios, Mr. Mead, and 
Secretary Slater in trying to bring this very important project 
to a close and in a way that all of us can be proud of. I thank 
you Senator Kerry. I thank the witnesses. This hearing is 
adjourned.
    [Whereupon, at 12:45 p.m., the hearing was adjourned.]
                            A P P E N D I X

 Prepared Statement of Hon. Bob Smith, U.S. Senator from New Hampshire
    As Chairman of the Environment and Public Works Committee, I thank 
Chairman McCain for holding this timely and important hearing. The 
Senate Environment and Public Works Committee has jurisdiction over 
expenditures from the Highway Trust Fund, oversight of the Federal 
Highway Administration, as well as primary responsibility for highway 
infrastructure legislation like the Transportation Equity Act for the 
21st Century (TEA-21).
    The report on the Boston Central Artery/Tunnel Project issued by 
the Federal Task Force raises significant issues in these areas, which 
I understand will be explored in detail by the Commerce Committee at 
today's hearing. The Environment and Public Works Committee is of 
course examining these issues as the Committee of primary jurisdiction, 
and today's hearing will be a valuable addition to our efforts.
    The Boston Central Artery/Tunnel Project is a significant public 
works project for the city, the Commonwealth of Massachusetts and the 
entire New England region. This important project will be completed, 
but at what cost? This project was originally, and by all accounts 
until a few months ago, a $10.8 billion project. Now we learn that 
costs will be closer to $13.5 billion. We are left to wonder whether 
some of these cost increases could have been avoided if the project had 
not suffered from the state and federal mismanagement documented in the 
Federal Task Force Report. Despite the requirement in TEA-21 for an 
annual detailed financial plan on any project in the billions of 
dollars, neither the state nor the federal highway administration 
(FHWA) adequately tracked and verified the increasing project cost as 
contracts continued to be awarded over budget. This is simply not 
acceptable.
    The federal task force review of the project's cost reporting and 
management is something that should have been done regularly throughout 
the project as part of FHWA's oversight responsibilities. I expect the 
FHWA to learn from its mistakes and to exercise improved monitoring 
procedures for protecting the integrity of the taxpayer's investment in 
such mega-projects.
    Ultimately, the responsibility for the project's increased costs 
must reside with the individuals and organizations that the 
Commonwealth of Massachusetts entrusted to manage this project. I am 
pleased that State officials have recognized this responsibility by 
agreeing to finance these increased costs, and I call on them to commit 
adequate funds from sound sources of revenue. I urge the Secretary of 
Transportation and other members of Congress to join me in ensuring 
that no federal funds above the existing formula will be spent on these 
cost overruns.
    Thank you.
                                 ______
                                 
      Response to Written Questions Submitted by Hon. John McCain 
                           to Kenneth M. Mead
Question 1. You have testified that the FHWA has been less than 
enthusiastic about your findings. In fact, the FHWA's acceptance of 
your recent recommendations only came after the Secretary overrode the 
positions taken by FHWA officials.

          a) Given the prior reluctance of the FHWA to objectively 
        oversee the Artery project, are you confident that FHWA will be 
        able to change its ``laissez faire'' oversight attitude?

          b) What additional actions do you believe should be taken to 
        address FHWA's alarming lapse of oversight on this project?

          c) What actions should be taken to prevent future 
        mismanagement of this or other federally funded transportation 
        projects?
Answer.

    1. a) The Secretary has initiated action to change FHWA's oversight 
performance, but we remain cautious. The Task Force directed by the 
Secretary identified needed management changes, such as establishing 
monitoring practices for Megaprojects. However, whether FHWA is 
successful in improving its oversight attitude depends on balancing its 
``partnership'' approach with the independent and critical approach 
required for effective oversight. We acknowledge that the most 
effective way to achieve the overall goal of a safe, efficient, and 
economical highway system is for FHWA and state officials to work in 
concert with one another, as well as with private industry. FHWA must 
also make clear to each employee that exercising effective oversight to 
protect the federal taxpayers' interests in our nation's highway system 
is a primary responsibility that should not be subordinated to 
``partnership.'' Therefore, we believe that FHWA should adopt a 
``trust, but verify'' approach.
    We have also noted that the Secretary recently acted to expand the 
effort he initiated with the FHWA Task Force on the Central Artery. The 
Assistant Secretary for Budget and Programs was directed to initiate a 
new Departmental Task Force to examine and improve the Department's 
oversight practices on large transportation infrastructure projects. 
The results of this effort should further help FHWA improve its 
oversight attitude and practices. We will review the actions that FHWA 
eventually takes to implement the recommendations made by the FHWA Task 
Force, as well as any recommendations that the Departmental Task Force 
may make.
    1. b) The 34 recommendations contained in the FHWA Task Force, if 
implemented, will be a good start toward addressing the existing 
problems with its oversight of the Central Artery project. In addition, 
actions being taken by FHWA in response to Office of Inspector General 
recommendations to develop policies on financial reporting (Report TR-
2000-050, February 10, 2000) and Owner-Controlled Insurance Programs 
(Report TR-1999-104, May 24, 1999) will improve the guidance to field 
personnel overseeing the Central Artery Project. Finally, placing a cap 
on the federal contribution to this project will limit the federal 
exposure to additional cost growth. Moreover, to improve oversight 
throughout FHWA, it must be made clear to all FHWA employees that the 
purpose behind FHWA's oversight is to ensure that the federal funding 
provided to each state is effectively and efficiently used to maintain 
and improve the National Highway System. In addition, FHWA must also 
recognize that an effective oversight program cannot be static. 
Oversight activities must be continually adjusted to address the 
current activities of the project to ensure they are properly managed.
    1. c) The actions recommended by the FHWA Task Force, if 
implemented, will be a good start toward preventing future 
mismanagement on the Central Artery project. However, the FHWA needs to 
ensure that the improved oversight activities instituted on the Central 
Artery project are then made the standard throughout the agency. In 
response to the recommendation in our February 10, 2000 report on 
Central Artery costs, FHWA is developing detailed guidance on financial 
reporting that is intended to ensure that financial plans submitted by 
Megaprojects provide a complete and accurate report on the projects' 
financial status. In response to our May 24, 1999 report on the Central 
Artery's owner-controlled insurance program, FHWA is in the process of 
developing guidance to improve its oversight of those programs. 
Finally, the Secretary recently directed the Assistant Secretary for 
Budget and Programs to initiate a new Task Force to examine and improve 
oversight practices throughout the Department. Each of these efforts 
should help FHWA improve its oversight of the Central Artery and other 
large infrastructure projects.

Question 2. As you know, I introduced legislation last year to strip 
motor-carrier safety authority away from FHWA, which is now law. I took 
this action in large measure based on 10 findings that FHWA paid little 
attention to motor-carrier safety issues and instead concentrated the 
bulk of its attention on highway construction. DOT-IG reports have 
found other instances where issues are unaddressed or poorly addressed 
at DOT due to a lack of leadership. The failure to name an 
administrator for the newly created Motor Carrier Safety Administration 
and the unresolved NAFTA truck safety problems are just two examples 
which come readily to mind.

          a) What should be done to address the leadership problems at 
        the Department?

          b) Is it possible that the Department is driven more by 
        desire to avoid negative media attention that by the desire to 
        effectively administer its statutory responsibilities?
Answer.

    2. a) Timely action to select qualified leaders is the first step. 
There must also be a leadership focus on oversight activities. 
Departmental managers must establish clear direction that promotion of 
safety and the protection of federal investments in transportation 
infrastructure--as opposed to the promotion of projects--are primary 
responsibilities of all DOT personnel.
    2. b) The potential for negative media attention cannot be ignored 
by any federal agency in the conduct of its mission. Nonetheless, every 
public agency must meet its statutory responsibilities. The Secretary 
and Deputy Secretary have acted decisively in response to deficiencies 
we have reported on the Central Artery and other projects. Examples of 
this include the Task Force created to examine FHWA's oversight on the 
Central Artery and the Task Force that is planned to examine oversight 
practices throughout the Department. The actions directed by senior 
management stand in contrast to the negative responses we received from 
FHWA staff and state officials in response to our previous reports of 
inadequate enforcement of safety and poor stewardship of federal 
funding. The strong recommendations contained in the report issued by 
the Task Force on the Central Artery stands as evidence of the desire 
of the Department's senior leadership to effectively administer the 
Department's statutory duties.

Question 3. You have raised concerns that the use of ``advance 
construction'' funding on this project could increase the final federal 
contribution to the project to nearly $9.5 billion.

          a) Have you had discussions about these concerns with FHWA or 
        project managers and if so, what has been their reaction?

          b) Is this type of financing--when the state expends funds 
        and then reimburses itself when the federal funds are 
        apportioned--common practice?

          c) What are your recommendations to ensure the federal 
        exposure is not extended due to this funding maneuver?

          d) What is the total federal obligation on the Central 
        Artery/Tunnel project?

          e) What suggestions can you offer Congress to help ensure 
        there is a firm cap on federal dollars not only obligated to 
        this project, but to other so-called megaprojects?

Answer.

    3. a) OIG and FHWA personnel discussed the use of advance 
construction as a part of our interaction after the announcement of the 
$1.4 billion cost increase. However, because the potential magnitude of 
additional advance construction only became evident after the state 
requested $936 million in additional authority in its finance plan 
update, we are transmitting our testimony to the FHWA as a report 
requesting a formal response. We have also noted that the Secretary 
suspended authorizing additional advance construction authority pending 
resolution of the project's funding problems, and the Department has 
indicated that it does not intend to authorize the full amount of 
advance construction requested by the state.
    3. b) OIG has not conducted an audit to determine the extent to 
which this practice is being used throughout the nation. However, we 
are aware that the general authority exists and has been used in other 
states, albeit not to the extent seen in the Central Artery. Advance 
construction authority is intended to help a state manage its cash flow 
to accomplish large projects by offering an alternative to delaying 
projects out until Federal funding is available. Nonetheless, as the 
experience on the Central Artery shows, the unbridled use of advance 
construction can create a long term reduction in the portion of federal 
funding that will be available to address states' transportation needs 
in future years.
    3. c) To prevent the use of advance construction from extending the 
federal exposure on the Central Artery project, a firm cap may be 
placed to limit to a specific amount the total federal contribution to 
the project. If such a cap is not imposed through an agreement between 
the Department and the state of Massachusetts, Congress should consider 
imposing a cap through legislation.
    3. d) The total federal obligation to the Central Artery project, 
at the time of our audit (April 30, 1999), was expected to be $8.507 
billion.
    3. e) One option for establishing firm caps on federal dollars to 
highway construction projects is to follow the example used by the 
Federal Transit Administration in its full funding grant agreements for 
transit projects. Under these agreements, the total amount of the 
federal contribution to a proposed project is defined in advance. If 
the initial cost estimates are breached, the state must assume 
responsibility for the additional costs, or request additional federal 
funding.
    We have noted, however, that even where full funding grant 
agreements are used, the Transportation Equity Act for the 21st Century 
grants states considerable flexibility to redirect federal 
transportation funding. An alternative that would allow the states to 
retain reasonable flexibility in their use of federal funding while 
limiting potential increases in the agreed-upon federal contribution to 
any individual project would be to allow redirection of federal funding 
only within specified limits. For example, states could be restricted 
from redirecting federal funds to any individual project beyond a set 
percentage of the original cost estimate or a percentage of the 
originally agreed-upon federal contribution. This would also have the 
salutary effect of promoting more accurate cost estimating on large 
transportation projects.

