Mass Transit: Review of the South Boston Piers Transitway Finance Plan
(Correspondence, 11/09/2000, GAO/GAO-01-174R).
This report focuses on GAO's review of the South Boston Piers Transitway
Finance Plan. The Massachusetts Bay Transportation Authority (MBTA) is
building a 1.5 mile underground transitway to connect its existing
transit system with the South Boston Piers area, which is undergoing
significant economic development. The project is experiencing cost
increases and schedule delays, which have led to concerns over funding.
GAO notes that although MBTA has shown that it has the financial
capacity to complete the project, it has not yet clearly demonstrated to
the Federal Transit Administration's financial management oversight
contractor that funding the transitway project will not impair its
ability to operate and maintain its overall transit system.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GAO-01-174R
TITLE: Mass Transit: Review of the South Boston Piers Transitway
Finance Plan
DATE: 11/09/2000
SUBJECT: Mass transit operations
Subway construction
Construction costs
Financial management
Cost overruns
Schedule slippages
IDENTIFIER: South Boston Piers Transitway Project (Boston, MA)
Central Artery/Tunnel Project (Boston, MA)
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GAO-01-174R
South Boston Piers Finance Plan United States General
Accounting Office
Washington, DC 20548
November 9, 2000 The Honorable Richard C. Shelby Chairman The Honorable
Frank Lautenberg Ranking Minority Member Subcommittee on Transportation
Committee on Appropriations United States Senate
The Honorable Frank R. Wolf Chairman The Honorable Martin Sabo Ranking
Minority Member Subcommittee on Transportation and Related Agencies
Committee on Appropriations House of Representatives
Subject: Mass Transit: Review of the South Boston Piers Transitway Finance
Plan The Massachusetts Bay Transportation Authority (MBTA) is constructing a
1.5- mile underground transitway to connect its existing transit system with
the South Boston Piers area, which is undergoing significant economic
development. The South Boston Piers Transitway project is to be built in two
phases. The first phase is a 1mile, three- station bus tunnel between South
Station and Boston's World Trade Center. In November 1994, the Federal
Transit Administration (FTA) entered into a full funding grant agreement
with MBTA, 1 under which the federal government would provide $331 million
(80 percent) of the projected $413 million total cost for the project's
first phase, which was to be completed in December 2000. To date, MBTA has
received almost $242 million of that amount. However, this phase has
experienced significant cost increases and schedule delays; currently, the
project is 3 years behind schedule and its estimated total cost has risen to
$601 million.
Concern over the project's increased cost led to a provision in the
conference report accompanying the Department of Transportation and Related
Agencies Appropriations Act for fiscal year 2000 that made the funds for the
project contingent on MBTA's completion of a finance plan. This plan was to
set forth the full cost of completing the project and MBTA's strategy for
paying this cost, among other things.
1 The Federal Transit Administration's New Starts program provides funds for
new transit systems and extensions to existing systems. Full funding grant
agreements set the terms and conditions for federal participation in these
projects.
GAO- 01- 174R South Boston Piers Finance Plan 2 The report also directed GAO
and the Department of Transportation's Inspector
General to conduct independent analyses of the plan and report to the House
and Senate Committees on Appropriations. 2 Accordingly, this report provides
information on (1) the financing of the project, (2) the remaining risks to
the project's cost and schedule, and (3) MBTA's ability to operate and
finance its transit system.
On February 25, 2000, MBTA submitted a finance plan to FTA to document its
ability to fund the project while continuing to operate and maintain its
existing infrastructure. In June 2000, we postponed our ongoing review of
the finance plan because of concerns that delays and cost increases in the
Boston Central Artery/ Tunnel (CA/ T) project could affect MBTA's costs
under three contracts that it and the Massachusetts Highway Department share
for the design and construction of segments of the South Boston Piers
Transitway and the CA/ T projects. On August 17, 2000, MBTA and the CA/ T
project completed a joint analysis of the finance plans for the South Boston
Transitway and CA/ T and concluded that each plan's projections included
only that project's fair share of costs on the joint contracts. Therefore,
we resumed our analysis of MBTA's finance plan.
