Transportation Infrastructure: Central Artery/Tunnel Project Faces
Financial Uncertainties (Letter Report, 05/10/96, GAO/RCED-96-131).
Pursuant to a congressional request, GAO reviewed the Central
Artery/Tunnel Project in Boston, Massachusetts, focusing on: (1) the
project's estimated total costs; and (2) Massachusetts' plans for
financing the project.
GAO found that: (1) in January 1996, Massachusetts estimated that the
project's total cost was $7.8 billion, but that estimate did not include
$1 billion in previously identified costs or account for the effects of
inflation; (2) project costs could total more than $10.4 billion if
Massachusetts does not successfully contain construction costs well
below historic levels; (3) Massachusetts has directed two state agencies
to contribute $200 million toward project costs, but federal and state
funding may not be sufficient to complete the project by 2004; (4)
federal funding may be limited by the lack of provisions giving the
state access to unobligated balances from previous years; and (5)
Massachusetts has identified several funding options, but shortfalls
exist under all of the options because of its plans to accelerate
construction and begin numerous projects within a short period of time.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-96-131
TITLE: Transportation Infrastructure: Central Artery/Tunnel
Project Faces Financial Uncertainties
DATE: 05/10/96
SUBJECT: Federal aid for highways
Road construction
Intergovernmental fiscal relations
Future budget projections
Construction costs
Unobligated budget balances
Public roads or highways
Cost sharing (finance)
Cost control
IDENTIFIER: Central Artery/Tunnel Project (Boston, MA)
FHwA Interstate Construction Program
Massachusetts Design-to-Cost Program
FHwA Federal-Aid Highway Program
Highway Trust Fund
Boston (MA)
Massachusetts
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO report. Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved. Major **
** divisions and subdivisions of the text, such as Chapters, **
** Sections, and Appendixes, are identified by double and **
** single lines. The numbers on the right end of these lines **
** indicate the position of each of the subsections in the **
** document outline. These numbers do NOT correspond with the **
** page numbers of the printed product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
** A printed copy of this report may be obtained from the GAO **
** Document Distribution Center. For further details, please **
** send an e-mail message to: **
** **
** **
** **
** with the message 'info' in the body. **
******************************************************************
Cover
================================================================ COVER
Report to the Chairman, Subcommittee on Transportation and Related
Agencies, Committee on Appropriations, House of Representatives
May 1996
TRANSPORTATION INFRASTRUCTURE -
CENTRAL ARTERY/TUNNEL PROJECT
FACES CONTINUED FINANCIAL
UNCERTAINTIES
GAO/RCED-96-131
Central Artery/Tunnel Project
(342919)
Abbreviations
=============================================================== ABBREV
GAO - General Accounting Office
FHWA - Federal Highway Administration
MHD - Massachusetts Highway Department
Letter
=============================================================== LETTER
B-271688
May 10, 1996
The Honorable Frank R. Wolf
Chairman, Subcommittee on Transportation
and Related Agencies
Committee on Appropriations
House of Representatives
Dear Mr. Chairman:
At a cost of over $1 billion a mile, the Central Artery/Tunnel
project--an Interstate Highway System project in Boston,
Massachusetts--is one of the largest, most complex, and most
expensive highway construction projects ever undertaken. Although
$4.7 billion in federal and state funds has been obligated, this sum
is less than half of the more than $10 billion that will likely be
needed to complete the project. To date, about 86 percent of the
funding for the Central Artery/Tunnel project has come from federal
sources.
In response to your concerns about the increasing costs of this
project and the uncertainties associated with its financing, we
evaluated (1) the estimated total cost of the Central Artery/Tunnel
project and (2) the Commonwealth of Massachusetts' plans for
financing it.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
Massachusetts' official estimate of the total cost of the Central
Artery/Tunnel project, as updated in January 1996, is $7.8 billion.
However, that estimate excludes over $1 billion in costs that were
included in previous estimates and does not account for the effects
of inflation. Our analysis shows that the project's costs would
total $10.4 billion if the excluded costs and the effects of
inflation were considered. Moreover, the $10.4 billion assumes that
the state will be 100 percent successful in meeting the aggressive
cost containment goals established in 1995 for the project. It is
too early to tell whether the state will meet all of its cost
containment goals, and the results to date have been mixed. Closely
monitoring the project's cost performance is important because the
total costs could exceed $11 billion if historic patterns of cost
growth, rather than the project's cost containment goals, prevail.
Massachusetts plans to finance the Central Artery/Tunnel project with
federal and state funds; however, this funding may not be sufficient
to complete the project as scheduled by 2004. Massachusetts plans,
subject to the approval of the Secretary of Transportation, to award
over $3 billion in contracts in fiscal years 1996 and 1997 and to pay
for the contracts over a period of several years. However, when the
bills come due, funding may not be available to pay them. The
state's finance plan has identified funding shortfalls of up to $1.9
billion--shortfalls that could increase if the project does not meet
its cost containment goals. While Massachusetts has identified
several options for covering the shortfalls, it has not yet selected
a plan. If the Secretary is to approve these contracts, it is
critical that a plan be developed to ensure that funding is available
to pay the bills.
BACKGROUND
------------------------------------------------------------ Letter :2
The Central Artery/Tunnel project will build or reconstruct about 7.5
miles of urban highways in Boston--about half of them underground.
The project will (1) extend Interstate 90 east, mostly in tunnels,
through South Boston, under Boston Harbor (through the Ted Williams
Tunnel) to East Boston and Logan International Airport; (2) replace
the Central Artery--an elevated portion of Interstate 93 through
downtown Boston--with an underground roadway; and (3) replace the
I-93 bridge over the Charles River. Tunneling through a densely
populated urban area like downtown Boston will entail numerous and
complex construction challenges. The Central Artery/Tunnel project
will burrow close to buildings and subway tunnels, often with only a
few feet to spare. The project's construction plans include
underpinning the existing elevated Central Artery structure so that
it continues to carry traffic--as well as supporting the railroad
tracks leading into the city's main train station--while underground
highways are built directly below.