Question 4. In your view, is there an effort by the Department, 
particularly FHWA, to impose greater federal oversight over projects--
particularly Megaprojects--such as the Woodrow Wilson Bridge 
Replacement, the Alameda Corridor, and other? What are your 
recommendations for actions that Congress could take to ensure greater 
independent federal oversight of these Megaprojects?

Answer. We have noted that, in response to the recommendations in our 
report on the cost and funding of the Central Artery (TR-2000-050), the 
FHWA is in the process of developing detailed financial reporting 
guidelines to ensure complete and accurate reporting by project 
managers. In addition, the FHWA Task Force on the Central Artery made 
several recommendations for improving the independent oversight 
provided by both state FHWA offices and FHWA headquarters. OIG plans to 
conduct a review of the implementation of the Task Force's 
recommendations to examine the effectiveness of the actions taken.
    To further focus federal oversight on projects that are 
experiencing cost growth, Congress could consider requiring the 
Department to report annually on the status of each Megaproject. The 
report should identify the original cost estimate and the current cost 
estimate, the reasons for the cost growth, and the actions being taken 
to control cost growth on the project.
    Although Megaprojects are the largest projects in the Department, 
there are far more projects that are estimated to cost under $1 
billion. Collectively, these projects have the potential to experience 
considerable cost growth. In conjunction with the report on 
Megaprojects, Congress could require the Department to report annually 
on the status of all projects originally or currently estimated to cost 
more than a threshold amount ($50 million or $100 million) but less 
than $1 billion. This report could also identify the original and 
current estimated costs, the reasons for cost growth, and the actions 
being taken to control costs.

Question 5. The Secretary has discussed the efforts of the Task Force 
and stated the department is implementing 34 recommendations in the 
report released in April. To what extent, if any, is your office 
involved in overseeing the implementation of the actions?

Answer. OIG plans to review the implementation of the Task Force's 
recommendations to examine the effectiveness of the actions taken. We 
will recommend potential further actions, if needed, to ensure 
effective independent federal oversight of transportation construction 
projects. We will provide the results of that review to the Secretary 
and to the Committee upon completion.

Question 6. The Task Force was comprised mostly of FHWA officials. I 
recognize that a number of serious and critical comments were concluded 
by the Task Force along with many recommendations for improving federal 
and state oversight on this project. Do you believe the Task Force was 
impartial enough to have been able to thoroughly analyze the many 
problems associated with the management of this project?

Answer. The Task Force, while composed mostly of FHWA officials, was 
drawn from outside the Massachusetts Division Office concerned with the 
Central Artery. OIG personnel assigned to act in an advisory capacity 
to the Task Force director noted the earnest effort of the 
participants. The forthright and pointed report issued by the Task 
Force confirms that its members were diligent in their attempt to 
recognize and point out perceived deficiencies in FHWA's oversight of 
the Central Artery. OIG will continue to examine the oversight FHWA 
provides, and will specifically address this issue as a part of our 
review of the implementation of the Task Force recommendations.

Question 7. What, if any, options are available for further cost 
containment on this project?

Answer. Our review of cost trends on the project has identified that a 
primary source of cost increases is contract change orders. To minimize 
cost increases from requested changes, they must be addressed through 
aggressive management questioning of the changes requested by 
contractors. In addition, where the requested changes are found to be 
valid, appropriate penalties should levied when the cause of change is 
attributable to poor design, planning, or other contractor related 
causes.
                                 ______
                                 
      Response to Written Questions Submitted by Hon. John McCain 
                          to Andrew S. Natsios
Question 1. Please describe for the Committee your association with the 
project prior to taking the position as Chairman of the Massachusetts 
Turnpike Authority.

Answer. Prior to Governor Paul Cellucci appointing me chairman of the 
Massachusetts Turnpike Authority on April 11, 2000, I served as 
Secretary for Administration and Finance for the Commonwealth of 
Massachusetts. As secretary, I oversaw 22 agencies and was responsible 
for the Governor's budget and capital initiatives. I also served as the 
governor's chief advisor on fiscal and economic matters.
    While I did not have direct line authority over the Massachusetts 
Turnpike Authority--or any other similarly chartered public authority, 
as I explained in my testimony--as Administration and Finance 
Secretary, I reviewed and signed all official statements filed in 
conjunction with the borrowing undertaking by any state-related agency. 
In that reviewing capacity, I was aware of the Turnpike Authority's 
representations of the state of the finances of the Central Artery/
Tunnel Project, and on several occasions questioned those 
representations and sought additional information. In November, 1999, I 
refused to approve and sign an official statement because of questions 
my staff and I had relative to the disclosure by the Turnpike Authority 
of the finances of the Central Artery/Tunnel Project. Only after 
receiving assurances from the Turnpike Authority that the Project was 
not experiencing a significant cash flow problem did I sign off on the 
official statement.

Question 2. You have been in your present position only a few weeks and 
I am aware of many of the steps you have taken to change the management 
team and philosophy at the Project. You obviously have a daunting task 
before you in order to restore the Project's credibility in the eyes of 
the Public, the Administration and Congress.

          a) Do you really believe you will be able to restore the 
        Project's credibility and how long do you think it will be 
        before the Congress can trust Project leaders' statements and 
        if so, how?

Answer. While the task of restoring the project's credibility is indeed 
daunting, it is not impossible. I have pledged to follow the principle 
of complete transparency in providing information to Congress, the 
public, and the Executive branch. Let me give you a recent example of 
how we are using this approach in practice.
    Since I became Turnpike Authority chairman, Federal Highway 
Administration officials and Central Artery staff have been engaged in 
an intensive review of the project's costs and of the manner in which 
future costs are estimated. As you know, Federal Highway officials in 
early April placed the project's cost overrun in a range of $1.7 
billion to $1.9 billion. The previous Turnpike Authority administration 
placed the cost overrun at $1.4 billion. On Wednesday, May 24, I 
announced to the Artery Business Committee, in an annual ``State of the 
Project'' speech, that we will have an updated cost estimate for the 
Project in time for a new finance plan to be filed with the Federal 
Highway Administration on June 16, 2000. I also announced that we agree 
with federal highway officials and anticipate that the overrun is in 
the range of $1.7 billion to $1.9 billion.
    I emphasized that we agree with federal highway officials that the 
lower cost overrun figure was too optimistic and not realistic, 
especially in two areas: underestimating the cost of change orders, and 
overestimating the savings on contracts not yet bid.
    This open acknowledgement of cost is, I believe, in stark contrast 
to the posture of the previous Turnpike administration. In this regard, 
I believe that absolute candor is the most effective way for me to 
begin the process of restoring credibility to the Project and its 
managers. While the public, the Administration, the state Legislature, 
Congress, and federal transportation officials will be the ultimate 
arbiters, I believe we are well on our way to restoring the credibility 
and integrity of the Project.

          b) What are some immediate steps you intend to take to impose 
        greater fiscal responsibility over the Project?

Answer. While I was Secretary for Administration and Finance, the 
Commonwealth commissioned the accounting firm of DeLoitte & Touche to 
conduct an exhaustive review of the project including cost and 
schedule. That review will be done by mid-July, and it will be made 
public no matter the result.
    As Chairman, I am also commissioning two separate panels to review, 
respectively, the Owner Controlled Insurance Program, and the 
construction management contract with Bechtel Parsons, the management 
consultants for the Project. I have also appointed a new finance 
director for the Project and will soon appoint a Chief Financial 
Officer for the Turnpike Authority who will, under my direction, 
oversee the budgets of the Turnpike Authority and the Project. We are 
also conducting a review of the staffing patterns at both the Turnpike 
Authority and the Project.
    In addition to reviewing staffing and finances, including cost 
projections, at the Project, we are looking at potential cost savings 
associated with the Bechtel Parsons contract.

Question 3. For the record, how many lobbyists and consultants have 
been hired during the duration of the Project, at what total cost, and 
has any of the billions in federal funding been used to pay for them?

Answer. Following is a list of Subcontracts for Legislative and Public 
Affairs Consulting Services for all Project Work Programs as determined 
from a review of Subcontract logs maintained by Bechtel/Parsons 
Brinckerhoff (B/PB). The logs were reviewed for subcontractors and 
subcontract titles to identify the firms believed to have provided 
legislative and public affairs services.
    Generally public affairs expenditures were deemed Federal 
Participating and legislative consulting services were deemed Non-
Participating by the Federal Highway Administration. For some of the 
subcontracts the paid values may have been divided between 
Participating and Non-Participating. For the subcontracts before mid-
1994 (Work Program Nos. 5, 8 and 10), I have instructed B/PB to check 
their Project archives and review the payment documents to confirm 
whether the FHWA participated in all or part of the billings. This will 
take additional time and I will forward the information to you as soon 
as I receive it.
    Work Programs, Nos. 1, 2, 3, 4, 6 and 9, had no subcontracts that 
met the criteria of the type of services under consideration. Work 
Programs, Nos. 7 and 11, have no subcontracts.

                                    CA/T Project Subcontracts for Legislative and Public Affairs Consulting Services
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           Part./ Non-
                      Company Name                                          Contract Title                    Cont. No.       Part.        Amount Paid
--------------------------------------------------------------------------------------------------------------------------------------------------------
Work Program No. 5, Contract No. 90203; Period 5/25/90 to 6/30/91
Otis & Boyd                                               Marketing Strategies                               T-221                      $15,241

Work Program No. 8, Contract No. 91600; Period 6/5/91 to 9/30/92

Harvard College                                           Provide Book-Length History of CA/T Project        T-209                      $142,421.99

M L Strategies                                            Communications Planning                            T-255                      $113,981

Opinion Dynamics                                          Market Research Survey                             T-256                      $35,000

Work Program No. 10, Contract No. 93182; Period 10/1/92 to 9/30/93

Gerald W. Lange                                           Freelance Writer                                   T-242                      $33,750

Harvard College                                           Book-Length History of CA/T Project                T-246                      $43,778.07

M L Strategies                                            Communications Report                              T-240                      $35,000

Museum of Science                                         Big Dig Exhibit                                    T-212                      $493,446

P. J. Skerrett                                            Professional Writing Services                      T-271                      $3,550

Work Program No. 12, Contract No. 94165; Period 9/22/93 to 6/30/96

Fifield and Associates                                    Communications Planning                            T-307A       P             $10,000

Government Affairs Management Association                 Legal and Legislative Services                     T-254        NP            $124,076.20

Greater Boston Chamber of Commerce                        Artery Business Committee (ABC)                    T-375        P             $50,000

KRC Research & Consulting                                 Marketing Research--Commuter Attitudes Toward      T-323        P             $32,218.56
                                                           Transit