Results in Brief
MBTA's South Boston Piers Transitway finance plan demonstrates that the
agency has the financial capacity to pay the current estimated cost of $601
million to complete the project. MBTA plans to rely on federal funds,
specifically $331 million in New Starts funds (55 percent) and $150 million
in transit formula funds (25 percent), 3 to finance 80 percent of the
project's costs. The New Starts funds remain at the same level as approved
in the original full funding grant agreement. In addition, $120 million in
state and/ or MBTA bond funds will be used to cover the remaining 20 percent
of total project costs. To cover additional cost increases that might occur,
MBTA has established a $50 million capital reserve bond fund.
We found, largely through the work of FTA's project management oversight
contractor, 4 that the transitway's finance plan contains reasonable cost
and schedule projections. There are, however, two issues that could
jeopardize the project's schedule and cost. First, the contractor believes
that subsurface problems encountered while stabilizing the earth under the
Russia Wharf section of the project could cause a schedule delay. Second,
the estimated cost to purchase the project's buses has increased by $10
million because of market conditions and the vehicles' design. MBTA is still
considering a number of options to offset this increase. Despite these two
concerns, the contractor believes the project's expected opening date of
December 2003 is realistic and MBTA's $50 million capital reserve fund
should be able to cover any additional cost increases.
2 The conference report accompanying the Department of Transportation and
Related Agencies Appropriations Act for fiscal year 2001 contains a similar
provision with respect to the project's 2001 funding. 3 Capital funds are
also made available for urbanized areas on a formula rather than a project-
specific basis.
4 A project management oversight contractor serves as an extension of FTA's
technical staff in assessing grantees' project management and technical
capacity and capability to successfully implement major capital projects.
GAO- 01- 174R South Boston Piers Finance Plan 3 Finally, we note that while
MBTA has demonstrated that it has the financial capacity
to complete the project, it has not yet clearly demonstrated to FTA's
financial management oversight contractor that funding the transitway
project will not impair its ability to operate and maintain its overall
transit system.
Background
MBTA believes that the South Boston Piers Transitway project is the missing
link in the chain of development along the waterfront in the South Boston
Piers area. City and state officials expect that more than 13 million square
feet of new development, as well as the upgrading and conversion of existing
development to more intense use, will occur in the area within the next 15
years. Daily ridership for the transitway is expected to range from 22,000
to 34,000 in 2010.
The first phase of the South Boston Piers Transitway project is now expected
to cost $601 million- a $188 million increase (46 percent) over the $413
million projected in the 1994 full funding grant agreement. The project
management oversight contractor, FTA, and MBTA attribute most of the
project's cost increase to schedule delays and the fact that the original
cost estimate was based on an early project design. Construction delays were
due, in part, to technical interface problems on three joint construction
contracts with the CA/ T project, complications with relocating utilities,
and site conditions. According to MBTA, the joint construction contracts
were between 25- and 72- percent complete on September 25, 2000. Currently,
most major contracts have been awarded, construction is under way, and the
transitway is expected to open for service in December 2003, 3 years later
than originally projected. MBTA does not anticipate any circumstances that
would further alter either the revised cost estimate or the completion date.
On July 1, 2000, funding for MBTA was modified by the state legislation
described in its agencywide finance plan. Previously, MBTA had received
state subsidies that covered all costs in excess of available revenue. Under
the new funding structure, commonly referred to as “forward
funding,” MBTA receives a portion of the revenues from the state
retail sales tax as a dedicated source of funds. MBTA will continue to fund
its operating and capital needs from fare revenues, local assessments, and
federal assistance. However, under the “forward funding”
structure, bonds issued by MBTA after July 1, 2000, will no longer be
guaranteed by the Commonwealth of Massachusetts. The legislative intent is
that MBTA become an independent enterprise with its own sources of funds for
operations and capital investment.
MBTA Has Sufficient Capacity to Finance Construction of the Transitway
MBTA's South Boston Piers Transitway finance plan demonstrates that it has
the financial capacity to pay the estimated $601 million cost to complete
the project. Under the plan, MBTA will depend on federal funds to finance 80
percent of the project. While the amount of funds from the New Starts
program stays at the $331 million (55 percent) approved in the original full
funding grant agreement, the project will also use $150 million (25 percent)
in transit funds it expects to receive from the Formula Grant Program to
finance the project. FTA must amend the full funding grant agreement to
reflect MBTA's planned use of formula funds. To finance the remaining 20
percent of the project's costs, MBTA plans to use $120 million in
GAO- 01- 174R South Boston Piers Finance Plan 4 state and/ or MBTA bond
funds. Figure 1 shows MBTA's planned financing structure
for the transitway project.
