Surface Infrastructure: Costs, Financing and Schedules for Large-Dollar
Transportation Projects (Letter Report, 02/12/98, GAO/RCED-98-64).
Pursuant to a congressional request, GAO reviewed the costs, financing,
and schedules for large-dollar transportation projects, focusing on
eight projects that will play critical roles in the infrastructure
networks of six urban areas in the United States.
GAO noted that: (1) in 1997, the Bay Area Rapid Transit system began
construction on an 8-mile extension of its existing system to provide
transit riders with direct service to the San Francisco National
Airport; (2) the transit system will finance the $1.167 billion dollar
project through contributions from federal, state, and local agencies;
(3) the transit system expects the project to be completed in September
2001; (4) because of severe financial difficulties, in January 1998, the
Los Angeles County Metropolitan Transportation Authority suspended
construction for at least 6 months on two of the four remaining
extensions of the Los Angeles Red Line subway; (5) the Port Authority of
Allegheny County, Pennsylvania, is currently building the three
components of phase I of the Pittsburgh Airport Busway Project; (6)
financing for the project appears sufficient because federal funds,
covering 80 percent of the project's costs, are available to the project
and state funds, covering the remaining 20 percent, are ensured through
state transportation bonds; (7) the St. Louis MetroLink light rail
system began operations in July 1993; (8) when completed in 2001, the
17-mile St. Clair County, Illinois, extension will be the first addition
to the MetroLink system and will cost an estimated $339 million; (9) the
Salt Lake City Light Rail Transit project is a 15-mile system that
largely parallels Interstate 15, the major north-south highway through
the Salt Lake City area, which is also undergoing major improvement;
(10) construction began in 1977, and project officials expect the system
will begin operations by March 2000--10 months ahead of schedule and
well before the Winter Olympics open in Salt Lake City in 2002; (11) the
Central Artery/Tunnel project in Boston is one of the most expensive and
complex federally assisted highway projects ever undertaken; (12)
scheduled to be completed in 2004, the project will build or reconstruct
about 7.5 miles of urban highways, about half of which will be
underground; (13) as GAO reported in July 1997, the total funding needs
for the project are $11.6 billion, or about $800 million more than the
estimated net cost; (14) the Utah Department of Transportation will
reconstruct 17 miles of Interstate 15 which is scheduled to be completed
in July 2001; (15) the Alameda Corridor is a freight rail project
designed to improve the movement of goods over 20 miles between the
ports of Los Angeles and Long Beach and railyards near downtown Los
Angeles; and (16) expected to cost about $2 billion, the project has not
yet been fully designed, and limited construction has begun.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-98-64
TITLE: Surface Infrastructure: Costs, Financing and Schedules for
Large-Dollar Transportation Projects
DATE: 02/12/98
SUBJECT: Federal aid for highways
Public roads or highways
Highway planning
Road construction
Cost control
Cost sharing (finance)
Intergovernmental fiscal relations
Future budget projections
Mass transit operations
IDENTIFIER: Central Artery/Tunnel Project (Boston, MA)
Salt Lake City Light Rail Transit Project (UT)
San Francisco Bay Area Rapid Transit System (CA)
Alameda Corridor Project (CA)
Interstate 15
Los Angeles Red Line Project (CA)
Greater Pittsburgh International Airport (Pittsburgh, PA)
St. Louis MetroLink Light Rail System (IL)
Salt Lake (UT)
Boston (MA)
San Francisco (CA)
Los Angeles (CA)
St. Louis (MO)
Pittsburgh (PA)
FTA New Starts Capital Discretionary Grant
ISTEA
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Cover
================================================================ COVER
Report to Chairman, Committee on Appropriations, Subcommittee on
Transportation and Related Agencies, House of Representatives
February 1998
SURFACE INFRASTRUCTURE - COSTS,
FINANCING AND SCHEDULES FOR
LARGE-DOLLAR TRANSPORTATION
PROJECTS
GAO/RCED-98-64
Surface Infrastructure
(348047)
Abbreviations
=============================================================== ABBREV
ACTA - Alameda Corridor Transportation Authority
BART - Bay Area Rapid Transit system
BESTEA - Building Efficiency Through Surface Transportation and
Equity Act of 1997
DOT - U.S. Department of Transportation
FTA - Federal Transit Administration
FHWA - Federal Highway Administration
FCR - Flexible Congestion Relief
GAO - General Accounting Office
HOV - high-occupancy-vehicle
ISTEA - Intermodal Surface Transportation Efficiency Act
IRS - Internal Revenue Service
MTA - Los Angeles County Metropolitan Transportation Authority
NEXTEA - National Economic Crossroads Transportation Efficiency Act
SAMTRANS - San Mateo County Transit District
TCI - Transit Capital Improvement
TRAX - Transit Express Salt Lake Area Light Rail System
UDOT - Utah Department of Transportation
UTA - Utah Transit Authority
Letter
=============================================================== LETTER
B-278923
February 12, 1998
The Honorable Frank R. Wolf
Chairman, Subcommittee on Transportation
and Related Agencies
Committee on Appropriations
House of Representatives
Dear Mr. Chairman:
Increasing congestion, declining mobility, and deteriorating
infrastructure are affecting the performance of surface
transportation systems in many of the nation's urban areas.