Figure 1: Map of the Central
Artery/Tunnel Project
(See figure in printed
edition.)
Source: Massachusetts Highway
Department.
(See figure in printed
edition.)
The project is managed by the Massachusetts Highway Department (MHD).
Day-to-day design and construction activities are managed by a
management consultant--a joint venture of Bechtel/Parsons
Brinckerhoff, under contract with MHD. The Federal Highway
Administration (FHWA) approves and oversees the expenditure of
federal funds. For example, FHWA reviews the project's design plans
and construction specifications and determines whether they meet
applicable safety and quality standards and are eligible for federal
funding.
Construction began in 1991. The project attained its first major
construction milestone with the opening of the Ted Williams Tunnel to
commercial traffic in December 1995. As of April 1996, the project
was about 70 percent designed and 20 percent constructed;
construction of the underground Central Artery had begun, and a
revised Charles River crossing was being designed. The project is
scheduled to be completed in phases by 2004.
As of March 1, 1996, $4.7 billion had been obligated for the Central
Artery/Tunnel project--$4.1 billion in federal funds (86 percent) and
about $650 million in state funds (14 percent). Most federal funding
has come from the Interstate Construction Program, which was
established in 1956 to provide the states with federal funding to
cover 90 percent of the costs of building the Interstate Highway
System. MHD estimates that federal funding will, when the project is
completed, cover between 74 and 86 percent of the project's total
costs depending on the amount of federal funds provided for the
project in the future. Appendix I provides more detailed information
on the Central Artery/Tunnel project's obligations to date.
STATE'S OFFICIAL ESTIMATE
UNDERSTATES PROJECT'S TOTAL
COSTS
------------------------------------------------------------ Letter :3
According to our analysis, the estimated cost of the Central
Artery/Tunnel project is $10.4 billion when costs that were excluded
from the official estimate and the effects of inflation are
considered. In addition, costs could exceed the $10.4 billion
estimate if the state does not meet the aggressive cost containment
goals established for the project.
EXCLUDED COSTS AND INFLATION
---------------------------------------------------------- Letter :3.1
MHD's $7.8 billion cost estimate, released in July 1995 and updated
in January 1996, excludes over $1 billion in costs for the project.
According to MHD, the estimate includes the costs of building the
tunnels, viaducts, and surface roadways that make up the Central
Artery/Tunnel project but excludes about $600 million for items that
are not needed to directly design and construct tunnels, viaducts,
and surface roadways. These items include surface restoration,
environmental mitigation, relocation of Amtrak and commuter rail
tracks, toll booths, and maintenance facilities. In addition, the
estimate excludes $255 million in costs incurred prior to 1991. MHD
believes that excluding these costs is appropriate because, in 1991,
FHWA directed the state to prepare its estimate on the basis of the
remaining costs only. Finally, the estimate excludes costs that
could be paid for by state agencies other than MHD. For example, MHD
has excluded the $180 million cost of designing and constructing the
interchange at Logan International Airport because it believes this
interchange primarily benefits airport users and thus should be
funded by the Massachusetts Port Authority, the airport operator.
MHD has also excluded over $200 million in costs for connecting
roadways to Massachusetts Turnpike Authority facilities, such as the
Sumner and Callahan tunnels, and believes the Authority should
contribute to these costs. The costs excluded from the official
estimate were included in cost estimates in the past.
To begin addressing the issue of contributions from other state
agencies, Massachusetts enacted legislation in 1995 requiring that
the Massachusetts Port Authority and Massachusetts Turnpike Authority
each contribute $100 million toward the costs of the Ted Williams
Tunnel and authorizing $400 million in additional state bonds that
will be used for the project (see apps. III and IV). The
legislation also directed state agencies to conduct a study to
determine the amount of any additional contributions from the
Massachusetts Port and Turnpike authorities. The results of this
study are due in December 1996.
MHD's cost estimate also does not account for the effects of
inflation. Rather, the estimate represents expenditures incurred
prior to August 1994 at their value in the year they were incurred
and expenditures expected after that date in August 1994 dollars.
MHD officials stated that excluding the effects of inflation from the
cost estimate was consistent with prior practices and federal
requirements for estimating costs for the Interstate Construction
Program.\1
FHWA and MHD agreed to use a future inflation rate of 3.35 percent a
year as the basis for the funding scenarios contained in the
project's finance plan. Including the costs of inflation on awarded
and unawarded contracts would increase the $7.8 billion estimate by
about $1.2 billion. MHD officials stated that inflation has been
below 3.35 percent for the last 2 years and that they would seek
FHWA's concurrence for using an inflation assumption of between 2
percent and 2.75 percent in the near future. Our analysis of MHD's
cost estimate is discussed further in appendix II.
--------------------
\1 Since the final Interstate Cost Estimates were prepared in 1991,
FHWA has not had a requirement for the states to prepare cost
estimates for projects, nor guidelines for how such estimates should
be prepared.
COST CONTAINMENT
---------------------------------------------------------- Letter :3.2
When costs that were excluded from the official estimate and the
effects of inflation are considered, the estimated cost of the
Central Artery/Tunnel project is $10.4 billion. However, this cost
figure also assumes that the state will meet the aggressive cost
containment goals established for the design and construction phases
of the Central Artery/Tunnel project. The costs of the project could
increase further if these goals are not met--if historic patterns of
cost growth prevail, the project's total costs could exceed $11
billion.
