Transportation Infrastructure: Progress On and Challenges to Central
Artery/Tunnel Project's Costs and Financing (Letter Report, 07/17/97,
GAO/RCED-97-170).

Pursuant to a congressional request, GAO evaluated: (1) the estimated
cost of the Central Artery/Tunnel project in Boston, Massachusetts; and
(2) Massachusetts' plans for financing the project.

GAO noted that: (1) as of March 1997, Massachusetts had estimated that
the total cost of the Central Artery/Tunnel project was $10.8
billion--$400 million more than the $10.4-billion estimate contained in
its September 1996 finance plan; (2) this increase occurred primarily
because of growth in the project's estimated construction costs; (3)
costs actually increased by more than $400 million, but the state
assumed in its $10.8-billion cost estimate that the increases would be
partly offset by savings, primarily from the project's owner-controlled
insurance program; (4) however, the state also assumed that most of
these insurance savings, $778 million, would not be realized until 2017,
long after construction is completed; (5) as a result, the project's
total funding needs through 2004, when the project is scheduled to be
completed, are $11.6 billion--$778 million more than the project's
$10.8- billion cost estimate, (6) furthermore, uncertainties exist about
whether the savings projected by the state in the insurance program will
be achieved; (7) the state's $10.8-billion cost estimate also depends on
achieving the aggressive cost containment goals established for the
project; (8) while the state has made some progress in its cost
containment program, officials acknowledge that it has some ambitious
goals that will be difficult to meet; (9) Massachusetts has implemented
a plan to finance its share of the project's cost, including a strategy
to finance funding shortfalls; (10) furthermore, funding shortfalls
could be an additional $100 million to $500 million more if the state
does not meet its cost containment; (11) to finance the shortfalls, the
state plans to borrow $1.7 billion through a combination of revenue
bonds issued by the Massachusetts Turnpike Authority and grant
anticipation notes, as authorized by legislation passed in 1997; (12)
however, this plan may be insufficient to meet the project's financing
needs because it substantially covers the funding shortfalls only under
the best-case scenario modeled in the feasibility study; (13) in
addition, while the financial markets will decide whether the use of
grant anticipation notes is feasible, uncertainties exist about the use
these notes because the amount proposed by Massachusetts is
unprecedented and relies on borrowing against federal funds that may not
be authorized by the Congress until after the next federal highway
authorization expires, sometime around 2003; and (14) the state imposed
additional limits on itself to constrain the growth of state debt in
order to improve its credit ratings.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-97-170
     TITLE:  Transportation Infrastructure: Progress On and Challenges 
             to Central Artery/Tunnel Project's Costs and
             Financing
      DATE:  07/17/97
   SUBJECT:  Federal aid for highways
             Public roads or highways
             Highway planning
             Road construction
             Cost control
             Cost sharing (finance)
             Municipal bonds
             Intergovernmental fiscal relations
             Future budget projections
             Workers compensation
IDENTIFIER:  Central Artery/Tunnel Project (Boston, MA)
             Interstate Highway System
             Logan International Airport (Boston, MA)
             Massachusetts
             Boston (MA)
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Transportation and Related
Agencies, Committee on Appropriations, House of Representatives

July 1997

TRANSPORTATION INFRASTRUCTURE -
PROGRESS ON AND CHALLENGES TO
CENTRAL ARTERY/TUNNEL PROJECT'S
COSTS AND FINANCING

GAO/RCED-97-170

Central Artery/Tunnel Project

(342926)


Abbreviations
=============================================================== ABBREV

  GAO - General Accounting Office
  FHWA - Federal Highway Administration
  ISTEA - Intermodal Surface Transportation Efficiency Act
  MHD - Massachusetts Highway Department
  STEP -
  STARS -
  NEXTEA -

Letter
=============================================================== LETTER


B-275370

July 17, 1997

The Honorable Frank R.  Wolf
Chairman, Subcommittee on Transportation
 and Related Agencies
Committee on Appropriations
House of Representatives

Dear Mr.  Chairman: 

The Central Artery/Tunnel project in Boston, Massachusetts--one of
the largest, most complex, and most expensive highway construction
projects ever undertaken--is well under way, with contracts worth
nearly $8 billion either completed or awarded.  Construction began in
1991, and the project is expected to be substantially completed in
December 2004.  As of February 1997, federal funds accounted for $4.7
billion (about 82 percent) of the $5.7 billion obligated for the
project, with the remainder coming from state funds.  The level of
future federal funding for the project depends upon the amount
provided under the next federal highway program authorization; the
current authorization expires on September 30, 1997. 

In response to your concerns about the need to monitor the costs of
this project and the uncertainties associated with its financing, we
evaluated (1) the estimated cost of the project and (2)
Massachusetts' plans for financing it. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

As of March 1997, Massachusetts had estimated that the total cost of
the Central Artery/Tunnel project was $10.8 billion--$400 million
more than the $10.4 billion estimate contained in its September 1996
finance plan.  This increase occurred primarily because of growth in
the project's estimated construction costs.  Costs actually increased
by more than $400 million, but the state assumed in its $10.8 billion
cost estimate that the increases would be partly offset by savings,
primarily from the project's owner-controlled insurance program. 
However, the state also assumed that most of these insurance
savings--$778 million--would not be realized until 2017, long after
construction is completed.  As a result, the project's total funding
needs through 2004, when the project is scheduled to be completed,
are $11.6 billion--$778 million more than the project's $10.8 billion
cost estimate.  Furthermore, uncertainties exist about whether the
savings projected by the state in the insurance program will be
achieved. 

The state's $10.8 billion cost estimate also depends on achieving the
aggressive cost containment goals established for the project.  While
the state has made some progress in its cost containment program,
officials acknowledge that it has ambitious goals that will be
difficult to meet.  If current trends in the project's construction
costs continue, further cost increases of some magnitude seem likely. 
As a result, the project's cost could increase between $100 million
and $500 million. 

Massachusetts has implemented a plan to finance its share of the
project's cost, including a strategy to finance funding shortfalls. 
The state's December 1996 feasibility study identified a funding gap
of $1.8 billion to $2.3 billion between fiscal years 1998 and 2002,
depending on the federal funds provided.  However, unless additional
savings are implemented, this shortfall could be about $450 million
higher than expected because the feasibility study does not include
cost increases that occurred through March 1997.\1

Furthermore, funding shortfalls could be an additional $100 million
to $500 million more if the state does not meet its cost containment
goals for construction. 

To finance the shortfalls, the state plans to borrow $1.7 billion
through a combination of revenue bonds issued by the Massachusetts
Turnpike Authority and grant anticipation notes--short-term notes
issued by the state to borrow against future federal funds--as
authorized by legislation passed in 1997.  However, this plan may be
insufficient to meet the project's financing needs because it
substantially covers the funding shortfalls only under the best case
funding scenario modeled in the feasibility study.  In addition,
while the financial markets will decide whether the use of grant
anticipation notes is feasible, uncertainties exist about the use of
these notes because the amount proposed by Massachusetts is
unprecedented and relies on borrowing against federal funds that may
not be authorized until after the next federal highway authorization
expires, sometime around 2003.  If Massachusetts' plan to address
shortfalls is not sufficient, the state may have to borrow additional
funds.  This additional borrowing could make it difficult to stay
within the state's limits on the issuance of new debt.  The state
imposed these limits on itself to constrain the growth of state debt
in order to improve its credit ratings. 