Move Massachusetts 2000                                   Mitigation--Community Relations                    T-206        P & NP \1\    $295,197.58

Museum of Science                                         Big Dig Exhibit                                    T-238        P             $20,530.24

P. J. Skerrett                                            Script Writing                                     T-226        P             $1,020

Regan Communications                                      Public Affairs Communication                       T-270        P & NP \1\    $248,806.17

The Commonwealth Group                                    Legal and Legislative Services                     T-253        P & NP \1\    $120,391.39

Work Program No. 13, Contract No. 96158; Period 6/26/96 to 10/31/00

AK Media/MA                                               Billboard Advertising                              T-211        NP            $87,000 (inv=d)

Hill, Holliday, Connors, Cosmopulos                       Public Information Outreach Initiative             T-400        NP            $1,078,409.48

Work Program No. 14, Contract No. 96159; Period 6/26/96 to 10/31/00

Hagler Bailly/Apogee Research, Inc.                       Development of a Surface Transportation            T-350        P             $249,983.47
                                                           Apportionment Model (STAM)

Boland & Madigan Inc.                                     Legislative Consulting Services                    T-405        NP            $159,262.97

Carrie Fuchs                                              Marketing Coordinator                              T-453        P             $14,700

Fifield and Associates                                    Communications Planning                            T-307B       P             $14,210.19

Fifield and Associates                                    Communications Planning                            T-341        P             $57,093.75 \2\

Fifield and Associates                                    Project Management Consulting                      T-383        P             $76,123.96 \3\

Government Affairs Management Association                 Legal and Legislative Services                     T-293        NP            $0

GPC/O'Neill & Associates                                  Legislative Services                               T-483        NP            $53,250(invd)

Hill, Holliday, Connors, Cosmopulos                       Public Information Outreach Initiative             T-400        P             $1,099,589.65

Ingalls Advertising                                       Advertising                                        T-322        P             $45,000

McDermott/O'Neill &Associates                             Legislative Services                               T-328        NP            $351,004.60

Move Massachusetts 2000                                   Mitigation and Community Relations Program         T-204        P             $337,921.81

The Commonwealth Group                                    Legal and Legislative Services                     T-292        NP            $52,500

Winston & Strawn                                          Legislative Consulting Services                    T-377        NP            $133,074.37

McKay Communications                                      Mitigation of CA/T Construction Impacts on Pat's   14-710-0017  P             $113,219.42
                                                           Pushcart Restaurant                                0

                Sub-total (Non-Participating as presently known):                                                                       $2,138,577.62

                Total (Participating and Non-Participating):                                                                            $5,840,751.87
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Paid value was divided between Participating and Non-Participating and archives must be reviewed to determine exact values.
\2\ Of this value $28,546.88 was paid by B/PB and not billed to the CA/T Project.
\3\ Of this value $30,000.00 was paid by B/PB and not billed to the CA/T Project.


Question 4. In your view, is there currently a cap on the amount of 
federal funding that will be allocated to this project and if so, what 
is that level?

Answer. Yes, the Commonwealth has and will continue to operate under 
the direction from federal highway officials that there is a cap on the 
amount of federal funding that will be allocated to the Project. As 
stipulated in the Federal Highway Administration (FHWA) letter dated 
May 8, 2000 to the Turnpike Authority, FHWA imposed an administrative 
cap on federal funds for the project. Federal funds are limited to 
$8.549 billion--$7.049 in federal obligations through the life of the 
Project plus $1.5 billion in GANs (grant anticipation notes) 
repayments.
    As I stated in my testimony before the Committee on Commerce, 
Science, and Transportation on May 3, 2000, the Commonwealth is not 
looking for additional federal assistance to finish the Central Artery/
Tunnel Project. As you are aware, the Massachusetts Legislature and the 
Governor recently approved a finance plan of more than $1.9 billion 
that exceeds even the high cost range identified by the Federal Highway 
Administration. The Commonwealth's finance plan also created a $500 
million contingency reserve to be used to offset any future possible 
overruns or other transportation needs in the Commonwealth.
                                 ______
                                 
      Response to Written Questions Submitted by Hon. John McCain 
                          to Rodney E. Slater
Question 1. There is no statutory limit on the amount of money the 
Federal government will contribute to the project, is there currently a 
written agreement signed by the State and FHWA capping the Federal 
funding for this project?

          A) What is the total Federal funding obligation on the 
        Central Artery/Tunnel project and on what does the Department 
        base this level?

          B) The cost of the project has skyrocketed from its early 
        estimates. What actions, if any, did the FHWA take to reign in 
        these costs?

          C) Why has the Department agreed to fund more than $8 billion 
        toward this project? And, is it standard operating procedure 
        for the FHWA to keep upping the Federal ante on all of its 
        highway projects based on whatever the State ultimately decides 
        to spend?

Answer.

    A) On June 22, 2000, the Federal Highway Administration (FHWA), the 
Massachusetts Executive Office of Transportation and Construction 
(EOTC), the Massachusetts Highway Department (MHD), and the 
Massachusetts Turnpike Authority (MTA) executed a formal Project 
Agreement which covers the amount of Federal funding on the Central 
Artery/Tunnel project and the working relationship between the parties. 
[See Attachment.] The agreement limits the amount of Federal-aid 
highway funds that may be obligated and spent for the Central Artery 
project to $8.549 billion. This maximum level applies regardless of 
State use of advance construction authority (AC). In no case shall AC 
conversions for the Central Artery project be allowed which bring the 
obligation authority total above the $8.549 billion cap. As of May 30, 
2000, Federal-aid obligations total $5.898 billion.
    B) Since the early stages of project implementation, FHWA has been 
actively involved in Central Artery project activities to contain 
costs. Activities include: participating in the project's Cost 
Containment Committee; using value engineering studies; encouraging 
project staff to recover costs from design errors and omissions by 
consultants; and performing reviews, during the preliminary design 
phase, to ensure utilization of optimum design concepts. To date, we 
estimate that the Cost Containment Committee's effort has resulted in 
savings of $670 million, the value engineering reviews have reduced 
costs by over $400 million, the cost recovery program has recouped 
about $30,000 in services and, while no detailed accounting has been 
made of all the design/product improvement reviews, these savings would 
be well over $100 million.
    C) The amount of Federal funds made available to the State is 
determined by apportionment formulas defined in TEA-21. The State then 
has the legal authority to choose which projects it initiates with this 
Federal funding within the statewide transportation improvement 
program. The FHWA checks to ensure that the projects meet eligibility 
requirements and only reimburses the State for eligible costs. However, 
as long as eligibility requirements are met, States are free to 
identify their needs and then meet those needs with the Federal-aid 
highway funds they receive. In fact, Section 145 of title 23, U.S.C., 
protects the sovereignty of the States and their rights to ``determine 
which projects shall be federally financed.''
    Projects that receive Federal-aid funding are reimbursed for the 
share of project costs that are eligible under the Federal funding 
category being used. On most projects, the entire scope of work is 
usually eligible and the Federal-aid share is applied in its entirety. 
On the Central Artery project, the Federal-aid share of eligible 
project costs will exceed $8 billion. The FHWA makes independent 
eligibility determinations regarding the use of Federal-aid funds on 
individual projects. These determinations include the original scope of 
work and any changes to the scope of work that are deemed to be 
necessary as the project progresses toward completion.

Question 2. In 1997, this Committee held a hearing on program 
efficiencies, or lack thereof, at the Department of Transportation that 
had been identified by the General Accounting Office and the DOT's 
Inspector General. In testimony at this hearing, Deputy Secretary 
Mortimer Downey cited the Department's oversight on the Central Artery 
project as a model to be followed with other mega projects. Mr. Downey 
stated that the Department ``had taken steps to bring the management of 
large dollar infrastructure projects under control.'' Now, two years 
later, we learn that the Department's oversight was less than stellar. 
[And despite some statements to the contrary, I don't believe the 
Department's poor performance can be tied solely to lack of candor, 
shall we say, on the part of Massachusetts' project officials].

          A) What assurances can you give us today that we won't be 
        here next year or the year after addressing more Big Dig horror 
        stories?

          B) What changes have you made at the FHWA to assure an arms-
        length relationship between State project officials/contractors 
        and Federal officials?

Answer.

    A) This is a complex project with complex construction, including 
underground excavation adjacent to large buildings and transit lines. 
Full sharing of information is essential between Federal and State 
managers of the project. On June 22, the FHWA, the Massachusetts EOTC, 
the MHD, and the MTA executed a formal agreement that addresses the 
Federal Task Force Report recommendations for improving the working 
relationship of the parties on the project.
    Governor Cellucci recently signed legislation designed to fund the 
Central Artery project costs, including the cost overrun announced in 
February and contingency funding for any future cost overruns that 
might occur. On June 16, 2000, the State submitted an updated Finance 
Plan to the FHWA for acceptance. The State update reflects the newly 
legislated funding and identifies other funding sources that address 
the cost of the Central Artery project and account for a balanced 
statewide transportation program. The FHWA expects to complete its 
review of the Finance Plan Update by July 31, 2000.
    B) The FHWA is forming a Major Projects Team at the Headquarters 
level to assist the Division Offices with the management of large 
dollar construction projects, to ensure efficient use of Federal 
resources, and to minimize project delays. While the FHWA Division 
Offices will remain responsible for traditional Federal-aid oversight 
responsibilities for all projects, the Major Projects Team will assist 
the Division Offices with risk assessment and oversight decisions in 
the areas of finance, environment, and project development on large 
dollar construction projects. The Team will also oversee the 
implementation of relevant recommendations from the General Accounting 
Office and the Office of Inspector General audits of major projects.
    At a recent national meeting, FHWA Headquarters, Resource Center, 
and Division Office managers discussed stewardship and oversight of the 
Federal-aid program. Managers were reminded of their responsibilities 
and the need for objectivity and independence, while sustaining the 
partnerships with State departments of transportation. Based on 
discussions at the national meeting, a statement of policy was issued 
on June 9, 2000. In addition, FHWA is currently reviewing its 
stewardship and oversight policies, and is forming a working group to 
develop a program guidance paper on stewardship and oversight.

Question 3. What actions should be taken to prevent future 
mismanagement of this or other federally funded projects?

Answer. As the stewards of Federal funds, the Department and the modal 
administrations have an oversight responsibility to make certain that 
taxpayer dollars are being spent properly, in the best and most 
efficient manner, in accordance with Federal statutes. The enhanced 
oversight of major projects is applicable to all the Department's modal 
administrations. At the senior management level, the Department tracks 
the largest transportation infrastructure projects--generally those 
over $1 billion in value. Reports of key information are developed on a 
bimonthly basis. Under the leadership of the Assistant Secretary for 
Budget and Programs, we are also developing a department-wide process 
with clear standards and directions to review and provide oversight for 
major projects.
    FHWA has taken a number of actions to improve project oversight, 
including issuance of revised finance plan guidance on May 23, 2000, 
that further defines the content and format of Financial Plans as 
required by Section 1305 of TEA-21. This guidance will result in 
financial documents that contain more complete, accurate, and timely 
information. The Financial Plan Guidance presents an outline for the 
Initial Financial Plan and for the Annual Updates. This guidance and 
its attachments should encourage consistency in the way the initial 
documents are prepared, in the content of the annual updates, and in 
the format of the core exhibits.
    As noted above, FHWA is also forming a Major Projects Team at the 
Headquarters level to assist with large-dollar project management. In 
addition to the duties listed in the answer to Question 2, FHWA's Major 
Projects Team will oversee the implementation of the 34 recommendations 
from the Federal Task Force Report on the Central Artery project. Also, 
the team will review project estimates and will provide an independent 
review of the initial Finance Plan and its annual updates for major 
projects.