During the design of a highway, bridge, or tunnel, preliminary design
concepts are refined into detailed plans and specifications, and
preliminary construction cost estimates can increase. As we reported
in June 1995, although officials estimated that these refinements
had, on average, increased the project's construction cost estimates
by 18 percent, MHD's cost estimate assumed zero cost growth during
the design of future construction projects.\2 To control increases in
construction costs during the design process, MHD initiated a
"design-to-cost" program in March 1995. FHWA and MHD officials
stated that this is the first time such a program has been used in
the state's highway program.
Under the design-to-cost program, contractors design their segments
of the project within an agreed construction cost baseline budget.
The design contractor is required to submit periodic interim products
as well as a final design. If the estimate in any of the submittals
exceeds the agreed baseline budget (assuming that MHD has not
requested changes to the contract), the contractor is required to
redesign the project--at the contractor's own expense--so that the
estimated construction cost falls within the baseline budget.
Project officials and contractors told us that the program has
generally made them much more cost-conscious. They said this has
been particularly helpful on a large project like the Central
Artery/Tunnel project in which multiple state, local, and federal
agencies review--and can influence--the project's designs.
Experience with this design-to-cost program has been limited, and the
results have been mixed. As of April 30, 1996, only 5 of the
project's 15 awarded design contracts included agreed baseline
budgets. One design contractor had not agreed to participate in the
program because MHD and the contractor could not agree on a baseline
budget.\3 On one design contract, for the construction of viaducts
and ramps north of the Charles River, the contractor was able to
reduce an initial cost estimate by over $22 million by reducing the
number of ramps and taking other measures. However on another
contract, for the construction of part of a tunnel in the underground
Central Artery, the contractor's estimate of the construction costs
for two segments exceeded the $427 million baseline budget for those
two segments by about $50 million. This increase occurred, in part,
because the contractor identified additional reinforcement and
structural steel requirements in the tunnel. MHD's management
consultant is still evaluating the contractor's submittal and has
asked the contractor to prepare an offsetting savings plan, which has
not yet been completed. It is uncertain at this time whether it will
be possible to reduce the estimated construction costs in line with
the baseline budget.
For construction, MHD's cost estimate budgets a 7-percent contingency
for cost growth on future construction projects. This rate is far
lower than the 16-percent average cost growth on completed contracts
and nearly 20-percent average cost growth on ongoing contracts that
we reported in June 1995. MHD does not have a formal program or
specific strategies for holding construction cost growth to 7
percent. Officials told us they expect to limit cost growth to 7
percent by closely monitoring proposed contract change orders.
While FHWA supports the state's cost containment initiatives, it has
questioned using these assumptions as the basis for the project's
cost estimate. For example, FHWA raised concern about the lack of
specific strategies for holding construction cost growth to 7
percent. FHWA recommended that the state budget construction cost
growth contingencies of 10 percent rather than 7 percent during the
construction phase, and 10 percent rather than 0 percent during the
design phase. MHD declined to accept these recommendations; FHWA
officials have stated that they cannot compel the state to change its
cost estimate for the project. Since January 1996, MHD has prepared
a monthly management report at FHWA's request to monitor and compare
the project's cost performance against the official estimate.
We reported in June 1995 that if the construction cost estimates for
the remaining design contracts increased at the historic 18-percent
rate, the project's total costs could increase by over $300 million.
If the cost estimates for the remaining construction contracts
increased at a rate of 16 to 20 percent, the project's total costs
could increase by more than $400 million. While only experience will
show by how much costs actually increase during the design and
construction phases, the project still faces several risks that could
increase its costs. For example, much of the construction work
remaining on the project is underground tunneling. FHWA and state
officials agree this work is inherently risky, given the
uncertainties of underground work in a densely populated urban area.
In addition to technical challenges, MHD's plan for a new Charles
River crossing faces a lawsuit from the city of Cambridge and others
that alleges, among other things, that MHD and FHWA did not comply
with legal requirements for preserving parklands.\4 While the suit is
pending, the risks of schedule delays and cost increases remain.
--------------------
\2 Central Artery/Tunnel Project (GAO/RCED-95-213R, June 2, 1995)
\3 Of the nine remaining awarded design contracts, eight included a
design-to-cost contract provision, and MHD hopes to conclude
negotiations for a baseline budget in the next 6 months. The other
contract was being negotiated. Project officials said they plan to
include all remaining seven unawarded design contracts in the
design-to-cost program.
\4 23 U.S.C. �138.
PROJECT FACES FINANCING
UNCERTAINTIES
------------------------------------------------------------ Letter :4
The available state and federal funding may not be sufficient to
complete the Central Artery/Tunnel project as scheduled by 2004.
Although the amount of federal funding that will be available in
fiscal year 1998 and beyond is not known, shortfalls exist under the
funding scenarios modeled in Massachusetts' February 1996 finance
plan. While the finance plan discusses options for addressing the
shortfall, none has been selected to date. The state faces
challenges to both maintain its commitment to its statewide road and
bridge improvement program and build the Central Artery/Tunnel
project.
FUTURE FEDERAL FUNDING IS
UNCERTAIN
---------------------------------------------------------- Letter :4.1
To date, most federal funding for the Central Artery/Tunnel project
has come from the Interstate Construction Program, the program begun
in 1956 to build the Interstate Highway System (see app. I).
Generally, this program provided 90 percent of the cost of Interstate
projects to the states; this funding was based on the states'
estimates of the costs of completing those projects. The Intermodal
Surface Transportation Efficiency Act of 1991 (ISTEA) authorized
federal highway program spending through fiscal year 1997 and
provided the final Interstate Construction Program apportionments,
including $2.55 billion for Massachusetts to complete the Central
Artery/Tunnel project. Massachusetts received its final Interstate
Construction Program apportionment in fiscal year 1995;\5 after the
state expends its funds for this program, it will draw on its funds
for other federal highway programs--such as the National Highway
System Program and the Bridge Program--to finance both the Central
Artery/Tunnel project and the statewide highway and bridge
improvement program. The funding that will be available to
Massachusetts after fiscal year 1997 will not be known until the
Congress reauthorizes the federal-aid highway program.