Confronted with these problems, many federal, state, and local
agencies are improving and upgrading their highways and mass transit
systems and are assisting the private sector in improving
transportation facilities. In fiscal year 1998, the federal
government will distribute nearly $26 billion to states and
localities for the construction and repair of the nation's surface
transportation systems. To meet the nation's transportation needs,
states and localities are planning or building several large-dollar
projects to replace aging infrastructure or build new capacity.
These large-dollar projects represent a substantial investment of
federal, state, and local transportation funds. In addition, the
private sector has begun to participate in the funding of important
transportation projects.
As part of your Committee's ongoing review of large-dollar
transportation projects, you asked us to review eight projects that
will play critical roles in the infrastructure networks of six urban
areas in the United States. This report discusses the costs,
financing, and schedules for completing these eight transportation
projects: the Bay Area Rapid Transit System's extension to the San
Francisco Airport, Los Angeles' Red Line subway, Pittsburgh's airport
busway, St. Louis MetroLink's extension, Salt Lake City's South
Light Rail Transit Line, Boston's Central Artery/Tunnel, Salt Lake
City's I-15 reconstruction, and the Alameda Corridor (Los Angeles).
In total, the eight projects are expected to cost about $23 billion;
the estimated costs of individual projects range from about $11
billion for Boston's Central Artery/Tunnel to $313 million for Salt
Lake City's light rail line.
BACKGROUND
------------------------------------------------------------ Letter :1
Large-dollar infrastructure projects present several major challenges
to federal, state, and local transportation officials. First, they
are very costly and require large commitments of public resources
that may take several years to garner from federal, state, and local
sources. Because of the high costs of these projects, their
financial packages are complex and may include debt financing to
cover construction costs. Second, the projects can be technically
challenging to construct and require their sponsors to resolve a wide
range of social, environmental, land-use, and economic challenges
before and during construction. To keep the projects on schedule and
within budget, federal and state officials must carefully oversee
their development, planning, and construction. At the federal level,
the Department of Transportation's Federal Transit Administration and
Federal Highway Administration are responsible for approving and
overseeing these large-dollar infrastructure projects.
The Federal Transit Administration provided funding for five of the
eight projects we reviewed in this report. The agency provided the
funds primarily through its "New Starts" program--a program that
provides grants to local transit providers for constructing or
extending certain types of mass transit systems. After assessing the
technical merits of a project and its finance plan, the agency enters
into a full funding grant agreement with the project's sponsor. The
agreement establishes the terms and conditions for federal
participation, including the maximum amount of federal funds for the
project. State or local sources provide the remaining funding.
While the grant agreement commits the federal government to providing
the federal contributions, these contributions are subject to the
annual appropriations process. To oversee each project, the agency
uses a consultant that assesses the extent to which the grantee meets
its contractual obligations. The grantee is responsible for all of
the project's cost overruns.
The Federal Highway Administration provided funds for two of the
projects we reviewed--Boston's Central Artery/Tunnel and Salt Lake
City's I-15 reconstruction. A highway project typically is funded
through a state's federal-aid highway apportionment. The federal
government generally covers 80 percent of the total cost of a
federal-aid project. While the state is typically responsible for
planning, selecting, designing, and constructing the project, the
Federal Highway Administration ensures that applicable federal laws
and regulations are met and approves the expenditure of federal
funds. The agency is also responsible for overseeing the eighth
project we reviewed--the Alameda Corridor. Funding for this
intermodal project will come from several public and private sources.