Question 4. One of the most disturbing comments from the testimony we 
have received so far came from Mr. Mead in which he stated that the 
Federal Highway Department's (FHWA) oversight on the Central Artery/
Tunnel project went beyond the agency's normal oversight effort. This 
raises very serious concerns, to say the least.

          A) What actions are you, as Secretary, taking to improve the 
        critically needed independent Federal scrutiny of the Central 
        Artery/Tunnel project?

          B) What actions in general are you taking to impose greater 
        Federal oversight on all Federal-aid highway funding projects?

          C) What actions are you taking Department-wide to ensure 
        greater independent Federal oversight on all federally funded 
        transportation projects--from airports to shipyards to highway 
        projects?

Answer.

    A) Changes were made in the Central Artery project leadership at 
the Federal and State levels. Another major action was the execution on 
June 22, 2000, of a formal agreement between the FHWA, the 
Massachusetts EOTC, the MHD, and the MTA. The agreement covers Task 
Force Report recommendations that address the working relationship 
between the parties.
    Also, the FHWA has acted on the Task Force recommendation to 
withdraw the delegation of authority to accept annual Finance Plan 
Updates for the Central Artery project from the FHWA Massachusetts 
Division Administrator and return the approval authority to FHWA 
Headquarters. The State Finance Plan Update submitted on June 16 is 
currently under review in FHWA Headquarters.
    B) As noted in the responses to Questions 2 and 3 above, FHWA has 
taken a number of actions to improve project oversight, including 
issuance of revised Finance Plan Guidance on May 23, 2000; formation of 
a Major Projects Team at the Headquarters level to assist with large-
dollar project management; and a review of stewardship and oversight 
policies and issuance of a policy statement on June 9, 2000.
    At a recent national meeting FHWA Headquarters, Resource Center, 
and Division Office managers discussed stewardship and oversight of the 
Federal-aid program. Because of resource limitations, oversight on 
Federal-aid highway funded projects is primarily focused on the largest 
of these projects. However, managers were reminded of their 
responsibilities and the need for objectivity and independence while 
sustaining the partnerships with the State departments of 
transportation. We believe that effective partnering with State DOTs 
will enhance management and accountability on all projects.
    C) We will develop a department-wide process to review and provide 
oversight for major projects that are complex in nature, of national 
and regional significance, and cost $1 billion or more. The Assistant 
Secretary for Budget and Programs is leading this effort by convening a 
working group and consulting independent experts to develop a process 
with clear standards and directions. Having such a process in place 
will build from the process used by the Federal Task Force on the 
Central Artery project and assist in dealing with risk assessment and 
making oversight decisions in the areas of finance, the environment, 
and program development for all projects. In addition, this process 
will include periodic reporting to senior level officials within the 
modal administrations and the Department regarding the status of all 
major projects of national and regional significance. The Office of the 
Inspector General will also be an engaged partner in this process to 
ensure that the oversight and monitoring of these projects is 
adequately maintained.

Question 5. Another area of concern raised by the Inspector General in 
his testimony concerns the use of advance construction funds. The IG 
believes the continued practice could increase the Federal obligation 
up to $9.5 billion.

        A) What are your views on the IG's concerns? And, what 
        guarantees can you give to ensure the IG's projected Federal 
        funding exposure is not allowed to become a reality?

Answer.

    A) The cost overruns on the Central Artery project are not related 
to the use of AC.
    When FHWA approves an advance construction project, it simply means 
that the project is eligible for Federal-aid. FHWA makes no commitment 
to fund the project, nor is the State committed to converting the 
project to a regular Federal-aid project. For an advance construction 
project to be submitted to FHWA for approval, the project must go 
through the complete planning process and be included on the state 
transportation improvement program (STIP). Each STIP must identify the 
level of anticipated AC conversions to Federal funding (amount expected 
to be obligated on advance construction projects) in order to maintain 
a financially constrained program as required by statute. This process 
allows for substantial public involvement in reviewing a State's 
proposed use of AC.
    The primary benefit of AC is that a project is constructed sooner, 
using State funds, which generally results in a lower cost to the State 
and Federal governments by avoiding inflation costs. Earlier 
construction also results in advancing safety improvements (reducing 
injuries and deaths) and expedites the economic returns that often 
result from a transportation project. The OIG has suggested that 
advance construction be limited to amounts that can be converted within 
a specified time, such as 3 or 5 years after project completion, using 
a limited portion of the State's annual apportionment. Limiting the use 
of advance construction more than what is now required by law (that 
projects be on a financially constrained STIP) effectively reduces the 
benefits that State and local governments, and the traveling public, 
can derive from early project completion.
    Restricting the use of advance construction could also 
significantly impact a number of States which use advance construction 
in conjunction with bond financed projects. On these projects, the 
conversion of advance construction coincides with the payment of the 
bonds, which may be 20 years or more. If advance construction was 
required to be converted in five years, then States would lose this 
very effective method of financing transportation projects.
    In the case of the Central Artery project, restricting the use of 
advance construction would have extended the amount of time to complete 
the project. The result would have been an even greater increase in 
construction costs, project management costs, and traffic management 
costs, as well as prolonged disruption to Boston's transportation 
system.
    Our Inspector General has expressed concern that the use of AC 
funds could increase the Federal obligation up to $9.5 billion. This 
issue has been resolved by the formal Project Agreement signed on June 
22, 2000, by the FHWA, the Massachusetts Executive Office of 
Transportation and Construction, the Massachusetts Highway Department, 
and the Massachusetts Turnpike Authority. This agreement limits the 
amount of Federal funding on the Central Artery project and also 
defines the working relationship between the parties. The agreement 
caps the amount of Federal-aid highway funds that may be obligated and 
spent for the Central Artery project at $8.549 billion. This maximum 
level applies regardless of State use of advance construction authority 
(AC). In no case shall AC conversions for the Central Artery project be 
allowed which bring the obligation authority total above the $8.549 
billion cap.

Question 6. There has been considerable interest and controversy over 
the project's Owner Controlled Insurance Program (OCIP). Last May, the 
Inspector General identified overpayments of Federal funds (including 
accrued interest) totalling nearly $150 million and noted the project 
was intentionally drawing down Federal funds for investment purposes--
which is against the law. Yet, FHWA dragged its feet in correcting the 
identified problem. In fact, I included a provision in the bill I 
introduced last August on truck safety in an effort to remedy the 
problem since the FHWA was taking no action. Finally in September, four 
months after the IG's report, the FHWA finally acted to reign in the 
insurance funding scheme.

        A) Why did the FHWA not act immediately to remedy the problem 
        identified by the Inspector General?

        B) Since last September, what action has the Department 
        initiated to ensure the use of OCIP on any federally funded 
        transportation project does not misuse Federal funds?

Answer.

    A) FHWA has been monitoring the OCIP on the Central Artery project 
since its creation in 1992. Due to the unique nature of the work and 
the condition of the insurance industry at the time of its creation, 
the OCIP on the Central Artery project was structured in a conservative 
manner to protect against very large potential risks. When the OCIP was 
established, certain assumptions were made as to the anticipated size 
of the work force and the expected accident rates. By 1995, it was 
evident that the initial assumptions were too conservative. In 1996, an 
agreement was made to reconfigure the OCIP to adjust for a history of 
fewer accidents than were expected. Through 1997 and 1998, insurance 
losses continued to be very low and in December 1998 an agreement was 
drafted to adjust the OCIP.
    We were in the process of evaluating the recommended provisions of 
the December 1998 agreement when we received the OIG recommendations. 
We believed it best to consider the totality of the December 1998 
recommended revisions and the OIG recommendations prior to taking 
action on either set of recommendations. At the same time, as we were 
evaluating the OIG recommendations, we discovered that several of the 
OIG calculations were based on estimated values. We needed time to 
determine the actual figures prior to taking action.
    Regarding premium overpayments and interest earned related to 
payments made on the Central Artery project OCIP, the excess balance is 
being applied to the premium payments for the next two years. In 
applying the excess balance to the premium payments, the actual 
calculated amount of premiums paid plus interest earned is being used 
rather than the OIG estimated amount.
    (B) At present, the only other Federally funded highway project 
with an OCIP is the I-15 project in Salt Lake City. The OCIP on this 
project has been structured to cover losses on a ``pay as you go 
basis.'' There is no trust fund for the project and the OCIP on the I-
15 project is fully funded by State Funds.
    To protect against problems on the Central Artery project and on 
all future projects, the FHWA, in accordance with Recommendation #25 in 
the Federal Task Force report, has retained an independent contractor, 
Aon--an expert in insurance and OCIP-type policies. Aon will conduct a 
review of the OCIP and the risks associated with the Central Artery 
project and will also advise the FHWA on a national policy to guide the 
structure and implementation of future OCIPs. The target date for 
completion of the OCIP review is July 31, 2000, and a report is 
expected in August 2000. We plan to issue this new policy sometime in 
the fall of 2000.

Question 7. You have stated that the Department has accepted all of the 
34 Task Force recommendations. What is the status of implementation? 
When can we expect all of the recommendations to be implemented?

Answer. Implementation of the recommendations is in progress. As can be 
seen from the following table, many of the recommendations are 
completed; several are expected to be completed upon acceptance of the 
Finance Plan Update, which was submitted to FHWA on June 16; and 
several are continuous in their implementation and are included in the 
formal Project Agreement, which was executed between the FHWA, the 
Massachusetts Executive Office of Transportation and Construction, the 
Massachusetts Highway Department, and the Massachusetts Turnpike 
Authority on June 22, 2000.
  Addressing the 34 Recommendations of the Federal Task Force on the 
                  Boston Central Artery/Tunnel Project
                 Review of Project Oversight and Costs
                         (Updated July 5, 2000)

_______________________________________________________________________

#1 Recommendation: The Division Office should make an annual, 
independent cost-to-complete estimate to be used as a primary source of 
information for decision making regarding the adequacy and 
acceptability of all future Finance Plans submitted for the Central 
Artery/Tunnel (CA/T) Project.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--Division Office will do cost to complete estimate for annual Finance 
    Plan Submission--October 2000.

Status
Completion awaiting Federal Highway Administration (FHWA) acceptance of 
    Finance Plan Update.
--Currently, FHWA staff are reviewing the June 16, 2000 re-submission 
    of the Finance Plan Update.

