[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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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).
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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.