--------------------
\1 As noted above, the amount of cost increases was greater than the
$400 million increase in the state's estimate for the project's total
cost because increases have been partially offset with savings, and
most of the savings attributable to the project's insurance program
will not be realized until 2017. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The Central Artery/Tunnel project, an Interstate Highway System
project in Boston, Massachusetts, will build or reconstruct about 7.5
miles of urban highways--about half of them underground.  As shown in
figure 1, the project will (1) extend Interstate 90 east, mostly in
tunnels, through South Boston, under Boston Harbor (through the Ted
Williams Tunnel), and 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. 

The project is currently managed by the Massachusetts Highway
Department (MHD).\2 Day-to-day design and construction activities are
managed by a management consultant--a joint venture of
Bechtel/Parsons Brinckerhoff--under contract with MHD.  Federal funds
are authorized under the Intermodal Surface Transportation Efficiency
Act of 1991, which expires on September 30, 1997.  The Federal
Highway Administration (FHWA) approves and oversees the expenditure
of the project's 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. 

Massachusetts periodically prepares finance plans detailing the
remaining estimated cost of the project and the sources of funds the
state plans to use to finance this cost.  Since March 1996, the state
has also prepared monthly project management reports.  These reports,
which present the estimated cost of the project on the basis of
current costs and savings, are used to identify trends, manage the
project on a total-cost basis, and monitor the progress of cost
containment goals.  In 1995 the Secretary of Transportation announced
that FHWA would require states to prepare finance plans for federally
assisted highway projects with an estimated total cost of $1 billion
or more, and FHWA has requested that Massachusetts prepare a plan
annually or more frequently if events warrant.  FHWA has no
requirements for states to prepare total cost estimates for projects
nor standards for how such estimates should be prepared. 

   Figure 1:  Map of the Central
   Artery/Tunnel Project

   (See figure in printed
   edition.)

   Source:  Massachusetts Highway
   Department.

   (See figure in printed
   edition.)

In December 1996, the state released a study (referred to as the
feasibility study) addressing options for financing the state's share
of the Central Artery/Tunnel project.  In March 1997, a state law
conveyed ownership of certain roadways and tunnels in downtown
Boston, including those comprising much of the Central Artery/Tunnel
project, to the Massachusetts Turnpike Authority and authorized the
Authority to issue revenue bonds to help finance the project's
construction and other costs.  To provide further financing for the
project, Massachusetts' May 1997 transportation bond bill authorized
the state to issue short-term notes to be repaid with future federal
funding. 

During the last 12 months, the project has progressed toward
completion at a faster rate than at any time in its history.  In June
1997, MHD estimated that about 90 percent of the project was designed
and more than 26 percent was constructed.  The Ted Williams Tunnel
opened to commercial traffic in 1995 and to passenger vehicles on a
limited basis during 1996.  The tunnel's permanent connections to the
Massachusetts Turnpike are under construction and will open to all
traffic in 2001 (see fig.  2). 

   Figure 2:  The Ted Williams
   Tunnel

   (See figure in printed
   edition.)

   Source:  MHD.

   (See figure in printed
   edition.)


As shown in figure 3, work on the tunnels that will replace the
above-ground Central Artery is under way, with 6 of the 10 principal
construction contracts awarded as of April 1997.  The northbound and
southbound Central Artery tunnels are scheduled to open to traffic in
2002 and 2003, respectively.  After 2002, the pace of construction
should slow considerably, as demolition of the elevated Central
Artery, surface restoration, and street improvements take place.  The
project is scheduled to be substantially completed in December 2004. 

As of March 1, 1997, $5.7 billion had been obligated for the Central
Artery/Tunnel project.  Contracts for a larger amount--$7.7
billion--had been completed or awarded as of March 31, 1997.  To
accomplish this level of contract activity, Massachusetts has made
extensive use of advance construction, which allows it to begin many
projects concurrently by obligating federal funds over several years. 
For example, although $2.1 billion in contracts will be awarded in
fiscal year 1997, only $180 million will be obligated, consistent
with FHWA's regulations.  The remainder will be obligated over a
5-year period.  Appendix I provides additional information on federal
and state obligations for the Central Artery/Tunnel project and
Massachusetts' use of advance construction. 

   Figure 3:  Construction of the
   Underground Central Artery

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

Source:  MHD. 


--------------------
\2 The Massachusetts Turnpike Authority will assume ownership and
management of the Central Artery/Tunnel project under a state law
approved in Mar.  1997.  The Authority and MHD are currently drafting
an agreement delineating the roles, responsibilities, and terms of an
eventual transfer. 


   STATE ESTIMATES THE TOTAL COST
   AT $10.8 BILLION, BUT FUNDING
   NEEDS ARE HIGHER
------------------------------------------------------------ Letter :3

As of March 1997, Massachusetts estimated that the total cost of the
Central Artery/Tunnel project was $10.8 billion--$400 million more
than the $10.4 billion estimate contained in the state's most recent
finance plan of September 1996.  Increases occurred primarily in the
project's estimated construction costs and were partly offset by
savings.  However, a substantial portion of the estimated savings are
expected to come from the project's insurance program but will not be
realized until long after construction is completed.  Because these
savings will not be available as the project incurs costs, the
project will require total funding of $11.6 billion through 2004,
when it is scheduled to be completed.  Furthermore, uncertainties
exist as to whether the insurance savings projected by the state will
be achieved. 


      RISING COSTS PARTIALLY
      OFFSET BY SAVINGS
---------------------------------------------------------- Letter :3.1

Overall, Massachusetts estimates that the cost of the Central
Artery/Tunnel project has increased from about $10.4 billion to $10.8
billion over the last 12 months.  Although the estimated cost
actually increased by more than this amount, the state has found
savings to partially offset this growth. 

   Figure 4:  Central
   Artery/Tunnel Cost Estimates,
   March 1996 to March 1997

   (See figure in printed
   edition.)

Notes:  These figures have been adjusted to exclude credits for "air
rights"--proceeds the state expects to receive from developing
property acquired for the project's construction that will become
excess at the end of the project.  At FHWA's request, MHD's September
1996 finance plan changed how air rights were treated in earlier
plans from a credit to the cost of the project to a source of
revenue.  However, the state's monthly project management reports
through March 1997 continued to treat air rights as a credit to the
project's cost.  Project officials stated that future finance plans
would continue the practice of treating air rights as a revenue
source rather than a cost credit, and in May 1997, the Central
Artery/Tunnel project manager told us that the state planned to
revise its monthly cost-reporting system to treat air rights in the
same fashion. 