_______________________________________________________________________

#2 Recommendation: The process used by the Division Office staff in 
developing the independent cost estimate should be fully documented and 
refined with assistance from other elements of the FHWA. It should be 
published as a best practice for use in other mega-projects.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--MA Div. will document cost to complete estimate process used.

Status
Completion awaiting finalization of document by the MA Division Office.

_______________________________________________________________________

#3 Recommendation: The FHWA must establish monitoring practices and 
procedures for mega-projects.

Responsible Office: Infrastructure

Initiative(s) and Target Date(s)
--Develop monitoring practices and procedures.
--Develop finance plan guidance.

Status
Completed
--On April 11, 2000, issued the Major Project Team Concept Paper which 
    contains the monitoring practices and procedures.
--On May 23, 2000, issued Finance Plan Guidance.

_______________________________________________________________________

#4 Recommendation: The Division Office should expand the roles of 
current staff to include a review of the Finance Plan by the Financial 
Specialist and the Division Planning & Research Program manager. This 
will provide a technical analysis of the information presented in the 
Finance Plan, and provide additional assurances on the adequacy of data 
contained in the document.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--MA Div. will use Finance and Planning staffs to assist in review of 
    the annual Finance Plan Updates, including the one which was 
    delivered to the FHWA on June 16, 2000.

Status
Continuous--annually
--On June 16, 2000, Finance Plan Update received and MA Division Office 
    Finance Specialist and Planning Specialist assigned to assist with 
    the review.
--July 31, 2000 is target date established for FHWA to complete the 
    internal review of the Finance Plan Update.
_______________________________________________________________________

#5 Recommendation: The Task Force recommends that the FHWA determine 
that the Massachusetts Highway Department (MHD) and the Massachusetts 
Turnpike Authority (MTA) are ``high risk'' grantees as defined in 49 
CFR Section 18.12, with respect to the CA/T Project. As high risk 
grantees these agencies must provide more detailed financial and 
project management reports.

Responsible Office: Infrastructure and Administration

Initiative(s) and Target Date(s)
--Letter to MHD and MTA.

Status
Completed
--On June 15, 2000, issued letters to the MHD and the MTA designating 
    them as high risk grantees and outlining the terms of the 
    designation.

_______________________________________________________________________

#6 Recommendation: The U.S. Secretary of Transportation should request 
that the Governor of Massachusetts reevaluate the appropriateness of 
the MTA's continuing role in day-to-day management and control over the 
CA/T Project.

Responsible Office: Office of the Secretary

Initiative(s) and Target Date(s)
--Secretary makes request.

Status
Completed
--On April 11, 2000, Secretary met and discussed MTA role on CA/T 
    project management with the Governor. Following this meeting, the 
    Governor changed the MTA manager; MTA continues to manage the day-
    to-day activities of the CA/T Project.

_______________________________________________________________________

#7 Recommendation: It is recommended that the CA/T Project management 
take whatever steps are necessary to ensure that all requests from 
external monitoring agencies for information, records, or access to 
records are met in a responsive and timely fashion. A failure to 
provide this access should be considered a violation of 49 CFR Section 
18.42(e), which will impact the reimbursement and further availability 
of Federal funds.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--Meet with new Chairman and CA/T Staff to enlist their support for 
    much improved accessibility to records by oversight agencies.
--Continue monthly (no less frequently than bimonthly) audit 
    coordination meetings to follow-up on progress, quality of 
    information provided, and access issues.
--Include this item in the Project Agreement.

Status
Continuous--monthly
--On April 20, 2000, met with Chairman and received assurance that 
    availability of information to oversight agencies and the public 
    was one of his goals.
--Met with senior CA/T staff and received assurance that audit 
    coordination and follow-up actions were being reassigned from the 
    legal department to the Acting Assistant Project Director and a new 
    position is being established as the focal point for these 
    activities.
--Included as Item #3 in the Project Agreement executed on June 22, 
    2000, by Executive Office of Transportation and Construction 
    (EOTC), MHD, MTA, and FHWA.

_______________________________________________________________________

#8 Recommendation: Require B/PB to submit a certified letter to the 
Federal Highway Administrator describing their role in the management 
of the CA/T Project, including whether either company raised questions 
regarding escalating cost exposure and/or the decision to withhold 
material information from the FHWA.

Responsible Office: Infrastructure

Initiative(s) and Target Date(s)
--Letter to MTA with copy to B/PB.
--Certified letter to be received from B/PB.

Status
Completed
--On May 11, 2000, letter sent to MTA with copy to B/PB; requested that 
    B/BP submit the certified letter.
--On June 16, 2000, B/PB certified letter received--to be discussed at 
    the next quarterly meeting (tentatively scheduled for August 2000).

_______________________________________________________________________

#9 Recommendation: It is recommended that the FHWA Office of Chief 
Counsel review the circumstances surrounding the failure to disclose 
information concerning the potential $1.4 billion overrun and recommend 
whether to take action under 49 CFR Part 29--Governmentwide Debarment 
and Suspension (Nonprocurement) And Governmentwide Requirements For 
Drug-free Workplace (Grants).

Responsible Office: Chief Counsel

Initiative(s) and Target Date(s)
--Conduct a review of the circumstances.
--Recommend whether to take action under 49 CFR Part 29 by June 30, 
    2000.

Status
Completed
--Review completed.
--Recommendation is that no immediate action should be taken to pursue 
    Governmentwide Debarment and/or Suspension, since the purpose of 
    suspension and debarment is to protect the public interest and not 
    to punish. Implementation of the Task Force recommendations and the 
    changes in management should obviate the need to seek 
    Governmentwide Debarment and/or suspension of those who failed to 
    notify FHWA of significant cost increases.

_______________________________________________________________________

#10 Recommendation: The Division Office should continue its oversight 
and coordination efforts to ensure that the containment of costs and 
the mitigation of delays and conflicts remain a primary CA/T Project 
focus.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--Division Office to continue to provide its full oversight of the 
    project and aggressive cost containment initiatives.

Status
Continuous
--The Project's cost containment efforts are ongoing with FHWA 
    participating.
--The Projects Cost Recovery program is ongoing with FHWA 
    participating.
--The FHWA MA Division's Contract Change procedure requires a cost 
    evaluation of all proposed changes and this is ongoing.

_______________________________________________________________________

#11 Recommendation: The U.S. Secretary of Transportation should consult 
with the Governor of Massachusetts to seek changes in the State CA/T 
Project leadership consistent with the recently announced change in 
Federal CA/T Project leadership.

Responsible Office: Office of the Secretary

Initiative(s) and Target Date(s)
--Secretary consults with Governor and requests change.

Status
Completed
--On April 11, 2000, Secretary met with the Governor, who made the 
    management change.

_______________________________________________________________________

#12 Recommendation: Documentation of the Massachusetts Division 
Office's process for independent validation of CA/T Project costs 
should include a system for aggregation of cost and schedule related 
data routinely accumulated in the normal course of project oversight by 
FHWA CA/T staff.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--FHWA Area Engineers will, on a quarterly basis, review and update 
    project cost and schedule information. This information will be 
    used by FHWA managers to verify Project Management Monthly (PMM) 
    information presented by the CA/T Project.

Status
Continuous--quarterly
--PMM cost information reconciled with FHWA estimate.
--Schedules for major milestones for the I-90 and I-93 openings 
    discussed weekly between FHWA and CA/T.

_______________________________________________________________________

#13 Recommendation: The delegation of authority to accept annual 
Finance Plans for the CA/T Project should be withdrawn to FHWA 
Headquarters.

Responsible Office: Infrastructure

Initiative(s) and Target Date(s)
--Memorandum to division office.

Status
Completed
--On April 27, 2000, Headquarters memo sent to MA Division Office 
    withdrawing delegation of authority.
--On May 9, 2000, State notified that authority for acceptance of CA/T 
    Finance Plan Updates resides with FHWA Headquarters Office of 
    Infrastructure.
--On June 16, 2000, Finance Plan Update delivered to FHWA Headquarters 
    for acceptance.
_______________________________________________________________________
#14 Recommendation: The FHWA Division Office should obtain written 
assurance from the State that all data with respect to the independent 
audits of the CA/T Project (e.g., O'Brien Kreitzberg and Deloitte 
Touche) will be provided to the FHWA. The FHWA should independently and 
objectively review this and other external reviews of the Project (such 
as by the OIG, state auditors, etc.), and must not accept assurances 
provided by Project officials.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--Include item in Project Agreement.

Status
Completed
--On April 2000, meeting held with MTA staff to discuss how this would 
    be accomplished and timing of reviews of draft Finance Plan Updates 
    by planning groups and FHWA.
--Included as Item #4 in the Project Agreement executed on June 22, 
    2000, by EOTC, MHD, MTA, and FHWA.
_______________________________________________________________________
#15 Recommendation: CA/T Project should perform an annual bottom-up 
review for the remaining years of the CA/T Project, beginning with the 
last quarter of 2000. The results of these efforts should be 
incorporated into the PMM.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--PMM will be revised to include enhanced schedule and cost 
    information.
--CA/T project will conduct bottom to top review of cost to complete as 
    part of the annual Finance Plan Update.
--Beginning October 2000.
--Include item in Project Agreement.

Status
Continuous
--Requirement for annual total project forecast (bottom-up review) 
    included as Item #5 in the Project Agreement executed on June 22, 
    2000, by EOTC, MHD, MTA, and FHWA.
--A revised format of the PMM is being developed, evaluated, and 
    revised as it is used for the monthly PMM meetings. The FHWA and 
    CA/T continue to evaluate and discuss improvements and other 
    options for the PMM.
_______________________________________________________________________
#16 Recommendation: The data contained in the PMM should be modified to 
show potential project cost exposures identified in the separate 
document referred to as the Up/Down chart. The PMM or similar vehicle 
should include such items as: (1) anticipated cost exposures in design 
and/or construction activities; (2) projected labor rate increases; (3) 
anticipated petroleum price increases or decreases; (4) expected 
increases in operational costs such as insurance premiums, consultant 
support services, and materials: and (5) potential and settled claims.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--PMM will be revised to include enhanced schedule and cost 
    information.
--Include in Project Agreement.

Status
Continuous
--Requirement for PMM to show potential cost exposures included as Item 
    #6 in the Project Agreement executed on June 22, 2000, by EOTC, 
    MHD, MTA, and FHWA.
--A revised format of the PMM is being developed, evaluated, and 
    revised as it is used for the monthly PMM meetings. The FHWA and 
    CA/T continue to evaluate and discuss improvements and other 
    options for the PMM.

_______________________________________________________________________

#17 Recommendation: The Significant Schedule Trends Report shows 
possible delays to all six remaining key milestones. The PMM should 
indicate why the projected delays have occurred and what measures are 
being considered by MTA management to remedy this deficiency.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--PMM will be revised to include enhanced schedule and cost 
    information.
--Include in Project Agreement.

Status
Continuous
--June 22, 2000, requirement to document projected delays, identify 
    causes of delays, and provide measures under consideration to 
    remedy delays is included as Item #7 in the Project Agreement 
    executed by EOTC, MHD, MTA, and FHWA.
--A revised format of the PMM is being developed, evaluated, and 
    revised as it is used for the monthly PMM meetings. The FHWA and 
    CA/T continue to evaluate and discuss improvements and other 
    options for the PMM.