Figure 1: Funding Sources for the South Boston Piers Transitway
55% New Starts funds ($ 331) 25%
Formula funds ($ 150)
20%
State and/ or MBTA ($ 120)
Federal Nonfederal
Dollars in millions
Source: GAO's presentation of data provided by MBTA. To cover any additional
cost increases that might occur, MBTA established a $50 million capital
reserve bond fund. FTA requested the reserve to address the risks associated
with the remaining construction. The project management oversight contractor
has concluded that MBTA's estimate of $601 million to complete the project
is reasonable and that MBTA is demonstrating a strong financial commitment
to complete the project with the addition of the $50 million capital reserve
fund. Moreover, a separate review of the South Boston Piers Transitway
finance plan by FTA's financial management oversight contractor also
concluded that MBTA has the financial capacity to complete the project. 5
Two Issues Could Affect the Transitway's Cost and Schedule
Largely through the work of FTA's project management oversight contractor,
we found that MBTA's finance plan for the South Boston Piers Transitway
project contains reasonable cost projections. However, the project
management oversight contractor noted that two issues could delay the
project and/ or increase costs. Nevertheless, MBTA's $50 million capital
reserve fund should be able to cover additional cost increases.
5 FTA engages these contractors to determine whether a grantee has the
financial capacity to effectively support a major capital project.
GAO- 01- 174R South Boston Piers Finance Plan 5 According to FTA's project
management oversight contractor, construction at the
Russia Wharf area of the project could be delayed because of problems with
stabilizing the ground under historic buildings. This stabilization requires
two procedures- soil freezing (a technique to inhibit the flow of water and
soil during excavation and tunneling activities) and mining the soil by the
New Austrian Tunneling Method (a technique to provide structural support for
a tunnel by spraying layers of concrete on its interior surface during
excavation). The contractor believes that there is a high probability that
subsurface problems could delay this critical work and noted that if MBTA
encounters a significant problem during these stabilization procedures, the
project's completion could be delayed by more than 2 months. According to
MBTA, however, it is premature at this time to assume a schedule delay in
the project.
The contractor also found that complications in developing a bus to satisfy
the project's requirements could affect the project's cost. The type of
vehicle MBTA requires for the project is not an “off- the-
shelf” bus and is not currently available in the United States. 6 MBTA
is negotiating with a company to provide them, but the $1.6 million cost per
bus is substantially higher than the $1.1 million cost originally included
in the project's budget. According to MBTA, the primary reasons for the
higher cost are the vehicle's unique configuration and existing market
conditions. MBTA is negotiating with the company to lower the cost of the
buses, but it estimates that the project's budget for them has a $10 million
shortfall. To offset this shortfall, MBTA is still considering a number of
options, including potential savings in the vehicle maintenance facility.
MBTA is confident that a significant portion of the shortfall can be
eliminated. On August 17, 2000, MBTA's Board of Directors approved the
vehicle contract, subject to, among other things, FTA's release of the
transitway funds for fiscal year 1999. Although FTA subsequently released
these funds to MBTA, as of November 8, 2000, MBTA had not awarded the
vehicle contract.
MBTA Has Not Clearly Demonstrated It Can Maintain Its Existing Transit
System
While MBTA has shown that it has the financial capacity to complete the
South Boston Piers Transitway project, it has yet to clearly demonstrate
that funding this project will not impair its ability to maintain its
existing mass transit system. 7 A recent financial capacity report by FTA's
financial management oversight contractor raised concerns about MBTA's
overall capital program. Continued oversight by FTA is essential to help
ensure that MBTA makes appropriate resources available to its currently
existing system, notwithstanding the transitway project.
In May 2000, MBTA published an agencywide finance plan that reflected the
changing needs of its transit system. These changing needs occurred because
of, among other things, “forward funding” provisions. FTA's
financial management oversight
6 MBTA has proposed a dual- mode, hybrid diesel- electric, 60- foot
articulated (i. e., jointed) bus for the transitway project. 7 Under the
Transportation Equity Act for the 21 st Century, in evaluating proposed
projects for full funding grant agreements, FTA requires sufficient local
resources to operate the overall proposed transit system without requiring a
reduction in existing mass transportation services.