According to the September 1996 finance plan, the project's $10.4
billion total cost estimate reflected project costs as of June 1996
and included recognition of future insurance savings totaling about
$226 million.  Those savings were taken in November 1996. 

Source:  GAO's analysis of MHD's data. 

The largest increase in the project's estimated cost was for
construction--the largest cost component of the Central Artery/Tunnel
project.  Between March 1996 and March 1997, estimated construction
costs increased by about $500 million, a 7.4-percent increase.  While
a number of factors contributed to the increased construction costs,
about $278 million occurred because bids on construction contracts
were higher than projected.  Most of these increases occurred on two
large-dollar contracts--totaling nearly $800 million--awarded in
January and March 1997.  On one contract for segments of the tunnels
to replace the above-ground Central Artery, state and FHWA officials
stated that several factors contributed to the increase, including
the complexity of integrating the new tunnel with the existing Boston
Harbor tunnels while sustaining traffic, and noise mitigation
measures that were costlier than expected.  On another contract for
tunneling for the I-90 underground connection to the Ted Williams
Tunnel at Fort Point Channel, state and FHWA officials said that
complex tunneling techniques never before used to this extent in the
United States contributed to higher-than-expected bids.  State and
FHWA officials expressed confidence that the circumstances
experienced on these two contracts were unique and that remaining
contracts would not experience the same types of cost increases. 

Two other categories of cost increases resulted in about $230 million
in additional construction costs.  First, estimates of construction
costs prepared during the design phase were more than the amount
budgeted.  Second, actual and estimated costs of changes to awarded
construction contracts exceeded the amount budgeted for such changes. 

The project has also achieved savings to offset cost increases; the
largest savings have come in the project's owner-controlled insurance
program.  While contractors in a construction project traditionally
purchase their own insurance and add the cost of their premiums to
the contract, the Central Artery/Tunnel project purchased "wrap-up"
insurance that provides workers' compensation insurance, general
liability insurance, and other coverage for all contractors and
subcontractors working on the project.  Wrap-up insurance programs
generally result in lower total insurance costs for a number of
reasons, including the elimination of redundant insurance services
and profit margins associated with the purchase of insurance by each
contractor and subcontractor. 

Since December 1994, the estimated cost of the insurance program has
been reduced by over $700 million.  These estimated savings result
from, among other things, a better-than-expected safety record and
lower-than-expected accident claims on the project.  Most of the
estimated insurance savings are attributable to anticipated refunds
which, along with other insurance related funds, will earn interest
until all claims are paid, at which time these remaining funds will
be returned to MHD.  Project officials estimate that MHD will receive
these proceeds, including refunds and related interest, in 2017--13
years after construction is completed.  According to project
officials, standard industry practice is to assume that claims are
paid over a 13-year period after the project is completed. 


      PROJECT'S TOTAL FUNDING
      NEEDS ARE $11.6 BILLION
---------------------------------------------------------- Letter :3.2

The state's $10.8 billion estimate of the project's total cost
includes a credit to the cost of the project of $778 million, which
represents the receipt of insurance proceeds.  However, these funds
will not be available until 2017 and thus cannot be used to help pay
for the cost of the project.  As a result, the project's total
funding needs during the period of construction will be $778 million
greater than the $10.8 billion total cost estimate, or about $11.6
billion.  (See table 1.) FHWA stated that while the insurance
proceeds would not be available for use in meeting the Central
Artery/Tunnel project's costs, they could be used for other federally
eligible transportation projects in Massachusetts. 



                                Table 1
                
                 Central Artery/Tunnel Project's Total
                         Cost and Funding Needs

                         (Dollars in millions)

                                        Data as of
                                         September   Data as
                                      1996 finance  of March
Obligations and cost                          plan      1997    Change
------------------------------------  ------------  --------  --------
Obligations through fiscal year 1996        $5,169    $5,081     ($88)
                                       (estimated)  (actual)
Estimated obligations fiscal year            5,979     6,523       544
 1997 through 2004
======================================================================
Total estimated obligations through        $11,148   $11,604      $456
 2004
Insurance proceeds in 2017                     722       778        56
======================================================================
Total (net) project cost                   $10,426   $10,826      $400
----------------------------------------------------------------------
Source:  MHD. 


      INSURANCE SAVINGS MAY NOT BE
      REALIZED
---------------------------------------------------------- Letter :3.3

Although Massachusetts' cost estimate assumes that insurance proceeds
will be received in 2017, the insurance program may not continue in
its present form until that time.  According to industry
representatives and officials on other transportation projects with
wrap-up insurance policies, most workers' compensation claims are
filed within 2 years after construction ends.  Industry and project
officials also said that within 18 months to 5 years after
construction ends, the liability for satisfying any further claims is
frequently transferred to a reinsurer or another party who manages
the claims until they are paid.  The state estimates that workers'
compensation and general liability claims payments after 2006 will
total about $28 million; however, it also assumes that the insurance
trust accounts will carry over $300 million until 2017 and accumulate
interest during that period.  In particular, the state credits to the
cost of the project about $226 million, representing interest
accumulated between 2006 and 2017.  However if the liability were
sold to a reinsurer, these proceeds would be largely unavailable to
the project, and the total estimated cost of the project would rise
from the state's $10.8 billion estimate to about $11.1 billion. 

In commenting on a draft of this report, MHD stated that it has
decided at this time not to use a reinsurer and to retain the funds
until 2017.  However, it noted that this decision would need to made
in consultation with FHWA in about 2004, nearer to the end of the
project. 

In addition, the state's assumptions have other uncertainties. 
Estimated savings from the project's insurance program stem in part
from estimates of lower-than-expected accidents and claims.  In 1992,
the cost estimates of the workers' compensation component of the
wrap-up insurance program were established on the basis of a
75-percent "loss ratio;" that is, the value of claims paid was
expected to total 75 percent of premiums.  However, over the last 4
years, the actual loss ratio has been about 30 percent.  As a result,
the project has reduced its assumptions about the insurance loss
ratio from 75 percent to 55 percent.  Although experience has been
somewhat limited to date on wrap-up insurance for large construction
projects, project officials stated that large programs tend to end
with loss ratios of 45 percent to 55 percent. 

While only future experience will demonstrate whether the state's
accident and claims assumptions are correct, it should be noted that
the Central Artery/Tunnel project is only 26-percent complete, and
the project is beginning 6 years of underground tunneling in the
congested downtown area.  This construction will be complex; it will,
for example, require maintaining highway traffic on the existing
Central Artery's elevated structure directly above tunnel
construction and maintaining rail and subway operations below and
near tunnel construction.  In the coming years, the number of
contractor personnel and the level of construction activity in the
downtown area will greatly increase.  If loss claims were to
increase, and if the loss ratio were 65 percent, rather than the 55
percent assumed in the cost estimate, the project's cost would
increase by about $56 million. 