_______________________________________________________________________

#18 Recommendation: The Finance Plan should be based on more realistic 
cost and revenue scenarios, and include contingency plans to cover 
potential revenue shortfalls or cost overruns. Inclusion of contingency 
plans will minimize the surprises inherent in an overly optimistic 
forecast scenario and provide for an earlier discussion of how 
potential circumstances would be addressed.

Responsible Office: Program Administration

Initiative(s) and Target Date(s)
--develop finance plan guidance.

Status
Completed
--On May 23, 2000, issued Finance Plan Guidance.

_______________________________________________________________________

#19 Recommendation: The Finance Plan, since it is a picture of the 
funding revenues and outlays for a project, should include all costs 
associated with the project, regardless of the source of funding. Since 
this project does not recognize costs borne by the State, such as 
personnel expenses for MTA employees, the total CA/T Project cost 
figures are inherently low. A more realistic picture would include such 
costs, since they are directly attributable to the CA/T Project, 
although they would not be included in a budget for the B/PB joint 
venture.

Responsible Office: Program Administration

Initiative(s) and Target Date(s)
--For CA/T Project, review Finance Plan update--June 2000.
--Develop finance plan guidance for all mega projects.

Status
Completion awaiting FHWA acceptance of the Finance Plan Update
--On June 16, 2000, FHWA received the Finance Plan update.
--On May 23, 2000, issued Finance Plan Guidance.

_______________________________________________________________________

#20 Recommendation: By showing post-construction funding as lump-sum 
amounts, the annual budget and cash flow needs through the conclusion 
of the project financing are not clear. For example, funds needed for 
the GANs repayments and the conversion of advance construction should 
be shown annually.

Responsible Office: Program Administration

Initiative(s) and Target Date(s)
--Include the requirement in the Finance Plan Update comment letter.
--Include chart in Finance Plan Update.

Status
Completion awaiting FHWA acceptance of the Finance Plan Update
--On May 8, 2000, Finance Plan Update comment letter issued; contains 
    the requirement for inclusion of a schedule in the Finance Plan 
    Update detailing the time frame for use of OA beyond 2003.
--June 16, 2000, Finance Plan Update contains out year obligations for 
    conversion of AC.
--Items #1 and #2 of the Project Agreement executed on June 22, 2000, 
    by EOTC, MHD, MTA, and FHWA, limits OA to $8.549 billion, including 
    AC conversions.

_______________________________________________________________________

#21 Recommendation: Although the financing requirements are intended to 
accurately depict the future needs of the CA/T Project, it is 
recommended that future Finance Plans include a short discussion of 
past costs and the impact these have had on the initial assumptions. 
This permits the reader to gain a full understanding of the finances 
for the Project, past, present, and future.

Responsible Office: Program Administration

Initiative(s) and Target Date(s)
--The Finance Plan Updates will provide total cost information.

Status
Continuous--for CA/T Project, with acceptance of annual Finance Plan 
    Updates
--May 8, 2000, Finance Plan Update comment letter issued and contains 
    the requirement for inclusion of all project costs in the Finance 
    Plan Update.
--June 16, 2000, Finance Plan Update contains total cost-to-go 
    information.
--Items #1 and #2 of the Project Agreement executed on June 22, 2000, 
    by EOTC, MHD, MTA, and FHWA limit OA to $8.549 billion, including 
    AC conversions.

_______________________________________________________________________

#22 Recommendation: The Federal Highway Administrator should require 
the MHD to reach agreement with local officials on the terms of a 
balanced statewide program. By making the agreement a formal condition 
of STIP approval, the FHWA and the FTA would have a means of ensuring 
the commitment is satisfied.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--Require MHD to take the lead in developing a consensus definition of 
    the $400 million Statewide Program.
--Include in Project Agreement.

Status
Underway
--On April 28, May 8, etc.; MHD planning department held meetings with 
    transportation planning agencies and industry representatives to 
    develop this definition.
--A consensus Memorandum of Understanding (MOU) has been agreed to by 
    representatives of the transportation planning agencies and the 
    State.
Execution of this MOU by the Massachusetts Executive Office of 
    Transportation and Construction, the MHD, and Regional Planning 
    Associations as a condition of STIP approval is included as Item #8 
    in the Project Agreement executed on June 22, 2000, by EOTC, MHD, 
    MTA, and FHWA.

_______________________________________________________________________

#23 Recommendation: The Finance Plan contains potential project offsets 
that have been determined to be outside the scope of the CA/T Project. 
These include the OCIP credits, air space leases, and the sale of the 
CA/T Project management building. While post-construction credits and 
revenues may be included in cash flow models, the Task Force recommends 
that they not be allowed as offsets to reduce the cost of the CA/T 
Project.

Responsible Office: Program Administration

Initiative(s) and Target Date(s)
--Meet with new MTA Chairman on use of credits.
--Include issue in Finance Plan Update comment letter.

Status
Continuous--annually with the FHWA acceptance of Finance Plan Updates
--MTA Chairman assured FHWA that credits would not be shown in finance 
    plan documents unless funds were available to be used to support 
    cash flow needs.
--Finance Plan Update comment letter issued May 8, 2000; contains this 
    issue.
--The Finance Plan Update received June 16, 2000, does not include 
    these credits.

_______________________________________________________________________

#24 Recommendation: The FHWA should require the CA/T Project management 
to obtain an independent certification as to the accuracy of the 
information contained in the Finance Plan. This certification would 
accompany the Plan upon submission to FHWA for review and acceptance.

Responsible Office: Program Administration

Initiative(s) and Target Date(s)
--Require the independent certification.

Status
Continuous--annually for the FHWA acceptance of Finance Plan Updates
--October 2000 Finance Plan Update will contain the results of the 
    ongoing independent valuation of costs and schedules being 
    performed by the State's consultant; consultant's work is currently 
    scheduled for completion in July 2000.

_______________________________________________________________________

#25 Recommendation: The FHWA should retain the services of an 
independent contractor to conduct a review of the OCIP and the risks 
associated with the CA/T Project, and to assist the FHWA in the 
development of National policy on OCIPs.

Responsible Office: Program Administration

Initiative(s) and Target Date(s)
--Retain contractor by May 1, 2000.
--Develop and issue national policy on OCIP's by Fall, 2000.

Status
Underway
--On May 3, 2000, contractor (Aon) selected and brought on board.
--August 2000 is the target for FHWA's contractor, Aon, to complete a 
    review of the insurance records and interviews of principals, and 
    to prepare a report to assist FHWA in defining the insurance needs 
    for the CA/T project and future projects.

_______________________________________________________________________

#26 Recommendation: The CA/T Project figures for extra construction 
costs are optimistically low. The bid discount rate of 13 percent and 
PCA rates of 7 percent to 10 percent should be changed to properly 
reflect recent trends. If this is done, the likely cost of the 
remaining construction work will be estimated at $300 million to $480 
million higher than reflected in the bottom-up CA/T Project estimate. A 
more realistic estimate would be $1.7 to $1.88 billion in potential 
project cost overruns. This increases the potential total project cost 
to the range of $13.4 to $13.6 billion. (The $13.4 billion figure is 
the total of the $10.8 billion pursuant to the C/SU Rev. 6 estimate, 
plus $900 million in allowable credits, plus the $1.7 billion project 
overrun). In addition, if inflation rates rise, as is the present 
trend, the estimate should be further adjusted to reflect this trend. 
Finally, further adjustments should be anticipated for litigation, 
vulnerability, environmental contingencies, and other unforeseen events 
likely in a project of this magnitude.

Responsible Office: Program Administration

Initiative(s) and Target Date(s)
--Include issue in comments letter on the Finance Plan Update.

Status
Continuous--annually for the FHWA acceptance of the Finance Plan Update
--Finance Plan Update comment letter of May 8, 2000, included this 
    issue.
--After FHWA and MTA reconciled the variances in the project cost 
    estimates, the Finance Plan Update received on June 16, 2000, used 
    basically the figures from the high end of the FHWA estimate range.
--Potential forecast and variance requirements are addressed by Item 
    #10 and Item #11 of the Project Agreement executed on June 22, 
    2000, by EOTC, MHD, MTA, and FHWA.

_______________________________________________________________________

#27 Recommendation: The Finance Plan should include revenue sources 
that are likely to be available to the CA/T Project. If a revenue 
source requires legislation, legislative support needs to be 
demonstrated. If the revenue is to be provided by another State agency, 
agreement or concurrence from that agency needs to be obtained.

Responsible Office: Program Administration

Initiative(s) and Target Date(s)
--Include issue in Comments letter on the Finance Plan Update.

Status
Continuous--annually for the FHWA acceptance of the Finance Plan Update
--Finance Plan Update comment letter of May 8, 2000, included this 
    issue.
--On May 17, 2000, Governor signed the legislation. (Approximately $1.9 
    billion for CA/T and $500 million for the Statewide Program).

_______________________________________________________________________

#28 Recommendation: Another option, pending legislative action on the 
above proposals, is for the State to commit its general fund to the CA/
T Project. The general funds would serve as surety until other funding 
sources are established. State officials advised the Task Force that 
funds may be available for budget surpluses or other reserve funds.

Responsible Office: Program Administration

Initiative(s) and Target Date(s)
--Include issue in Comments letter on the Finance Plan Update.

Status
Continuous
--Finance Plan Update comment letter of May 8, 2000, included this 
    issue.
--On May 17, 2000, Governor signed the legislation. (Approximately $1.9 
    billion for CA/T and $500 million for the Statewide Program.)

_______________________________________________________________________

#29 Recommendation: The PF (Potential Forecast) for all project 
elements should be a best estimate of the completion cost.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--Include the requirement for best estimate in the Project Agreement.

Status
Continuous
--The requirement for a best estimate of completion cost is included in 
    Item #10 of the Project Agreement executed on June 22, 2000, by 
    EOTC, MHD, MTA, and FHWA.

_______________________________________________________________________

#30 Recommendation: The PF should be maintained on a current basis for 
all project elements.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--Include the requirement to maintain on a current basis in the Project 
    Agreement.

Status
Continuous
--The requirement for maintaining the potential forecast on a current 
    basis is included in Item #10 of the Project Agreement executed on 
    June 22, 2000, by EOTC, MHD, MTA, and FHWA.

_______________________________________________________________________

#31 Recommendation: The PF total for all project elements should not be 
constrained by MTA policy directives.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--Include the requirement for no constraint by MTA policy in the 
    Project Agreement.

Status
Continuous
--The requirement for unconstrained potential forecast is included in 
    the Project Agreement executed on June 22, 2000, by EOTC, MHD, MTA, 
    and FHWA.