GAO- 01- 174R South Boston Piers Finance Plan 6 contractor performed a
financial capacity assessment of the finance plan, 8 which
focused on the reasonableness of the plan's underlying financial
assumptions, and developed models to test the sensitivity of those
assumptions. In November 2000, the contractor's financial capacity
assessment report concluded that MBTA continues to maintain the financial
capacity to complete the transitway project.
This report, however, raised several concerns about MBTA's overall capital
program. According to the contractor, for example, MBTA has not clearly
identified the source of $130 million in funds for commuter rail replacement
and rehabilitation requirements for its overall system. In addition, MBTA's
fleet management plans for its entire system have not been updated to
reflect its current fleet replacement and maintenance plans. Finally, MBTA
reduced the amount of capital funds programmed for the overall maintenance
of its core facilities. According to the contractor, MBTA's financial risks
and challenges are caused by many developments, including “forward
funding” and other commitments associated with the CA/ T project. MBTA
told the contractor that the uncertainties created by “forward
funding” and the dynamic nature of its operating environment
necessitate capital and finance plans that are flexible and poised to react
to changes in the environment. MBTA also told the contractor that unfunded
projects would be continually reassessed in the context of funding
availability. The contractor recommended that FTA continue to monitor MBTA's
capital program to ensure that sufficient resources are made available to
fund an updated fleet management plan and maintain the agency's core
facilities.
Agency Comments
We provided MBTA and FTA with a draft of this report for review and comment.
FTA provided a copy to its financial management oversight contractor. While
generally agreeing with our report, the contractor provided clarifications
about its assessment of MBTA's agencywide finance plan. The contractor
commented that funding the South Boston Piers Transitway project is not the
primary challenge for MBTA and that it has the financial capacity to
complete this project. However, the contractor noted that MBTA's fiscal
risks and challenges are caused by a multitude of developments, primarily
the new “forward funding” initiative and complications created
by MBTA's commitments with the CA/ T. The contractor also said that the
challenges it cited in its financial capacity review addressed an MBTA
capital plan that includes projects that will probably change because of
future developments. The contractor added that MBTA has never operated in
the environment created by the new “forward funding” legislation
and that this environment makes it difficult for MBTA to document a plan
that clearly demonstrates financial capacity without some level of risk.
According to the contractor, this is why FTA's close monitoring of the
project is critical.
In commenting on our draft report, MBTA stated that reinvestment in its
transit system will continue to be a high priority. Over the next 5 years,
for example, MBTA expects to spend, on average, $350 million per year on
core infrastructure, which is
8 A financial management oversight contractor performs these reviews to
assess a grantee's financial capability to meet the full funding grant
agreement obligations on major capital projects and to help ensure that
existing transit service would not be interrupted owing to the grantee's
lack of financial capacity.
GAO- 01- 174R South Boston Piers Finance Plan 7 about two- thirds of its
total capital program. MBTA also provided us with technical
comments, which we incorporated as appropriate.
Scope and Methodology
To perform our analysis for this report, we reviewed MBTA's South Boston
Piers Transitway and agencywide finance plans, the financial management
contractor's financial capacity assessment report, several project
management oversight contractor reports, and relevant supporting
documentation. We interviewed appropriate MBTA officials and the financial
management oversight contractor to discuss the cost and financing
assumptions underlying the plan. To obtain information about the project's
cost and status, we met with MBTA's senior management and FTA's project
management oversight contractor. We also met with FTA headquarters and
regional officials to obtain specific information on this project. We
performed out work from April through November 2000 in accordance with
generally accepted government auditing standards.
We are sending copies of this report to the Honorable Rodney E. Slater,
Secretary of Transportation; the Honorable Nuria Fernandez, Acting
Administrator, Federal Transit Administration; The Honorable Jacob J. Lew,
Director, Office of Management and Budget; Robert H. Prince, General
Manager, Massachusetts Bay Transportation Authority; and other interested
parties.
Key contributors to this report were Jack Bagnulo, Helen Desaulniers, Kirk
Kiester, and Ron Stouffer. If you have questions about this report, please
call me at (202) 512- 2834.
Phyllis F. Scheinberg Director Physical Infrastructure
(348258)
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