Project officials stated that the project has completed 18 months of
the 6-year construction schedule and that accidents and claims have
decreased during that time.  Officials expressed confidence that the
state's assumptions will hold and believed that if that is the case,
it may be possible to reduce the estimated cost of the insurance
program even more. 


   CONSTRUCTION COSTS COULD
   INCREASE FURTHER IF COST
   CONTAINMENT GOALS ARE NOT
   REALIZED
------------------------------------------------------------ Letter :4

While MHD is aggressively pursuing its cost containment goals, the
project is not meeting these goals.  Unless additional offsetting
savings are found, it will be difficult to avoid increases in the
cost of the project.  We estimate that these increases could add
between about $100 million and $500 million to the cost of the
project if current trends continue. 

In 1995, MHD established an overall goal of holding the cost of
changes to the project's construction contracts to 10.7 percent or
less of the contracts' estimated bid prices.  This overall goal was
based on two assumptions:  (1) holding cost growth on contracts
awarded after November 1994 to an average of 7 percent of the awarded
bid price and (2) holding cost growth on contracts awarded through
November 1994 to about 25 percent of the awarded bid price--the
average amount that was being experienced on those contracts at that
time.  Cost increases above MHD's goals have occurred on contracts
awarded both before and after November 1994.  As of December 1, 1996,
cost growth on awarded contracts totaled 17.4 percent of contract bid
prices, rather than the project's 10.7-percent goal, as shown in
table 2. 



                                Table 2
                
                Percentage Increase in Costs on Awarded
                     Central Artery/Tunnel Project
                 Construction Contracts, as of December
                                1, 1996

                         (Dollars in millions)

                                          Cumulati
                                  Number        ve   Percent   Percent
                                      of   awarded      cost    actual
                                contract  contract    growth      cost
Contracts                              s     price      goal    growth
------------------------------  --------  --------  --------  --------
Contracts awarded through             36    $1,108      25.0      28.4
 November 1994
Contracts awarded after               28     1,571       7.0       9.7
 November 1994
======================================================================
All awarded contracts                 64    $2,678      10.7      17.4
----------------------------------------------------------------------
Source:  GAO's analysis of MHD's data. 

As table 2 shows, the contracts awarded after November 1994 have
experienced much lower growth in costs (9.7 percent) than the
contracts awarded through November 1994 (28.4 percent).  MHD and FHWA
officials believe that the cost performance of contracts issued after
November 1994 is a more meaningful indicator of the effect of MHD's
cost containment efforts than the performance of contracts issued
before that date because MHD did not have a cost containment program
in effect until 1995.  As of December 1, 1996, 49 construction
contracts had not been awarded.  If those contracts experience the
same 9.7-percent cost growth as the contracts awarded after November
1994 (instead of the 7-percent goal), the cost of the project would
increase by about $100 million. 

However, it may not be possible to limit the growth in contract costs
to the 9.7 percent experienced on the 28 contracts awarded after
November 1994 because those contracts have not been in effect for
very long.  As of December 1, 1996, only 5 of the 28 contracts,
valued at less than $10 million, had been completed, while 11
contracts (accounting for about 70 percent of the $1.6 billion cost
of the 28 contracts) were less than 25-percent complete. 
Nevertheless, almost one-half of the 28 contracts had already
exceeded the 7-percent cost containment goal.  For example, one
contract that MHD awarded in 1995 to construct the underground
Central Artery is 22-percent complete and will not be finished until
2000.  However, MHD estimates that this contract had already exceeded
its bid price by 13 percent as of December 1, 1996. 

While we cannot predict the total cost increase on all construction
contracts, we believe that it will be difficult to meet the goals set
in 1995 and to avoid increases in the cost of the project.  For
example, assuming that awarded construction contracts experience no
further cost growth after December 1, 1996, costs for the remaining
49 unawarded contracts could increase by only 5.7 percent if the cost
containment goal of 10.7 percent is to be met.  If, however, the
unawarded contracts experience the same 17.4-percent growth
experienced by the awarded contracts, as shown in table 2, the total
cost of the project would rise by about $500 million. 

State officials agreed that the project has ambitious cost
containment goals that will be difficult to meet.  However, they
stated that the existing goals are essential to provide designers and
contractors with an incentive to control contract changes and
restrict cost growth.  They believe that any relaxation of the goals
would deprive state managers of the leverage needed to control costs
and that ultimately such a relaxation would become a self-fulfilling
prophecy, resulting in even further cost increases. 


      MHD IS TAKING STEPS TO
      REDUCE COSTS, BUT OPTIONS
      FOR MORE SAVINGS MAY BE
      LIMITED
---------------------------------------------------------- Letter :4.1

Since our May 1996 report,\3 MHD has analyzed the reasons for cost
increases and developed strategies to reduce the cost of construction
contracts.  For example, MHD now requires firms bidding on Central
Artery/Tunnel construction contracts to include a bid of the cost and
time associated with removing unanticipated underground obstructions. 
MHD officials stated that this estimate allows them to obtain a
competitive price at the outset of a contract for unknown factors
rather than face negotiated change orders and delays after a contract
is awarded.  The project's construction managers stated that,
although it is still too early to assess measurable results, some of
these initiatives could reduce the cost and number of contract
changes, primarily by avoiding delays in these contracts. 

MHD has also made progress in reducing estimated construction costs
during the design process.  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.  MHD stated in 1995 that preliminary cost estimates, on
average, increased 18 percent.  To control cost increases, MHD
initiated a "design-to-cost" program in 1995.  Under this program,
contractors design their segments of the project within an agreed
baseline budget for construction costs.  The design contractor must
periodically submit progress estimates 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 agreed
baseline budget), 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. 

The design-to-cost initiative is intended to result in no growth in
the estimated cost of construction during the design phase.  An MHD
analysis shows that, as of April 1997, estimated construction costs
under this program have increased in total by about 4 percent,
compared with the historical 18-percent rate.\4 As of April 1997, MHD
required design contractors to find cost reductions on four contracts
to reduce estimated cost increases by $60 million.  The Deputy
Project Manager for Design stated that contractors' plans have
resulted in reductions of about $44 million of this $60 million and
that he is confident that the remainder will be recouped as well. 

While MHD has made some progress in containing costs, options for
further savings may be limited.  For example, as of March 1997, only
four principal construction contracts--two for the Route 1A
interchange at Logan International Airport and two for the
underground Central Artery--were early in the design stage, where
greater opportunities exist for significant scope reductions or
changes.  MHD is redesigning the scope of one of the Route 1A
interchange contracts to reduce its costs by about $56 million. 