In December 1994, MHD prepared a finance plan at FHWA's request.
This plan stated that the available funding from federal and other
sources would be sufficient to complete the project by 2004.
However, as we reported in June 1995, this plan understated the
project's costs and projected future federal funding levels that
might not be realized in the current budget environment.
Furthermore, the plan assumed that Massachusetts would gain access to
over $700 million of its federal highway program's unobligated
balance--funding that is not available under current law.\6 We
reported that under other financing scenarios, Massachusetts could
experience a shortfall of over $2 billion. In June 1995, FHWA asked
MHD to prepare a new finance plan and, among other things, include
all costs for the project excluded from the cost estimate, include
the effects of inflation, and model more conservative estimates of
future federal funding.
MHD's revised plan, dated February 1996, provides three scenarios for
the project's cost and three scenarios for future funding. On the
cost side, the plan does not provide a total figure for the project;
instead, remaining costs are presented. Under the "middle cost"
scenario, which MHD considers the best approximation of the project's
future needs, the remaining costs of the project, from July 1995 to
completion, would be $5.8 billion. According to our analysis, this
would equate to a total cost for the project of $10.2 billion. FHWA
asked MHD to use the middle cost scenario as the basis for the
funding scenarios in the finance plan.
The finance plan models three possible future funding scenarios:
-- The "low funding" scenario assumes that Massachusetts will
receive the same share of the Federal Highway Trust Fund's
receipts that it has received since fiscal year 1992, adjusted
to exclude the influence of the $2.55 billion Interstate
Construction Program apportionment that it received under ISTEA.
FHWA asked MHD to model this funding scenario in December 1995.
MHD believes this scenario is unnecessarily conservative because
it would substantially reduce Massachusetts' current federal
funding at a time when Highway Trust Fund receipts are
increasing. Under this scenario, Massachusetts would receive
about $450 million a year.
-- The "middle funding" scenario assumes that Massachusetts will
receive $657 million in fiscal years 1998, 1999, and 2000 and
$450 million a year thereafter. It also assumes that
Massachusetts will gain access to $638 million of its
unobligated balance. MHD considers this the most likely future
funding scenario.
-- The "high funding" scenario assumes that Massachusetts will
receive the same funding each year after fiscal year 1997 that
it expects to receive in fiscal year 1997--about $730 million.
This funding level would include recognition of Massachusetts'
Interstate Construction Program funding under ISTEA. The high
funding scenario also assumes that Massachusetts will gain
access to $638 million of its unobligated balance.
Each scenario makes assumptions about how much federal and state
funding will be made available for the Central Artery/Tunnel project
and how much will go to other state transportation projects. Another
possible federal funding scenario that FHWA originally asked
Massachusetts to analyze but that was later excluded from the finance
plan is the return-to-origin approach. Under this scenario, states'
contributions to the highway account of the Highway Trust Fund would
be returned to them in the form of annual federal-aid highway
apportionments. According to FHWA's Office of Fiscal Services,
between fiscal years 1998 and 2005, Massachusetts would receive an
average of about $395 million a year under a return-to-origin funding
formula.\7
--------------------
\5 Although Massachusetts will not receive new Interstate
Construction Program apportionments in fiscal years 1996 and 1997, an
equity adjustment provision of ISTEA--hold harmless--preserves the
states' historic funding. For Massachusetts and other states, this
adjustment includes recognition of past Interstate Construction
Program funding.
\6 In the federal highway program, an "unobligated balance" is the
difference between the money a state is apportioned and the money it
is allowed to obligate. Subject to certain limitations, these
balances can build up over time. MHD's December 1994 finance plan
assumed that to finance the project between October 1994 and
September 1997, Massachusetts would spend the $707 million that had
built up over time, as well as the funds apportioned to it each year.
However, current law contains no provision that would allow
Massachusetts to spend its unobligated balances in this manner.
\7 FHWA told us that Massachusetts would receive between $370 million
and $415 million a year. FHWA's range depends on what assumptions
are made about Massachusetts' share of the Highway Trust Fund's
receipts relative to other states' shares. Massachusetts' share has
been declining in recent years, and the $370 million figure assumes
that the decline will continue at the current rate through 2005,
while the $415 million figure assumes that Massachusetts' share will
remain at its current level. The $395 million figure represents the
approximate average of the two estimates. MHD officials believe that
FHWA's methodology is flawed and that Massachusetts' average
contribution between 1998 and 2005 will be about $463 million a year.
The principal difference between the two estimates lies in the
assumptions made about future growth in Highway Trust Fund receipts.
FHWA uses a Department of the Treasury index, which estimates that
future receipts will grow between 1.5 and 1.7 percent a year between
1998 and 2005, while MHD uses a figure of 3.5 percent. MHD's figure
represents the annual growth in vehicle miles traveled projected in
the U.S. Department of Transportation's 1993 biannual report on the
condition and status of the nation's highways and bridges.
SHORTFALLS EXIST UNDER ALL
FUNDING OPTIONS
---------------------------------------------------------- Letter :4.2
Shortfalls in available funding exist between fiscal year 1996 and
fiscal year 2000 or 2001 under all of the funding scenarios compared
with the middle cost scenario in MHD's February 1996 finance plan.
These shortfalls occur in large measure because of Massachusetts'
plans to accelerate the project's construction and begin numerous
projects within a short period of time. To accomplish this,
Massachusetts plans to make extensive use of advance construction.