_______________________________________________________________________

#32 Recommendation: On a quarterly basis, an overall CA/T Project 
Budget vs Potential Forecast Variance Report should be furnished to the 
FHWA. This report would contain an explanation of all significant 
variances, by project element, segregated into the following 
categories:
 The components of the reported variances that are deemed to be 
    firm to the point of requiring a corresponding revision to the 
    budget of the affected project element. These kinds of changes 
    include, but are not limited to, the value of actual contract 
    awards (or executed change orders), approved scope changes to be 
    incorporated during design, and expected settlement amounts for 
    asserted differing site condition claims.
 The components of the reported variances that are deemed by 
    the CA/T Project management to be subject to further adjustment by 
    future management corrective action, or other alternative remedies.
 The components of the reported variances that are deemed by 
    the CA/T Project management as being speculative in nature. These 
    include reported potential forecast variances that are difficult to 
    quantify and price but which could have a positive or adhere effect 
    on the future cost of the program.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--Include the requirement for report in the Project Agreement.

Status
Continuous--on a semi-annual basis
--The requirement for a semi-annual report is included in Item #11 of 
    the Project Agreement executed on June 22, 2000, by EOTC, MHD, MTA, 
    and FHWA.

_______________________________________________________________________

#33 Recommendation: CA/T Project management and the Division Office 
should continue with the cost containment initiatives to achieve the 
greatest savings by:

 A pro-active and aggressive change negotiation and claims 
    defense;

 Rigorous controls to prevent scope change for remaining 
    construction work;

 The encouragement of VECPs to simplify construction logistics 
    and staging on construction contracts;

 Limiting changes in scope and minimizing scope transfers 
    between projects; and

 Adding a construction contract clause for price adjustment for 
    fuel prices to the remaining construction contracts.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--Division Office to continue aggressive cost containment initiatives.

Status
Continuous
--The Project's cost containment efforts are ongoing with FHWA 
    participating.
--The Project's Cost Recovery program is ongoing with FHWA 
    participating.
--The FHWA MA Division's Contract Change procedure requires a cost 
    evaluation of all proposed changes and this is ongoing.

_______________________________________________________________________

#34 Recommendation: The Task Force recommends the FHWA and MHD enter 
into an agreement to formalize recommendations contained in this report 
which are relevant to the working relationship between the parties.

Responsible Office: Massachusetts Division

Initiative(s) and Target Date(s)
--Project Agreement between MHD, MTA, FHWA--June 2000.

Status
Completed/Continuous
--Project Agreement executed by EOTC, MHD, MTA, and FHWA on June 22, 
    2000: formalizes recommendations of Federal Task Force Report 
    relevant to the working relationship between the parties and limits 
    OA for the CA/T Project to $8.549 billion, including AC 
    conversions.

_______________________________________________________________________


Question 8. A very troubling article was recently reported about the 
project's purchase of a parking lot for disposing dirt during 
construction. But the parking lot was never even used by the project 
and was ultimately returned to the original owner--at a cost of some 
$50 million. Has the Department considered taking action to ensure any 
misspent and wasted funding is not borne by the taxpayers but instead 
is the obligation of the State and the program managers?

Answer. The article referenced in your question incorrectly implied a 
payment of $50 million for property alleged to not have been used for 
the Central Artery project. Contrary to the report in the newspaper, 
the referenced property settlement did not result in a $50 million 
payment for a single property unused for project purposes. Instead, a 
global settlement was negotiated by the Massachusetts Attorney 
General's Office that settled legal claims and eliminated substantial 
exposure associated with over 1 million square feet of land takings 
from several parcels and used by a variety of projects including the 
MHD Northern Avenue Project, the Central Artery project, and the MBTA 
Silver Line Transitway Project.
    The parcel in question consisted of approximately 290 thousand 
square feet. A long-term temporary easement was acquired over the 
parcel in December, 1991. To satisfy Federal regulations, the 
acquisition needed to be completed in advance of advertising the 
contract, which included use of the parcel as a site for materials 
processing. Bids on the contract suggested that use of the parcel as 
originally contemplated would have resulted in significant project 
costs. To minimize such costs, the project identified other means of 
addressing materials disposal and used this parcel for several other 
project purposes, all of which resulted in project savings.
    Preventing waste and misspending of Federal funds is always of 
paramount importance to the Department of Transportation and its modal 
administrations. As stewards of Federal funds, we take very seriously 
our responsibility to ensure that taxpayer dollars are being invested 
in the best and most efficient manner, in accordance with Federal 
statutes. We will fulfill our oversight responsibility on the Central 
Artery project and all other projects subject to the jurisdiction of 
the Department.

Question 9. I would like to briefly turn to a different issue, but one 
that is also very important to this Committee. I have heard that you 
are considering moving Administrator Hart from his current position at 
the Maritime Administration, either permanently or temporary, to a post 
at the new Federal Motor Carrier Safety Administration. You already 
know my strong concern over the need for leadership to oversee motor 
carrier safety, which is essentially why the new agency was created. 
However, concerns have been expressed that such a move would leave the 
Maritime Administration without a full time administrator at a critical 
time.

          A) I am very interested in knowing how you intend to proceed 
        to ensure that both the Maritime Administration and the Federal 
        Motor Carrier Safety Administration have the leadership they 
        need to fulfill their many important duties? Can you share your 
        thoughts on this with the Committee?

Answer. I am aware of your firm commitment to having the best possible 
leadership at the new Federal Motor Carrier Safety Administration 
(FMCSA), and I am equally committed to making the best possible choice 
of FMCSA Administrator. I also agree that the critical challenges 
facing the maritime sector demand continued high-quality leadership for 
the Maritime Administration (MARAD).
    My recent appointment of Maritime Administrator Clyde Hart to be 
Acting Deputy Administrator of the FMCSA on a temporary basis is 
intended to provide the agency with high-quality, knowledgeable and 
seasoned leadership by a Presidential appointee while the selection 
process for FMCSA Administrator proceeds. I am confident that we will 
identify a nominee for Administrator with the full set of credentials 
needed for this critical motor carrier safety post. Administrator 
Hart's extensive experience in regulation of the motor carrier industry 
will be particularly valuable in the interim to get this new 
Administration underway.
    Deputy Administrator John Graykowski has already led MARAD once in 
the past and I am pleased that we had the option to call upon him 
again. The Deputy Administrator has demonstrated his complete 
commitment to managing MARAD in carrying out its many important duties.
                   central artery/ted williams tunnel
                     project partnership agreement
    This agreement is entered into by and between the Federal Highway 
Administration (``FHWA''), the Commonwealth of Massachusetts 
(``Commonwealth'') acting by and through the Executive Office of 
Transportation and Construction (``EOTC'') and the Massachusetts 
Highway Department (``MHD''), and the Massachusetts Turnpike Authority 
(``MTA'').
    WHEREAS, pursuant to Massachusetts General Laws Chapters 16 and 
81A, MHD and MTA, effective July 1, 1997, entered into the Central 
Artery/Ted Williams Tunnel Project Management Agreement, under which, 
among other things, MTA agreed to assume management of the Central 
Artery/Ted Williams Tunnel Project (``CA/T Project'') on behalf of MHD, 
and
    WHEREAS, MTA is responsible for management and supervision of the 
CA/T Project and is currently using an Integrated Project Organization 
(``IPO'') through the engineering and management services of the joint 
venture of Bechtel Corporation and Parsons Brinkerhoff, Quade, and 
Douglas, Inc. (``B/PB'') and,
    WHEREAS, MHD, acting through EOTC, is the recipient of Federal 
Highway Funds for the Commonwealth, and as such, oversees the 
obligation and distribution of federal funds to the CA/T Project, and 
performs audit functions consistent with said funding and,
    WHEREAS, B/PB reports to and receives direction and supervision 
from the Commonwealth acting through MTA and in turn B/PB implements 
that direction throughout designated phases of the CA/T Project and,
    WHEREAS, FHWA seeks to clarify its oversight role in implementing 
the CA/T Project and to establish new reporting and verification 
procedures necessary to ensure the Commonwealth's accurate and full 
financial disclosures regarding the CA/T Project and,
    WHEREAS, this agreement will be deemed to supplement the existing 
MHD/FHWA Massachusetts Division Office Project Oversight Agreement as 
it relates to the CA/T Project,
    NOW IT IS THEREFORE AGREED, by and between the parties to this 
agreement:
Funding
    1. Notwithstanding the Commonwealth's use of advance construction 
(``AC'') authority the maximum level of Federal-aid highway obligation 
authority (``OA'') and funding available for the CA/T Project shall not 
exceed $8.549 billion.
    2. In recognition of the CA/T Project's funding levels previously 
established in accepted finance plans and updates, and the 
Commonwealth's commitment to provide funds necessary to cover the 
recently disclosed cost increases, the maximum amount of new net 
advance construction authorizations on the CA/T Project shall not 
exceed $222 million. This will provide an AC balance to improve cash 
flow management and allow the CA/T Project to recover funds resulting 
from underuns on existing contracts. In no case shall AC conversions 
for the CA/T Project be allowed which bring the OA total above the 
$8.549 billion dollar cap.
Responsibilities
    3. To the extent allowable by law, all state and private entities 
associated with the CA/T Project shall provide any and all information 
and records to external monitoring agencies and shall provide timely 
access to records and persons employed on the CA/T Project. MHD and MTA 
shall be held accountable for compliance with this provision and a 
failure to provide timely and full access may be considered a violation 
of 49 CFR 18.42(e) with potential imposition of sanctions including but 
not limited to withdrawal of reimbursement and further availability of 
federal-aid funding. MHD will support the MTA's efforts to provide 
timely and full access of records.
    4. The MHD, MTA and Massachusetts's Executive Office for 
Administration and Finance (A&F) shall provide to the FHWA all data 
with respect to independent audits of the CA/T Project including but 
not limited to O'Brien Kreitzberg and Deloitte Touche audits, and 
failure to provide such data will similarly be viewed as a potential 
violation of the regulations subject to potential imposition of 
sanctions. The FHWA will independently review these audits as well as 
those performed by other entities and coordinate needed action with 
appropriate parties.
    5. The CA/T Project shall perform a total project forecast for the 
remaining years, in conjunction with the annual finance plan, beginning 
with the October 1, 2000 submission. The results of these reviews will 
be included in the project monthly management report (``PMM'') and the 
annual finance plan updates.
    6. The CA/T Project shall assure that the data contained in the PMM 
is modified to show potential cost exposures. The PMM shall also 
include such items as:

          a. anticipated cost exposures in design and/or construction 
        activities

          b. projected labor rate increase

          c. anticipated petroleum price increases or decreases

          d. expected increases in operational costs such as insurance 
        premiums, consultant support services, and materials, and

          e. estimated and settled Right of Way (ROW) and construction 
        claims.