Instead of providing a grant for the Alameda Corridor, as it does to
highway and mass transit systems, the Department of Transportation
provided a $400 million loan to help finance this project.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
In summary, we found the following:
-- In 1997, the Bay Area Rapid Transit system began construction on
an 8-mile extension of its existing system to provide transit
riders with direct service to the San Francisco International
Airport. The transit system estimates that the project will
cost $1.167 billion--an estimate that the Federal Transit
Administration approved when it signed a full funding grant
agreement in June 1997. The transit system will finance the
project through contributions from federal, state, and local
agencies. Federal funds will provide $750 million, or 64
percent of the project's total cost. Despite the large federal
commitment, the transit system's finance plan projects that
expenses will exceed revenues during construction and produce
annual cash shortfalls that will peak at $184 million in 2001.
Accordingly, the transit system has established a short-term
borrowing program to address these financing gaps. However, the
financing gap may be larger than projected in the transit
system's most recent finance plan because the plan assumes
higher federal contributions than those specified in the grant
agreement. As a result, cash shortfalls could reach almost $290
million, and the transit system may need an additional $29
million to finance these shortfalls. The transit system has
established a capital reserve account to meet the additional
financing requirements. Whether the current funding of the
reserve account is sufficient will depend on the actual rate of
expenditure for construction and the revenues flowing into the
account. The transit system expects the project to be completed
in September 2001. (App. I provides detailed information on
this project.)
-- Because of severe financial difficulties, in January 1998, the
Los Angeles County Metropolitan Transportation Authority (the
Authority) suspended construction for at least 6 months on two
of the four remaining extensions of the Los Angeles Red Line
subway. Several factors have led to the Authority's financial
problems. First, an October 1996 consent decree forced the
Authority to shift its funding priority from completing the Red
Line project to expanding its bus program. The Authority
estimates that it will need an additional $1 billion over the
next 15 years to comply with the consent decree. In addition,
revenues from local sales taxes and funds from federal, state,
and local sources have been lower than expected. As a result,
the Authority does not have sufficient funds to complete the Red
Line and must delay other projects as well. The federal
government has agreed to pay $2.8 billion for the project, which
is now expected to cost over $6.1 billion. As of November 1997,
the Authority had spent about $2 billion in federal funds,
including $78 million on the suspended extensions. However, the
project's suspension raises questions about the federal
government's future support of the project. The Federal Transit
Administration has directed the Authority to develop a realistic
recovery plan. The Authority has not set dates for resuming
work on the suspended extensions or for completing the recovery
plan. (App. II provides detailed information on this project.)
-- The Port Authority of Allegheny County, Pennsylvania, is
currently building the three components of phase I of the
Pittsburgh Airport Busway Project: a 7-mile exclusive busway
from the borough of Carnegie to downtown Pittsburgh; a 1.1-mile
high-occupancy-vehicle lane through the currently unused Wabash
Tunnel; and six park-and-ride lots. The original design
included a new bridge and about 2 miles of busway in an area
known as the CONRAIL shelf. However, in June 1997, the Port
Authority eliminated some segments of the project, including the
new bridge, because of cost increases and delays. The Port
Authority noted that it could still provide nearly all of the
project's initial benefits at the original estimated cost--about
$327 million--and ensure the project's completion by 2001.
Financing for the project appears sufficient because federal
funds, covering 80 percent of the project's costs, are available
to the project and state funds, covering the remaining 20
percent, are ensured through state transportation bonds.
According to the project's managers, other issues, such as a
pending lawsuit are not expected to have a significant impact on
the project's costs and schedule. Because the project's scope
was reduced, the Federal Transit Administration planned to
deobligate $19.4 million that had already been provided to the
Port Authority. However, the Conference Report on the 1998
Department of Transportation Appropriations Act directed the
Federal Transit Administration not to deobligate these funds.
(App. III provides detailed information on this project.)
-- The St. Louis MetroLink light rail system began operations in
July 1993. When completed in 2001, the 17-mile St. Clair
County, Illinois, extension will be the first addition to the
MetroLink system and will cost an estimated $339 million. This
cost estimate was found reasonable by consultants under contract
to the Federal Transit Administration and the Illinois
Department of Transportation. The proposed alignment will pass
near known archeological remains and through an old railroad
right-of-way potentially containing hazardous wastes. Although
project officials stated that costs could increase, they believe
they have taken sufficient measures to limit any cost growth
resulting from these factors. Federal funds will cover $244
million of the project's costs, and local funds will cover $95
million. But because sufficient revenues will not be available
as the project's costs come due, the project will experience
cash shortfalls for 4 years, peaking at $92 million in fiscal
year 2000. While the project will issue grant anticipation
notes--notes that are expected to be repaid with future federal
funds--to cover the shortfall, the financing costs of this
issuance will increase the project's total cost by about $25
million. The project's original finance plan did not anticipate
the need for grant anticipation notes because that plan assumed
that higher levels of federal funding would be available in the
early years of the project. (App. IV provides detailed
information on this project.)