In a traditionally financed federal-aid highway project, all the
funds needed for a contract are obligated at the start of a contract
and then outlayed as the contractor's bills come in over the several
years required to build the project. Advance construction allows a
state to obtain federal approval to begin a project and to select a
later fiscal year to obligate all the federal funds needed for the
project. This approach allows a state to begin more projects in a
single year than it could under the traditional financing approach.\8
Under FHWA's advance construction regulations, revised in July 1995,
a state using advance construction is no longer required to obligate
all of the federal funds needed for a project in a single fiscal
year. Rather, it can do so over a several-year period as needed to
match the contractor's billings. This revision allows a state to
begin many more projects concurrently and depend on future funding to
pay the bills.
To meet the project's construction schedule, Massachusetts will use
advance construction to begin numerous projects concurrently, most of
these in fiscal years 1996 and 1997, and to pay for them over several
years. Specifically, Massachusetts plans to award 26 contracts,
totaling $3.7 billion, in this manner--including contracts totaling
over $2 billion in fiscal year 1996. According to MHD, this strategy
will save $1 billion in total costs for the project and 5 years in
construction time. The Secretary of Transportation must approve
these contracts. According to the FHWA Administrator, the Secretary
can do so only if the funding to pay the bills can reasonably be
expected to be available.
However, when the bills come due, the needed funding may not be
available. Under all of the funding scenarios in the finance plan
(compared with the middle cost scenario), a shortfall in available
funding would exist between fiscal year 1996 and fiscal year 2000 or
2001. For example, under the low funding scenario, the state would
experience relatively small shortfalls in fiscal years 1996 and 1997
of $36 million and $13 million, respectively. These shortfalls would
grow to between $510 million and $746 million a year in fiscal years
1998 through 2000, for a cumulative shortfall of $1.9 billion.
Table 1 shows the projected cumulative shortfalls that would occur
under the finance plan scenarios, as well as the return-to-origin
scenario. If the assumption that Massachusetts would gain access to
its unobligated balances were removed from the middle funding and
high funding scenarios, shortfalls of over $1 billion would exist.
While the projected shortfalls would be less if Massachusetts gained
access to its unobligated balances, the state would still face
funding shortfalls under all scenarios (see apps. III and IV).
Table 1
Cumulative Shortfalls Expected Under
Various Central Artery/Tunnel Project
Financing Scenarios: Fiscal Years 1996
Through 2000/2001
(Dollars in millions)
Shortfall-- Shortfall--with
without access to access to
unobligated unobligated
Funding scenario balances balances
------------------------------ ------------------ ------------------
MHD's low funding ($1,912) ($1,274)
MHD's middle funding ($1,336) ($698)
MHD's high funding ($1,050) ($432)
Return-to-origin ($2,059) ($1,394)
----------------------------------------------------------------------
Note 1: The cumulative shortfalls shown above are from fiscal year
1996 through fiscal year 2000 under the low and high funding
scenarios and from fiscal year 1996 through fiscal year 2001 under
the middle and return-to-origin scenarios. The reason the shortfall
period is shorter under the low funding scenario than it is under the
middle funding scenario is that the middle funding scenario assumes
that the project will receive a smaller share of the total federal
funds available to Massachusetts in fiscal year 2001 and later. This
is because other state transportation projects are assumed to receive
a greater share of the total available funds in those years under the
middle funding scenario.
Note 2: The data in table 1 reflect our calculations based on data
in MHD's finance plan. MHD's finance plan does not calculate the
effect of the state's gaining access to the unobligated balances
under the low funding scenario, compare the effects of gaining and
not gaining access to the unobligated balances on annual surpluses or
shortfalls, or measure annual surpluses and shortfalls under the high
funding scenario.
Note 3: The return-to-origin scenario uses the figures developed by
FHWA's Office of Fiscal Services and assumes that Massachusetts
receives an average of $395 million a year. MHD's return-to-origin
analysis assumes that the state would receive $463 million a year,
which is not dissimilar to the low funding scenario. The
return-to-origin scenario above also assumes the same level of state
funding for the Central Artery/Tunnel project and the same
distribution of federal funding between the project (71 percent) and
the state's other transportation projects (29 percent) as are assumed
for the low funding scenario.
Source: MHD's Central Artery/Tunnel project finance plan, February
1996; FHWA's Office of Fiscal Services; and our analysis.
--------------------
\8 An advance construction project must meet the same federal
requirements and be processed in the same manner as other federal-aid
highway projects. However, the state cannot receive federal
reimbursement until the project is formally converted to a
federal-aid project. Until conversion occurs, FHWA's approval of an
advance construction project does not constitute a commitment of
federal funds.
OPTIONS FOR ADDRESSING THE
SHORTFALL HAVE NOT BEEN
SELECTED
---------------------------------------------------------- Letter :4.3
The state's finance plan identifies several options to address the
shortfall, including short-term financing, extending the project's
schedule, reducing the project's scope, and reducing the funding for
other state transportation projects. MHD considers short-term
financing to be the most viable option. For example:
-- The state is studying the feasibility of establishing a
metropolitan highway system in Boston. This approach could lead
to the issuance of toll-financed revenue bonds to help finance
the Central Artery/Tunnel project.
-- MHD believes that funding received by the project in 2002 and
later could be utilized. While less than $200 million in new
obligations will remain to be incurred by the end of fiscal year
2002, MHD's finance plan assumes that the Central Artery/Tunnel
project will continue to receive one-half or more of the federal
funds apportioned to Massachusetts between fiscal years 2002 and
2005. As a result, the finance plan shows that the project will
build funding surpluses of as much $1.8 billion during that
period. According to MHD's finance plan, these funds could then
be used to repay the debt incurred during the peak construction
period in order to cover funding shortfalls.