    7. The CA/T Project shall document projected delays to schedule 
milestones, identify the causes for these delays, and provide measures 
under consideration to remedy these delays. This information shall be 
provided on a timely basis and in a manner enabling FHWA to comment on 
these matters and coordinate in an appropriate way.
    8. EOTC and MHD shall reach agreement in principle with the MARPA 
respecting the terms of a balanced statewide program. The meeting of 
this balanced statewide program, and concurrence of MARPA, will be a 
formal condition for granting STIP approval.
    9. The Secretary of EOTC and the Commissioner of MHD shall certify 
that each CA/T Project finance plan and update is consistent with the 
balanced statewide program and the approved STIP. This certification 
shall be required as a condition of FHWA's acceptance of the finance 
plan and updates.
    10. The CA/T Project shall ensure that the potential forecast for 
all CA/T Project elements be a best estimate of the completion cost, be 
maintained on a current basis for all CA/T Project elements, and be 
accurate and complete and unconstrained by policy directives regarding 
costs of the CA/T Project.
    11. The CA/T Project shall submit an overall Budget vs. Potential 
Forecast Variance Report on a semiannual basis to the FHWA beginning 
October 1, 2000 . This report shall contain an explanation of any and 
all variances, by CA/T Project element, segregated into the following 
categories:

          a. the components of the reported variances that are deemed 
        to be firm to the point of requiring a corresponding revision 
        to the budget of the affected CA/T Project element. These 
        include but are not limited to, the value of actual contract 
        awards (or executed change orders), approved scope changes to 
        be incorporated during design, and expected settlement amounts 
        for asserted construction claims.

          b. the components of the reported variances that are deemed 
        by the CA/T Project management to be subject to further 
        adjustment by future management corrective action, or other 
        alternative remedies.

          c. the components of the reported variances that are deemed 
        as being speculative in nature. These include speculative 
        forecast variances that are difficult to quantify and price but 
        which could have a positive or adverse effect on the future 
        cost of the CA/T Project and/or the statewide program.

    The FHWA, the EOTC, MHD and the MTA have caused this Agreement to 
be executed by their authorized officers as a sealed instrument 
effective as of June 27, 2000.
                                 ______
                                 
      Response to Written Questions Submitted by Hon. John McCain 
                            to Matthew Wiley
Question 1. In describing the Joint Venture, your testimony mentioned 
your role in ``cost and schedule monitor[ing] and monitoring and 
reporting on all project cost[s].''

          a) What authority and/or responsibility does the Joint 
        Venture have concerning the cost of this project?

Answer. B/PB is generally responsible for the program management on the 
CA/T project, including cost/schedule controls, planning and monitoring 
of costs. In this role, B/PB has been subject to the overriding control 
and supervision of the MHD, and now the MTA, to establish policy, 
provide general direction and guidance, oversee B/PB's performance as 
the management consultant, and make all major decisions, including 
decisions affecting the overall cost of the project.

          b) Did the Joint Venture receive any direction from State or 
        federal officials to restrain costs on this project?

Answer. Yes. The MHD, and subsequently the MTA, decided what particular 
scope elements to pursue, what cost-saving avenues to follow, and what 
budget assumptions should be used in overseeing work on the project. 
Both MTA and B/PB constantly emphasized the importance of containing 
costs and conceiving cost containment initiatives while not 
compromising the project's success, both in terms of the scope of work, 
quality, and schedule. Since 1986, B/PB has proposed and MHD/MTA 
accepted and approved over 1 billion dollars in cost containment 
initiatives.

Question 2. Your testimony highlights the Joint Venture's role in the 
awarding of contracts. Last October, the DOT-IG found that contract 
award amounts were exceeding budget by more than 24 percent--one of 
many findings rejected by FHWA and project managers. Upon further 
investigation, the IG found the latest contract awards to exceed budget 
by 38 percent.

          a) From your perspective, please explain how and why the 
        contracts are over budget by such large amounts? Does the 
        management team have any concerns over these contract cost 
        overruns?

Answer. The CA/T project has been divided into approximately 117 
separate construction packages. For each of these packages, the MHD 
enters into a fixed price contract with a construction contractor. The 
differences noted by the DOT-IG between (a) contract budget amounts and 
(b) the actual contract award amounts for various construction 
contracts are derived from the comparison between the actual award 
amount and the amount that had been included (or budgeted) in the last 
comprehensive budget estimate, issued in 1995, known as Revision 6 or 
``Rev. 6,'' for each of those contracts. It is important to emphasize 
that the Rev. 6 Budget assumptions, which were very aggressive--
including the amounts budgeted for construction contract--were 
developed in 1994 and early 1995 when the CA/T project design overall 
was only 50 percent complete and significant scope decisions had yet to 
be made by MHD/MTA, and the latest contracts which were the focus of 
the DOT-IG Report were in the very early stage of design. Scope details 
traditionally evolve during the course of the final design. For 
example, the Rev. 6 budget assumed the existing Dewey Square Tunnel was 
to be essentially reused with minimal rebuilding. For operational 
reasons, a decision was subsequently made by MTA to significantly 
rebuild the tunnel, which increased the cost by $100 million.
    As another example, from 1991 through 1994 the low bid was about 13 
percent below the engineer's estimate. This experience was the basis 
for the Rev. 6 budget assumption. In 1997, there was a tremendous 
volume of construction awards (greater than $2.5B), and the low bid was 
on average only 2 percent below the engineer's estimate. These market 
conditions, both regionally and nationally, which had a particular 
impact on the construction costs, were beyond the control of B/PB and 
the project and resulted in an increase of over $300M. B/PB regularly 
updated and revised its estimates of construction costs for the ``to be 
awarded'' construction contracts based upon the latest design and 
pricing parameters. These revised estimates were not reflected in the 
project budget as a definite budget variance until bids were received 
and the contractors received notices to proceed. It should be noted, 
however, that estimate variations were identified as potential 
exposures in the Project Management Monthly (``PMM'').
    B/PB is certainly concerned about the increase in the cost of the 
project. The project has tried to manage costs aggressively. Even 
though the scope and costs changed during the design process, the 
project continually and diligently worked to keep the estimated cost 
close to the budget through such things as cost reduction initiatives, 
peer reviews and value engineering. As soon as the contract was 
awarded, any budget variance between the low bid and the contract 
budget would be recognized. At the same time, the project would try to 
find cost offsets so that there would be no impact on the overall 
budget.

          b) To your knowledge, have Joint Venture management or the 
        Massachusetts Turnpike Authority taken action to ensure future 
        project budget estimates are more accurate and that contract 
        awards remain on budget?

Answer. As noted previously, the differences between the actual 
contract award amounts and the amounts budgeted in Rev. 6 are not due 
to inaccuracies or other deficiencies in B/PB's cost estimating. Nor 
are they due to any failure of B/PB to update or revise its estimates.
    In March 2000, the MTA committed to annually undertake 
comprehensive or bottoms-up budgetary assessments, including reviews 
for contracts to be awarded. This approach should minimize disparities 
between the budgeted and the actual amounts of the contract awards, as 
well as provide an accurate assessment of the potential total project 
cost.
    In addition, the PMM report includes all cost exposures, both 
definitive and speculative. This facilitates early management action on 
all potential issues and enhances communications with the many project 
individuals and organizations having an interest in these matters. B/PB 
will continuously identify potential budget variations and will 
continue to provide recommendations on minimizing project cost 
exposures. Furthermore, the project has several layers of reviews and 
approvals in connection with contract change orders, including reviews 
by the project legal department, the FHWA and others. We are confident 
that all of these measures will provide a more accurate ongoing 
assessment.

Question 3. Your testimony states that construction management 
comprises the bulk of B/PB's current responsibilities. In February, the 
DOT IG found that construction costs increased by $827 million because 
of such factors as:

   construction contracts were awarded for more than budgeted 
        amounts;

   modifications to work requirements during performance of 
        contract work;

   increases in the allowance included in the budget for 
        potential claims and changes to a construction contract after 
        award;

   variations in police detail costs; and

   variations in material costs.

The IG's findings are disturbing to say the least.

          a) As the venture that controls the day-to-day operations of 
        the project, why did you fail to reveal the cost hikes?

Answer. In responding to this question, we think it would be helpful to 
provide some further background concerning B/PB's management consultant 
role on the CA/T project. B/PB provides (and has provided) management 
consultant services under a series of contracts with MHD and, since 
1997, has provided those services under the management and direction of 
MTA. B/PB's services are almost all consulting in nature and include 
design management, construction management and schedule monitoring and 
reporting. B/PB has responsibility for project controls, which includes 
monitoring individual contractor costs and schedules, construction 
sequence planning and monitoring, and reporting on the overall project 
cost and schedule. B/PB also prepares total cost and schedule budget 
revisions as requested by MTA.
    B/PB's contractual obligations do not include any responsibility--
directly or by subcontract (except for minor remediation work as 
directed by the MTA)--for direct construction of any portion of the CA/
T project. Construction of the CA/T project is undertaken through 
numerous construction contracts that are competitively bid and awarded 
on a fixed price basis by MHD. Although B/PB provides assistance to 
MHD/MTA in evaluating contractor bids, the contracts are executed 
between MHD and the construction contractors. The construction 
contracts contain certain statutorily-mandated provisions, such as so-
called differing site condition clauses, that allow for an equitable 
adjustment (time and cost) to the fixed price amount if a contractor 
encounters materially different conditions from those initially 
anticipated.
    In our opinion, B/PB has effectively managed the design and 
construction process with regard to all cost variables within our 
contractual scope and ability to control. B/PB takes great pride in the 
accomplishments on this project by ourselves, MTA, and the FHWA to 
control total project cost. Often the project costs are driven by 
issues beyond the control of the project including unknown underground 
conditions, project scope changes as a result of the numerous external 
influences affecting a project being built in an urban area, mitigation 
requirements in order to keep the traffic moving and the abutters 
sleeping, and the sheer political climate of Boston, all of which 
affect project cost and are beyond the control of B/PB.
    In direct response to this question, B/PB did not fail to reveal 
increases in costs. Under the successive work programs, B/PB regularly 
provided the MHD/MTA and FHWA with information about costs of the CA/T 
project.

          b) What funding or cost reductions has the Joint Venture 
        proposed to offset future cost increases?

Answer. B/PB has continually worked on ways to offset the cost 
increases on the project. Since 1995, there have been over $300M of 
these initiatives approved by MTA. B/PB continues to work with MTA to 
develop other avenues for potential cost reductions. In the fall of 
1999, these included: targeting for even lower casualty losses, 
exploring revenue opportunities such as the potential sale of the MTA 
building, refining the project scope and construction sequences, and 
capitalizing on schedule improvement initiatives.

          c) Do you agree with the findings contained in the IG's 
        February 10, 2000 audit on the current costs and funding of the 
        Central Artery/Ted Williams Tunnel Project? If so, what 
        findings do you specifically endorse and what findings do you 
        specifically dispute?

Answer. We agree with the IG's findings that the costs of the project 
are increasing. We are continuing our review and examination of the 
current costs and funding for the project and these matters are very 
much under active consideration.
    B/PB is in the process of refining the 1999 bottoms-up review of 
the total cost of the project based on input from independent 
evaluations, and upon conclusion of that process, will be in a better 
position to predict the final costs through project completion. B/PB 
will provide the results of this review to MTA, which will use this 
information in projecting the overall cost as well as ongoing cash flow 
needs.
    We would note that Massachusetts has recently enacted legislation 
that should provide adequate funding resources, including 
contingencies, to cover the anticipated cost increases. B/PB will of 
course continue to work with MTA to find other ways to reduce costs on 
the project while not compromising its overall quality and success.

                                
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