With limited opportunity to reduce the project's scope, the state is
looking for other ways to cut costs.  For example, MHD has proposed
that the amount currently budgeted for inflation in unawarded
contracts be reduced from 3.35 percent to 2.35 percent, on the basis
of recent inflation rates in the Boston area.  This lower inflation
rate would reduce estimated project costs by about $140 million. 
FHWA officials are reviewing this proposal.  MHD is also reducing the
estimated cost of the project by moving certain costs out of the
project's budget.  For example, in 1996, MHD reassigned about $20
million in costs from the Central Artery/Tunnel project to the
statewide road and bridge program.  These costs were associated with
project contracts for temporary structures at the Charles River and
the replacement of an existing bridge connecting to the project's
Interstate 90/93 interchange.  Project officials stated that these
costs were more appropriately reflected as statewide transportation
expenditures because they would have been incurred whether or not the
Central Artery/Tunnel project was built.  Officials said that they
are considering assigning some other project costs to the statewide
program. 


--------------------
\3 Transportation Infrastructure:  Central Artery/Tunnel Project
Faces Continued Financial Uncertainties (GAO/RCED-96-131, May 10,
1996). 

\4 Experience with the design-to-cost program has been limited to
date because, as of Nov.  1996, only 10 contracts had progressed
through the final design point in the design-to-cost program.  Eight
of these 10 contracts had their original baseline budgets established
late in the design process.  Generally, cost growth would be more
likely to occur earlier in the design process. 


   STATE'S PLAN FOR FINANCING
   PROJECT MAY BE INSUFFICIENT
------------------------------------------------------------ Letter :5

While the level of future federal funding is uncertain until the
federal highway program is reauthorized, Massachusetts' plan for
financing the state's share of the Central Artery/Tunnel project
identified funding shortfalls.  To address these shortfalls, the
state has implemented a plan to borrow $1.7 billion through
Massachusetts Turnpike Authority revenue bonds backed by toll
increases and short-term grant anticipation notes to be repaid with
future federal funds.  However, this plan may not be sufficient
because (1) shortfalls may be greater than modeled in the state's
plan and (2) while the financial markets will decide whether the use
of grant anticipation notes is feasible, uncertainties exist about
the use of these notes because the amount proposed by Massachusetts
is unprecedented and relies on borrowing against federal funds that
may not be authorized until the next federal highway authorization
expires, sometime around 2003. 


      FUNDING SHORTFALLS EXIST
      UNDER ALL SCENARIOS
---------------------------------------------------------- Letter :5.1

The state's December 1996 feasibility study identified a project
funding shortfall of $1.8 billion to $2.3 billion from fiscal years
1998 through 2002.  The study referred to this as the "interim"
shortfall because the project's needs outstrip sources of funds
during the accelerated construction years.  According to the study,
from fiscal years 2003 to 2005, construction needs subside and a
funding surplus of $1.6 billion reduces the project's "total" funding
shortfall to about $200 million to $700 million. 

The shortfall ranges are due to uncertainty about future federal
funding.  While the feasibility study modeled two potential federal
funding scenarios, shortfalls could be greater or smaller under other
possible federal funding scenarios.  For example, under several of
the reauthorization proposals introduced in the Congress during 1997,
the project's funding shortfalls in fiscal years 1998 through 2002
would range from $1.6 billion to $2.5 billion.  Details of the
various funding scenarios are discussed in appendix II. 

In addition to federal funding, the feasibility study identified the
state sources of funding that were expected as of December 1, 1996. 
These sources included (1) about $1 billion in state funds to match
federal funds and to pay for the portions of the project funded
exclusively by the state; (2) a $200 million contribution from the
Massachusetts Port Authority; and (3) $400 million in state bonds,
which was authorized in 1995, and which will be assumed by the
Massachusetts Turnpike Authority.  The feasibility study's
assumptions are shown in table 3. 



                                Table 3
                
                 Feasibility Study Analysis of Central
                  Artery/Tunnel Project Funding, as of
                  December 1, 1996 (Fiscal years 1997
                             through 2005)

                         (Dollars in millions)

                                        Fiscal                  Fiscal
                                         years      Fiscal       years
                                       1997-02       years   1997-2005
Obligations and sources               "interim     2003-05      "total
of financing                        shortfall"   "surplus"  shortfall"
----------------------------------  ----------  ----------  ----------
Obligations                             $5,696        $283      $5,979
======================================================================
Sources of financing
Federal
 -High-funding scenario                  2,435         675       3,110
 -Low-funding scenario                   1,916         675       2,591
State bonds                                800         240       1,040
Mass. Port Authority                       200           0         200
Mass. Turnpike Authority                   100           0         100
State bonds to be assumed by Mass.
 Turnpike Authority                        400           0         400
======================================================================
Total sources of financing
 -High-funding scenario                  3,935         915       4,850
 -Low-funding scenario                   3,416         915       4,331
======================================================================
Proceeds
Air rights proceeds                          0         255         255
Insurance proceeds                           0         722         722
======================================================================
Total proceeds                               0        $977        $977
======================================================================
Surplus/(shortfall)
 -High-funding scenario               ($1,761)      $1,609      ($152)
 -Low-funding scenario                ($2,280)      $1,609      ($671)
----------------------------------------------------------------------
Note:  This table excludes a $50 million contribution from the
Massachusetts Bay Transportation Authority, which was included in the
feasibility study's high-funding scenario but is not being pursued by
the project at this time. 

Source:  GAO's analysis of the feasibility study. 


      FUNDING SHORTFALLS COULD BE
      GREATER THAN ANTICIPATED
---------------------------------------------------------- Letter :5.2

The funding shortfalls could be higher than expected because the
shortfall estimate in the feasibility study reflects the obligation
estimate used in the September 1996 finance plan.  Since that time,
construction and other cost increases have raised the project's
funding requirements by about $450 million through March 1997.  While
some of those increases were offset by insurance savings in the total
cost estimate, most insurance savings will not be realized until
2017, long after the project is completed.  Thus, the cost increases
that occur during construction will still need to be funded. 
Furthermore, shortfalls may be $100 million to $500 million greater
if the state's cost containment goals for construction are not met. 
State officials acknowledged that these goals are ambitious and that
it will be difficult to meet them. 

The state could reduce the shortfall through additional savings. 
However, the $1.6 billion surplus between fiscal years 2003 and 2005,
which the feasibility study used to calculate the total shortfall
through 2005, will be smaller than reported.  According to the
September 1996 finance plan, the surplus funds accrued between fiscal
years 2003 and 2005 will be moved to the peak construction period
through short-term financing.  However, as shown in table 2, nearly
$1 billion of this surplus is revenues from the development of air
rights--proceeds the state expects to receive from developing
property acquired for the project's construction that will become
excess at the end of the project--and savings from the project's
insurance program.  As mentioned earlier, the state assumes that the
insurance savings will not be realized until 2017.  In addition, air
rights revenues will be largely unavailable to the project until
after 2005.  This is because about half the property expected to be
available will not be ready for development until late 2004. 

In commenting on a draft of this report, the state confirmed that
insurance and air rights proceeds would not be used to help finance
the project's debt and stated that future finance plans would clarify
that proceeds are expected to be received after 2005.  FHWA stated
that while these proceeds will not be available to meet the Central
Artery/Tunnel project's funding needs, they could be used for other
transportation-related purposes in Massachusetts. 