Although another option would be to extend the completion of the
project, MHD stated that extending the project's schedule by 4 to 12
years would increase the project's total costs from $840 million to
nearly $2 billion. Another option, reducing the project's scope,
would have significant adverse effects on traffic flow, air quality,
and the project's schedule, according to MHD. Finally, the option of
reducing funding for other state transportation projects would defer
needed roadway and bridge repairs and reverse the state's commitment
to a $400 million annual statewide construction program, exclusive of
the Central Artery/Tunnel project. As of May 1996, MHD had not
selected a specific strategy for financing the shortfalls.
Even if Massachusetts does not choose to reduce the funding for other
statewide transportation projects, the state faces significant
challenges to both maintain its $400 million annual statewide road
and bridge improvement program and build the Central Artery/Tunnel
project. Between fiscal year 1992 and fiscal year 1995, the federal
contribution to the statewide road and bridge program was over $200
million a year. MHD's finance plan shows that the federal
contribution could be reduced to $130 million a year by 1998.
Massachusetts officials told us that the state is committed to
maintaining a $400 million annual statewide construction program and
would increase the state's funding in the future if necessary to make
up for the reduction in federal funds.
OBSERVATIONS
------------------------------------------------------------ Letter :5
Neither Massachusetts' official cost estimate for the Central
Artery/Tunnel project nor the state's finance plan provides a
complete picture of the project's total costs. Although
Massachusetts plans to rely more on state resources to finance the
project in the future, the source of the funding should not be a
factor in deciding whether or not to report an expected expenditure
as a cost. A full disclosure of the project's total costs provides
the only basis for the Congress, state leaders, and the public to
understand the extent of the federal and state investment in the
Central Artery/Tunnel project. Full disclosure is also the only
means of providing a consistent baseline for measuring changes in the
cost of the project over time.
The state's cost containment initiatives demonstrate that the state
is serious about containing costs on this project. However, assuming
a 100-percent success rate for the state's cost containment
initiatives may not be realistic. It allows little room for anything
to go wrong, just at the time when the inherently risky underground
tunneling work in downtown and South Boston is just beginning.
Including larger contingencies in the official estimate, such as
those recommended by FHWA, could provide a more realistic picture of
the project's cost and a sounder basis for ensuring the availability
of adequate financing. Closely monitoring the project's cost
performance is essential to containing further cost increases and
avoiding further uncertainties in the project's financing. Moreover,
experiences with the cost containment program, both positive and
negative, could be shared with other state highway agencies.
Massachusetts and FHWA have come a long way toward developing a
credible and realistic finance plan since Massachusetts issued its
first plan in December 1994. However, it is important that FHWA and
the state agree on a plan for financing the substantial funding
shortfalls expected under all potential funding scenarios as soon as
possible. The seeds of this shortfall will, in large measure, be
planted in this fiscal year and the next when the state begins
extensively using advance construction contracting. If the Secretary
is to approve these contracts, it is critical that a clear plan for
financing the shortfalls be developed.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :6
We provided copies of a draft of this report to FHWA and the
Commonwealth of Massachusetts for their review and comment. We met
with FHWA officials, including the Associate Administrator for
Program Development, and with state officials, including the
Secretary of the Executive Office of Transportation and Construction
and MHD's Central Artery/Tunnel project manager. Both FHWA and
Massachusetts offered technical comments to clarify and amplify the
information presented in this report, and we have incorporated those
comments throughout the report as appropriate. Massachusetts also
provided us with a written statement presenting its views on the
project's finances and other issues (see app. V).
FHWA agreed with the report's findings. FHWA stated that it agreed
that the estimated total costs of the project are $10.4 billion. In
a letter to MHD dated April 30, 1996, sent after we obtained agency
comments, FHWA stated that it expected Massachusetts to fully
disclose the total estimated cost of the project in the next update
of the finance plan, due on October 1, 1996.
To address projected funding shortfalls, FHWA stated that, as a
condition of further approval of advance construction contracts, it
would require Massachusetts to demonstrate that unencumbered bonding
authority or third party financing exists to cover the entire amount
of a contract at the time of the contract's award. This
condition--also included in FHWA's letter to the state--will require
that new legislation be enacted in Massachusetts in the near future
to provide financing for the more than $3 billion in contracts being
issued in the current and next fiscal years. FHWA said that it would
require the state to demonstrate the availability of unencumbered
bonding authority or third party financing on a contract-by-contract
basis, rather than provide an overall plan for covering the
shortfalls. Nevertheless, we believe that if the appropriate state
legislation is enacted in time to meet the project's contracting
requirements, this action could provide assurance that funding to
cover the shortfalls will be available when the bills come due.
Massachusetts disagreed with our observations, maintaining that it
faces no greater financial uncertainty than any other state because,
until the Congress acts, no state knows what federal-aid highway
funding will be available to it after fiscal year 1997. While we
agree that all states face this uncertainty, no other state faces the
challenge of financing over $5 billion in costs for a highway
project. In addition, while Massachusetts' finance plan modeled the
effect of lower federal aid levels after fiscal year 1997,
substantial funding shortfalls exist under all funding scenarios, and
a plan for financing those shortfalls has not been selected.
In commenting on our report, Massachusetts disagreed that the finance
plan should provide a total cost figure for the project. The state
said that the total costs of the project can be calculated from the
information contained in the finance plan. However, even if state
and federal decisionmakers or the public had ready access to the
finance plan, the total costs of the project would not be readily
apparent from reading the plan. We found that to determine the total
costs of the project, we had to analyze several sources of
information within the plan and discuss them with MHD. Furthermore,
after we obtained agency comments, Massachusetts stated in its May 6,
1996, reply to FHWA's letter that requiring a total cost estimate in
the finance plan represented a significant change in FHWA's position.
Massachusetts' response did not indicate whether the state's next
finance plan would disclose the project's total cost.
Massachusetts also disagreed with our observation that it is
important to develop a plan for financing the shortfalls at this
time. The state said that neither such a plan nor an updated finance
plan should be developed until the state's study on additional
contributions from the Massachusetts Port and Turnpike authorities
was completed in December 1996. Massachusetts said that the
demonstrated commitment on the part of the state to finance the
project, as shown by its seeking third party financing and developing
other financing options in the finance plan, provide sufficient
assurance that funding will be available to cover projected future
funding shortfalls. While we recognize the state's commitment to
finance the project, we continue to believe that additional actions,
such as those outlined in FHWA's letter, are needed since the
Secretary must approve the state's extensive use of advance
construction.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7
To prepare this report, we analyzed the July 1995 cost estimate and
the February 1996 and earlier versions of the finance plan for the
Central Artery/Tunnel project. We reviewed supporting documentation
and discussed cost and financing issues with officials at FHWA's
headquarters in Washington, D.C., and, in Boston, Massachusetts, at
FHWA's Massachusetts Division Office, the state's Executive Office of
Administration and Finance, and MHD's Central Artery/Tunnel project
office. We discussed cost containment measures with project
officials and five design firms participating in MHD's design-to-cost
program and obtained and analyzed related documentation. We also
reviewed Massachusetts' statewide transportation plan and discussed
it with officials at FHWA and at the state's Executive Office of
Transportation and Construction in Boston. We also obtained and
reviewed state legislation and discussed it with officials at the
state legislature, the Massachusetts Turnpike Authority, the
Massachusetts Port Authority, and the Massachusetts Bay
Transportation Authority. We performed our work from October 1995
through April 1996 in accordance with generally accepted government
auditing standards.
---------------------------------------------------------- Letter :7.1
As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 30 days after the date of this letter. At that time, we will
send copies to the cognizant congressional committees; the Secretary
of Transportation; and the Administrator, Federal Highway
Administration. We will make copies available to others on request.
Please call me at (202) 512-2834 if you or your staff have any
questions. Major contributors to this report are listed in appendix
VI.
Sincerely yours,
John H. Anderson, Jr.
Director, Transportation and
Telecommunications Issues
OBLIGATIONS FOR THE CENTRAL
ARTERY/TUNNEL PROJECT AS OF MARCH
1, 1996
=========================================================== Appendix I
(Dollars in millions)
Percentage
of total
Obligation obligation
Source of funds s s
---------------------------------------------- ---------- ----------
Federal funds
Interstate Construction Program $3,662.8
National Highway System Program 194.6
Bridge Program 145.3
Other programs 84.1
======================================================================
Total federal funds $4,086.8 86.2%
State funds
State matching funds 623.4
Additional state funds 31.9
======================================================================
Total state funds $655.3 13.8%
======================================================================
Total $4,742.0 100.0%
----------------------------------------------------------------------
Note: Numbers may not add because of rounding.
Source: Central Artery/Tunnel Project Office, Massachusetts Highway
Department (MHD).
GAO'S ANALYSIS OF THE CENTRAL
ARTERY/TUNNEL PROJECT'S COSTS
========================================================== Appendix II
(Dollars in millions)
Item Cost
-------------------------------------------------------------- ------
Official estimate\a $7,780
Excluded costs
Expenditures prior to 1991 255
Connections to Massachusetts Turnpike Authority facilities 230
Logan Airport interchange 180
Other exclusions 574
======================================================================
Total excluded costs $1,239
Inflation\b
Awarded contracts 136
Unawarded (future) contracts 1,017
======================================================================
Total inflation $1,153
Development of air rights\c $225
======================================================================
Total $10,39
7
----------------------------------------------------------------------
\a MHD's cost estimate for the Central Artery/Tunnel project
comprises assumptions about the cost of labor and materials. We did
not examine these assumptions.
\b MHD's cost estimate does not account for the effects of inflation.
Rather, the estimate represents expenditures incurred prior to August
1994 at their value in the year they were incurred and expenditures
expected after that date in August 1994 dollars. Our analysis
assumes an inflation rate of 3.35 percent a year. This assumption
was agreed to by the Federal Highway Administration (FHWA) and MHD as
part of the middle cost scenario for the funding scenarios in the
project's February 1996 finance plan.
\c MHD's estimate deducts $225 million from the project's total cost
estimate. This deduction represents the sale of air rights--proceeds
the state expects to receive from the development of property
acquired for the project. In its July 1995 review of MHD's cost
estimate, FHWA stated that "the credit deduction for the sale of air
rights is not considered an appropriate deduction in the cost
estimate" and that "the amount and timing of any air rights credit is
uncertain." We are unaware of any precedent for a state's taking such
proceeds as a credit for a project's cost. While such proceeds might
appropriately be recognized as a source of financing, the $225
million that Massachusetts identifies will not be realized until
2004, when the Central Artery/Tunnel project's expenditures will
largely be completed.
Source: Central Artery/Tunnel Project Office, MHD, and our analysis.
FINANCING FOR THE CENTRAL
ARTERY/TUNNEL PROJECT UNDER THE
LOW FUNDING/MIDDLE COST SCENARIO
========================================================= Appendix III
(Dollars in millions)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total
---------------------------- -------- -------- -------- ---------- ---------- ---------- ---------- ---------- --------- -------- --------
Obligations $854.6 $961.3 $1,257.2 $1,196.3 $959.9 $437.1 $311.1 $113.6 ($191.5) ($265.0) $5,634.6
Funding
Federal $589.0 $518.0 $320.0 $320.0 $320.0 $320.0 $320.0 $320.0 $320.0 $320.0 $3,667.0
State 130.0 130.0 130.0 130.0 130.0 130.0 100.0 100.0 85.0 85.0 1,150.0
State bonds\a 300.0 100.0 400.0
Massachusetts Turnpike 100.0 100.0
Authority\a
Massachusetts Port 100.0 100.0
Authority\a
=====================================================================================================================================================
Total funds $819.0 $948.0 $650.0 $450.0 $450.0 $450.0 $420.0 $420.0 $405.0 $405.0 $5,417.0
Surplus/shortfall
Annual ($35.6) ($13.3) ($607.2) ($746.3) ($509.9) $12.9 $108.9 $306.5 $596.5 $670.0
Cumulative ($35.6) ($48.9) ($656.1) ($1,402.3) ($1,912.3) ($1,899.4) ($1,790.6) ($1,484.1) ($887.6) ($217.6) ($217.6)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Note: MHD modeled this scenario at FHWA's request.