      PLAN FOR ADDRESSING
      SHORTFALLS IS IN PLACE, BUT
      IT MAY NOT BE SUFFICIENT
---------------------------------------------------------- Letter :5.3

State legislation enacted in 1997 authorized $1.7 billion in state
borrowing to address the funding shortfalls identified in the
December 1996 feasibility study.  Specifically, under legislation
enacted in March and May of 1997, the following will occur: 

  -- The Massachusetts Turnpike Authority will contribute $700
     million by December 31, 1998, through revenue bonds backed by
     toll increases.  On July 1, 1997, the Authority Board voted to
     increase one-way tolls on the Sumner, Callahan, and Ted Williams
     Tunnels--effective July 10, 1997--including increased tolls on
     passenger vehicles from $1 to $2.  An additional $1 increase is
     planned in 2002 on these facilities as well as increases on the
     Massachusetts Turnpike's Boston Extension.\5

  -- The state will issue up to $1 billion in short-term grant
     anticipation notes, to be repaid with future federal highway
     funds. 

The authorized funding will substantially meet the funding shortfall
identified by the feasibility study under the "high" federal funding
scenario.  However, additional state funding will be needed if
federal funding is lower than the high funding scenario. 
Furthermore, the state's funding will not cover the $450 million in
additional funding needs through March 1997 discussed previously or
the additional funding that may be needed if MHD does not meet its
goals to contain construction costs. 

The financial markets will ultimately decide whether the use of grant
anticipation notes is feasible.  There is limited precedent for the
use of such notes, especially in amounts of this magnitude.  While
grant anticipation notes have been used in other states, they have
been issued for a substantially lower amount.\6

In addition, using grant anticipation notes to borrow $1 billion will
require Massachusetts to borrow against federal funds that may not be
authorized until after the next federal highway authorization
expires, sometime around 2003.  The feasibility study assumed that
all federal funds for the project from fiscal years 1998 through 2002
would be needed to pay for the project and that funding would not
exceed costs until 2003.  The study further assumed that, during the
surplus fiscal years from 2003 through 2005, the project would have
$283 million in funding requirements and receive about $675 million
in federal funds.  (See table 3.) Therefore, in order to borrow $1
billion or more in grant anticipation notes, Massachusetts would have
to repay the notes using federal funds beyond the likely 5- to 6-year
duration of the next highway authorization bill and beyond the
scheduled end of the project. 

According to officials at three bond rating agencies, uncertainties
associated with the availability and timing of future federal funds
means that the financial markets will almost certainly demand some
form of state backup in the event that federal funds are not
available to repay the notes.  This demand may entail some
difficulties for the state.  Massachusetts already has one of the
highest debt burdens in the nation and has put both statutory and
administrative measures in place, such as limits on the issuance of
new debt, to constrain the growth of state debt in order to improve
its credit ratings.  These limits restrict the state's flexibility in
issuing additional debt, and Massachusetts has emphasized the need to
stay within those limits as part of any solution to financing the
Central Artery/Tunnel project.  For example, the Massachusetts Deputy
Secretary for Administration and Finance told us that the state is
attempting to structure an issuance of grant anticipation notes that
would not require it to guarantee the notes with the full faith and
credit of the state.  State legislation also exempts the notes from
the state's statutory debt ceiling. 

According to state officials, there is no contingency plan for
financing the project should the combination of revenue bonds and
grant anticipation notes prove insufficient.  However, the
feasibility study described several potential sources of state funds,
including additional state borrowing--subject to the debt ceiling--or
further toll increases.  The study also described other sources, such
as gasoline taxes, taxes generated from increased property values,
and the diversion of state funds from other projects, but explained
that these options do not appear feasible or practical. 


--------------------
\5 According to the Turnpike Authority's chief financial officer, the
enacted and planned toll increases will be sufficient for the
Authority to make the required $700 million contribution and assume
the $400 million in state bonds authorized in 1995 (see table 2). 
The state has also proposed an additional $300 million contribution
from the Turnpike Authority at the end of the project, if necessary. 
According to the chief financial officer, if this contribution is
needed, the Turnpike Authority may have to raise tolls again. 

\6 For example, Pennsylvania issued $450 million in short-term notes
over a 5-year period, from 1986 to 1991.  The notes--from 3 to 6
years in duration--were issued as general obligation notes and backed
by the full faith and credit of the state.  Pennsylvania used its
Interstate Construction Program funds to pay the notes and state
legislation gave these principal payments first priority in the
state's use of those funds. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

The Central Artery/Tunnel project faces numerous and complex
challenges in constructing tunnels through a densely populated
downtown urban area, within a few feet of buildings and subway
tunnels, while keeping automobile and rail traffic flowing.  In
addition to these technical obstacles, Massachusetts faces the
challenges of controlling costs and paying for the project. 

Massachusetts is to be commended for establishing aggressive
management goals and for making progress in controlling the cost of
the Central Artery/Tunnel project.  By managing the project on a
total-cost basis, monitoring progress against that goal, developing
action plans to control costs and schedules, and holding contractors
accountable for cost increases, the state has shown that it is
serious about cost containment. 

Despite the state's efforts, the project's estimated costs have been
rising, and opportunities to produce more savings may be limited.  To
maintain total project costs at about $11 billion, the state would
not only have to meet but exceed its aggressive cost containment
goals.  State officials acknowledged that these are ambitious goals
that will be difficult to meet.  If current trends continue, further
cost increases of some magnitude seem likely.  We support the
project's adhering to its cost containment goals as a means of
holding down costs.  But these goals form the basis for the state's
cost estimate and its finance plan.  Decoupling the existing goals
from the project's cost estimate and revising that estimate to more
closely reflect the project's actual experience with its cost
containment program would provide a more realistic basis for securing
needed financing. 

While future federal funding remains an uncertainty, Massachusetts
has made progress in the last 12 months by restructuring its public
institutions to bring the resources of the state to bear on financing
the project.  However, a number of challenges remain to be overcome
before a plan that is sufficient to meet the financing needs of the
Central Artery/Tunnel project is in place.  While Massachusetts could
borrow additional funds to meet funding shortfalls, it will be
constrained by its statutory and administrative debt limits.  These
constraints on the state, the magnitude of the shortfalls, and the
likelihood of additional costs of some magnitude are likely to
require Massachusetts to reassess its financing plans, particularly
once federal funding for the next 5 to 6 years is established through
reauthorization of the federal highway program. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

To provide a more realistic estimate of the cost and financing of the
Central Artery/Tunnel project, we recommend that the Secretary of
Transportation direct the Administrator, Federal Highway
Administration, when FHWA requests the Commonwealth of Massachusetts
to prepare a new Central Artery/Tunnel project finance plan, to
include in that plan (1) a revised estimate of the project's costs
and funding needs that more closely reflects the state's actual
experience with its cost containment program and (2) a contingency
plan for financing the project if costs increase further or if the
sources of financing are not sufficient. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

We provided copies of a draft of this report to the Department of
Transportation and the Massachusetts Executive Office of
Transportation and Construction.  We met with FHWA officials,
including the Associate Administrator for Program Development, and
with state officials, including the Chief Financial Officer of the
Massachusetts Turnpike Authority and officials from MHD's Central
Artery/Tunnel Project Office. 