\a Legislation approved in Massachusetts in 1995 provided $400
million in state bonds that will be used for the Central
Artery/Tunnel project. It also provided for contributions of $100
million from the Massachusetts Turnpike Authority and $100 million
from the Massachusetts Port Authority.
Source: MHD's February 1996 finance plan and our analysis.
FINANCING FOR THE CENTRAL
ARTERY/TUNNEL PROJECT UNDER THE
MODIFIED MIDDLE FUNDING/MIDDLE
COST SCENARIO
========================================================== Appendix IV
(Dollars in millions)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total
---------------------------- -------- -------- -------- ---------- ---------- ---------- ---------- ---------- --------- -------- --------
Obligations $854.6 $961.3 $1,257.2 $1,196.3 $959.9 $437.1 $311.1 $113.6 ($191.5) ($265.0) $5,634.6
Funding
Federal $589.0 $518.0 $506.0 $466.0 $466.0 $225.0 $225.0 $225.0 $225.0 $225.0 $3,670.0
State 130.0 130.0 130.0 130.0 130.0 130.0 100.0 100.0 85.0 85.0 1,150.0
State bonds\a 300.0 100.0 400.0
Massachusetts Turnpike 100.0 100.0
Authority\a
Massachusetts Port 100.0 100.0 200.0
Authority\a
Massachusetts Bay 80.0 80.0
Transportation Authority\a
Total funds $819.0 $948.0 $836.0 $776.0 $596.0 $355.0 $325.0 $325.0 $310.0 $310.0 $5,600.0
=====================================================================================================================================================
Surplus/shortfall
Annual ($35.6) ($13.3) ($421.2) ($420.3) ($363.9) ($82.1) $13.9 $211.5 $501.5 $575.0
Cumulative ($35.6) ($48.9) ($470.1) ($890.4) ($1,254.3) ($1,336.4) ($1,322.5) ($1,111.0) ($609.5) ($34.5) ($34.5)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Note: MHD's middle funding scenario assumes that the state gains
access to $638 million of its unobligated balances. Because there is
no provision in current law that would afford Massachusetts or any
other state such access, we have removed this assumption from the
analysis. MHD views the middle cost/middle funding scenario as the
most likely when access to unobligated balances is assumed.
\a Legislation approved in Massachusetts in 1995 provided $400
million in state bonds that will be used for the Central
Artery/Tunnel project. It also provided for contributions of $100
million from the Massachusetts Turnpike Authority and $100 million
from the Massachusetts Port Authority. The middle funding scenario
assumes that future legislation and/or agreements will authorize
additional contributions--above and beyond those contained in the
1995 legislation--of $100 million from the Massachusetts Port
Authority and $80 million from the Massachusetts Bay Transportation
Authority.
Source: MHD's February 1996 finance plan and our analysis.
(See figure in printed edition.)Appendix V
COMMENTS FROM THE COMMONWEALTH OF
MASSACHUSETTS
========================================================== Appendix IV
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on the Commonwealth of
Massachusetts' letter dated May 1, 1996:
GAO COMMENTS
-------------------------------------------------------- Appendix IV:1
1. Massachusetts disagreed with our observations and asked us to
consider additional information to clarify and amplify information in
the report and to better reflect its views on certain issues. For
example, Massachusetts asked us to present its estimates of the cost
and schedule savings resulting from its use of advance construction
contracting and its disagreement with FHWA's analysis of future state
contributions to the Highway Trust Fund. We incorporated these and
other comments throughout the report as appropriate. However, we do
not believe that these changes constitute a basis for modifying our
observations about the project.
2. We believe that the title of the report is accurate. We agree
with Massachusetts that all federally funded programs face
uncertainties because of the federal budget climate. We also agree
that all states face uncertainty in their highway programs, since no
state knows what federal highway funding it will receive after fiscal
year 1997 until the Congress reauthorizes ISTEA. But we disagree
that Massachusetts faces no greater financial uncertainty in its
highway program than any other state. No other state faces the
challenge of financing over $5 billion in costs for a highway project
in the next 5-6 years or plans to use advance construction
contracting as extensively. While Massachusetts has modeled the
effects of lower federal aid levels after fiscal year 1997 in its
finance plan, substantial funding shortfalls exist under all funding
scenarios, and uncertainties exist about how those shortfalls will be
financed because a plan for financing them has not been selected.
3. We were not able to verify from the information in the finance
plan that the federal share for the project will be reduced to
between 60 and 70 percent. After we received Massachusetts' letter,
we asked MHD for supporting documentation. MHD's analysis shows that
the remaining federal share depends on assumptions about future
federal funding and ranges from 74 percent under the low funding
scenario to 86 percent under the high funding scenario.
4. While we recognize the commitment on the part of the state to
finance the project, substantial funding shortfalls exist even under
the finance plan's more optimistic funding scenarios. Therefore, we
believe the prudent strategy is to select a financing strategy as
soon as possible. This is particularly important, since the
Secretary must approve the state's extensive use of advance
construction.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI
RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION WASHINGTON,
D.C.
Steve Cohen
Thomas E. Collis
Gary L. Jones
Phyllis F. Scheinberg
BOSTON, MASSACHUSETTS
Jason Bromberg
Teresa Dee
Lena Natola
*** End of document. ***