While FHWA and the state generally agreed with the information
contained in this report, they disagreed with the estimate in our
draft report that the project would cost $11.1 billion and our
recommendation to revise the estimate of the project's cost to more
closely reflect the state's actual experience with its cost
containment program.  Specifically, FHWA and the state contended that
(1) while FHWA has no standards for states to follow in preparing
estimates for total project costs, they believed that all costs
incurred and proceeds generated by the project should be considered
in calculating "total cost" regardless of when they occur, even years
after the project is complete and (2) most of the state's estimates
of insurance savings affect only the total cost estimate and do not
reduce the project's total funding needs.  We revised the report to
present the state's total cost estimate of $10.8 billion and to
delineate the differences between the total cost estimate and the
project's total funding needs of $11.6 billion.  We continue to
believe, however, that uncertainties remain over whether the
insurance savings projected by the state for 2017 will be realized. 

FHWA and the state also disagreed with our recommendation to revise
the project's cost estimate to more closely reflect the state's
actual experience with its cost containment program.  While
recognizing the difficulty of meeting the goals, they stated that
decoupling the goals from the estimate as we recommend would send the
wrong message to the project's contractors and deprive state managers
of the leverage needed to control costs.  While we commend
Massachusetts for adhering to its aggressive cost containment goals,
we also believe that the state's cost estimate--an estimate that
forms the basis for financing the project when significant shortfalls
are projected--should recognize reasonably expected costs based on
current available information about the state's experience with its
cost containment program.  We have therefore retained our
recommendation. 

Both FHWA and Massachusetts offered technical comments to clarify and
amplify the information presented in the draft report.  We have
incorporated those comments throughout the report as appropriate.  In
addition, MHD provided a letter presenting additional views on the
progress of its cost and schedule containment initiatives (see app. 
IV). 


---------------------------------------------------------- Letter :8.1

The scope and methodology used in preparing this report are presented
in appendix III.  We performed our work from November 1996 through
June 1997 in accordance with generally accepted government auditing
standards, but we did not independently verify the data obtained from
MHD's database. 

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; the Administrator, Federal Highway Administration;
and other interested parties.  We will also 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
V. 

Sincerely yours,

John H.  Anderson, Jr.
Director, Transportation Issues


OBLIGATIONS AND THE USE OF ADVANCE
CONSTRUCTION ON THE CENTRAL
ARTERY/TUNNEL PROJECT
=========================================================== Appendix I

As of March 1, 1997, $5.7 billion had been obligated for the Central
Artery/Tunnel project.  About $4.7 billion, or 82.5 percent, of those
funds came from federal sources, while $1 billion, or 17.5 percent,
came from state sources, as shown in table I.1. 



                               Table I.1
                
                 Federal and State Obligations for the
                     Central Artery/Tunnel Project

                         (Dollars in millions)

Source of funds                                            Obligations
--------------------------------------------------  ------------------
Federal funds
Interstate Construction Program                                 $3,940
National Highway System Program                                    254
Bridge Program                                                     181
Surface Transportation Program                                     283
Other programs                                                      60
======================================================================
Total federal funds                                             $4,718
======================================================================
Total state funds                                               $1,003
======================================================================
Total obligations                                               $5,720
----------------------------------------------------------------------
Note:  Numbers may not add due to rounding. 

Source:  Central Artery/Tunnel Project Office, MHD. 


      ADVANCE CONSTRUCTION
------------------------------------------------------- Appendix I:0.1

As of April 1, 1997, about $8 billion in contracts for the Central
Artery/Tunnel project had either been awarded or had been completed. 
To accomplish this rate of contract activity, Massachusetts made
extensive use of advance construction, particularly during fiscal
year 1997.  Advance construction allows a state to begin many more
projects concurrently than under a traditionally financed highway
project.  With advance construction, under FHWA's July 1995
regulations, a state may begin a project and obligate federal funds
in phases over the several years required to build the project. 

Massachusetts plans to award 28 contracts totaling $4.2 billion in
this manner.  As of April 1, 1997, about $3 billion of this $4.2
billion had been awarded.  As table I.2 shows, the bulk of this
contracting activity occurred in fiscal year 1997.  In fact, during a
6-month period between October 1996 and March 1997, nearly $1.7
billion in contracts were awarded. 



                                        Table I.2
                         
                          Central Artery/Tunnel Project Advance
                         Construction Plan (as of September 1996
                                      Finance Plan)

                                  (Dollars in millions)

   Advance construction
     contracts awarded                        Obligations by fiscal year
---------------------------  ------------------------------------------------------------
               Numb   Total   1995-
Fiscal year      er   value      96    1997    1998    1999  2000  2001  2002  2003  2004
-------------  ----  ------  ------  ------  ------  ------  ----  ----  ----  ----  ----
1995              3    $451    $152    $299
1996              5     740      69     104    $221    $209  $101   $28    $5    $3
1997             10   2,136             180     496     676   587   187    10
1998              6     511                      24      96   159   110    59    44   $19
1999              1      93                               3     8    21    30    26     5
2000              2     185                                     3    20    71    81    10
2001              1     115                                          42    60    13
=========================================================================================
Total            28  $4,231    $221    $583    $741    $984  $858  $408  $234  $166   $34
-----------------------------------------------------------------------------------------
Note:  Numbers may not add due to rounding. 

Source:  GAO's analysis of MHD's data. 

According to MHD, this advance construction strategy will save $1
billion in the total cost of the project and 5 years in construction
time.  In May 1996, we reported that while Massachusetts was relying
on future funding to pay the bills, substantial funding shortfalls
existed in those years and Massachusetts did not have a plan for
financing the project.\7

Since that time the Federal Highway Administration has required the
state to provide either full funding or to provide state legislative
contract authorizations for the full value of all awarded contracts. 
Massachusetts has since authorized state legislative contract
authorizations for the full value of all awarded contracts, although
it plans to rely on federal funds, Massachusetts Turnpike Authority
bonds, and other sources as the ultimate source of financing. 


--------------------
\7 Transportation Infrastructure:  Central Artery/Tunnel Project
Faces Continued Financial Uncertainties (GAO/RCED-96-131, May 10,
1996)


FUTURE FEDERAL FUNDING SCENARIOS
FOR THE CENTRAL ARTERY/TUNNEL
PROJECT
========================================================== Appendix II

Future federal funding for Massachusetts will not be resolved until
the Congress reauthorizes the Intermodal Surface Transportation
Efficiency Act (ISTEA) of 1991.  However, we modeled six funding
scenarios on the basis of several current reauthorization proposals
and assumptions in the state's December 1996 feasibility study to
estimate the apportionments that Massachusetts could receive under
the reauthorized federal aid highway program.\8 Estimated annual
apportionments under all scenarios are lower than Massachusetts'
average annual apportionments of $831 million under ISTEA.  These
scenarios are the following: 

  -- The ISTEA Integrity Restoration Act (H.R.  674) , or STEP 21,
     assumes that each state will receive at least 95 percent of the
     revenues it contributes to the Highway Trust Fund.  Since
     Massachusetts has traditionally received more in federal highway
     aid than it pays in federal highway taxes, this proposal reduces
     federal funding to an average of $393 million per year. 

  -- The Surface Transportation Authorization and Regulatory
     Streamlining Act (S.  532), or STARS 2000, assumes that
     Massachusetts' average annual apportionments will be reduced to
     $432 million. 

  -- The "low" funding scenario in the feasibility study reduces
     Massachusetts' apportionments immediately to $450 million per
     year. 

  -- The "high" funding scenario in the feasibility study assumes
     that Massachusetts' apportionments will be reduced incrementally
     from $600 million per year from fiscal years 1998 to 2001 to
     $450 million per year thereafter. 

  -- The administration's proposal for the National Economic
     Crossroads Transportation Efficiency Act of 1997 (S.  468), or
     NEXTEA, retains the ISTEA framework and assumes that
     Massachusetts will receive an average of $580 million per year,
     ranging from $650 million in 1998 to about $560 million in 2000
     and beyond. 

  -- The ISTEA Reauthorization Act of 1997 (S.  586), or ISTEA Works,
     also retains the basic structure of ISTEA and assumes that
     average annual apportionments for Massachusetts would equal $656
     million.\9

Table II.1 shows the effect of each scenario on the financing for the
Central Artery/Tunnel project.  In modeling the scenarios for fiscal
years 1997 to 2005, we used the assumptions contained in the
feasibility study, including obligation and state funding amounts,
air rights proceeds, and savings from the insurance program as shown
in table 2.  All scenarios assume that the state is authorized to
obligate the entire amount of its apportionment each year.  In
practice, states' obligational authority has historically been less
than the amount of the apportionment. 



                         Table II.1
          
           Comparison of Various Federal Funding
            Scenarios for Massachusetts and the
             Effect on Funding for the Central
                   Artery/Tunnel Project

                                         Interim     Total
                    Average annual       surplus   surplus
                    Massachusetts       (shortfa  (shortfa
Scenario            apportionment            ll)       ll)
------------------  ------------------  --------  --------
STEP 21             $393                ($2,460)    ($936)
STARS 2000          $432                ($2,338)    ($756)
Feasibility study   $450                ($2,280)    ($671)
 "low"
Feasibility study   fiscal year 1998-
 "high"              01 $600            ($1,761)    ($152)
                     after fiscal year
                     2001 $450
NEXTEA              $580                ($1,860)     ($60)
ISTEA               $656                ($1,637)      $281
 Reauthorization
 Act
----------------------------------------------------------
Source:  GAO's analysis of FHWA and state data. 


--------------------
\8 We selected reauthorization proposals for which FHWA estimates of
average annual state apportionments were available. 

\9 FHWA also provided state-by-state estimates for H.R.  1609.  Under
this bill, Massachusetts' average annual apportionments would be the
same as those under S.  586, or $656 million per year. 


SCOPE AND METHODOLOGY
========================================================= Appendix III

To determine the estimated costs of the Central Artery/Tunnel
project, we analyzed the monthly management reports issued by MHD
from March 1996 to March 1997 and selected cost data on construction
contracts as of December 1, 1996.  We met with MHD and management
consultant officials to discuss the monthly reports and to determine
the basis for MHD's cost containment goals for the design and
construction phases and MHD's methodology for measuring progress
against those goals.  We also discussed our methodology for measuring
MHD's progress against its cost containment goals with project
officials, who generally agreed with our methodology.  We discussed
cost containment strategies and progress with officials at MHD's
Central Artery/Tunnel project office and obtained and analyzed
related documentation. 

In assessing MHD's success in achieving its cost containment goals,
we included scope changes in our calculation of growth in
construction costs because these costs represent actual increases or
decreases to total construction costs that if removed would not be
accounted for in our analysis of growth in construction costs.  We
excluded the total value of scope transfers from our calculation of
changes to awarded construction contract values.  However, we
captured this value as a separate line item under unawarded contracts
in order to account for this source of cost increases within the
total costs of the construction contracts.\10

To determine savings from the wrap-up insurance program, we reviewed
insurance cost estimates from the inception of the program through
March 1997 and discussed the program and its estimated savings with
FHWA, MHD, and project officials, as well as the project's insurance
broker Sheppard, Riley, Coughlin.  We also discussed various aspects
of wrap-up insurance programs with industry officials at Liberty
Mutual, Sedgwick James, Inc., the Workers' Compensation Rating and
Inspection Bureau of Massachusetts, and officials at other
transportation projects with similar insurance programs, including
the Los Angeles County Metropolitan Transportation Authority, the
Metropolitan Atlanta Rapid Transit Authority, the Washington
Metropolitan Area Transit Authority, and the New Jersey Turnpike
Authority. 

To determine the Commonwealth of Massachusetts' plans for financing
the project, we analyzed the September 1996 finance plan and the
December 1996 feasibility study.  We reviewed supporting
documentation--including additional funding scenarios for which
state-by-state estimates were available--and discussed financing
issues with officials at FHWA's headquarters in Washington, D.C., and
at FHWA's Massachusetts Division Office in Boston, Massachusetts; the
state's Executive Office of Administration and Finance; MHD's Central
Artery/Tunnel project office; the Massachusetts Port Authority; and
the Massachusetts Turnpike Authority; and with rating agency
officials at Moody's Investors Service, Standard & Poor's, and Fitch
Investors Service, Inc., in New York.  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.  In addition, we obtained
and reviewed state legislation and discussed it with officials at the
state legislature, the Massachusetts Turnpike Authority, and the
Massachusetts Port Authority. 

We performed our work from November 1996 through June 1997 in
accordance with generally accepted government auditing standards. 
However, we did not independently verify the reliability of MHD's
data in its Oracle database, which we used to analyze MHD's progress
in achieving its cost containment goals. 



(See figure in printed edition.)Appendix iv

--------------------
\10 According to project officials, the majority of scope transfers
into awarded construction contracts initially came from unawarded
construction contracts. 


LETTER FROM THE MASSACHUSETTS
HIGHWAY DEPARTMENT
========================================================= Appendix III



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION WASHINGTON,
D.C. 

Stephen M.  Brown
Steve Cohen
Gary L.  Jones
Phyllis F.  Scheinberg
Sara Vermillion

BOSTON, MASSACHUSETTS

Linda Choy
Teresa Dee
Lena Natola


*** End of document. ***