-- The Salt Lake City Light Rail Transit project is a 15-mile
system that largely parallels Interstate 15, the major
north-south highway through the Salt Lake City area, which is
also undergoing major improvement. Construction began in 1997,
and project officials expect the system will begin operations by
March 2000--10 months ahead of schedule and well before the
Winter Olympics open in Salt Lake City in 2002. Furthermore,
they expect the project to be completed within its $312 million
budget. The federal commitment to the project is about $241
million. Many of the project's major contracts have been
awarded at amounts lower than expected, allowing project
officials to implement a number of enhancements to the system.
For example, when additional funds became available, local
officials decided to install double tracks along segments where
single tracks had been planned. Project officials attribute the
low award prices to the competitive local construction
environment created, in part, by the highway project. (App. V
provides detailed information on the light rail project.)
-- The Central Artery/Tunnel project in Boston is one of the most
expensive and complex federally assisted highway projects ever
undertaken. Scheduled to be completed in 2004, the project will
build or reconstruct about 7.5 miles of urban highways (about
160 lane miles), about half of which will be underground.
Massachusetts reported that, as of September 30, 1997, the total
estimated net cost of the project was $10.8 billion. However,
as we reported in July 1997,\1 the total funding needs for the
project are $11.6 billion, or about $800 million more than the
estimated net cost, because the estimated net cost includes an
$800 million credit representing the future receipt of insurance
proceeds that, if realized, will not be available until 2017,
too late to help pay for the project. State managers have
worked to control the costs of the project and are continuing to
take steps to reduce them. However, unless additional savings
can be found, increased construction costs seem likely to push
the project's total net cost higher than the current $10.8
billion estimate. Massachusetts' October 1997 finance plan will
meet the funding needs of the Central Artery/Tunnel project if
its costs remain as forecast and if funding is received as
projected. However, the project's funding needs could be larger
than projected in the plan because (1) additional costs of some
magnitude seem likely and (2) federal funding could be up to $1
billion less than projected. In addition, while the financial
markets will ultimately decide the feasibility of one funding
strategy--using grant anticipation notes to borrow over $1
billion and repaying that amount with future federal highway
funding--the strategy presents several challenges. For example,
it 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. (App. VI provides
detailed information on this project.)
-- The Interstate 15 (I-15) project in Salt Lake City, Utah, is the
largest "design-build" highway project ever undertaken in the
United States. The Utah Department of Transportation will
reconstruct 17 miles of Interstate highway in and around Salt
Lake City, Utah, replacing all existing pavement, widening the
road from 6 to 12 lanes, reconstructing several major Interstate
highway interchanges, and replacing 137 bridges and other
structures. Construction began in April 1997, and the project
is scheduled to be completed in July 2001. A substantial
portion of the project's $1.6 billion expected cost is covered
under one fixed-price contract awarded to a single contractor to
both design and construct the project. The project's costs
could still grow, however, because the state has agreed with the
contractor to assume certain financial risks, such as the
possibility that hazardous materials may be discovered in
addition to those identified through investigations conducted
before the contract was awarded. While the design-build process
is relatively new to highway construction and there is little
historical information for predicting the magnitude of possible
changes in the project's costs, officials in states where
design-build contracts have been completed stated that
post-award change orders have added from around 2.5 percent to
around 8.5 percent to these contracts' costs. Changes of this
magnitude, if they were to occur, would add roughly $35 million
to $110 million to the I-15 project's costs. The I-15 project
is the largest component of Utah's Centennial Highway Fund--a
10-year, $2.6 billion fund for the construction and
reconstruction of highways throughout Utah. The state has
requested $970 million in federal funding for the I-15 project
beyond its expected highway apportionments as part of a $4.3
billion request for federal funding for transportation projects
for the 2002 Winter Olympic Games. Utah expects to receive
about half of the requested amount and, as of October 1997, had
received about $14 million in federal funds for environmental
studies and property acquisition. According to state officials,
if additional federal funds are not made available, Utah will
complete the project either by raising additional state funds or
by reducing or canceling some of the other 39 projects slated to
be financed from the Centennial Highway Fund. (App. VII
provides detailed information on this project.)
-- The Alameda Corridor is a freight rail project designed to
improve the movement of goods over 20 miles between the ports of
Los Angeles and Long Beach and railyards near downtown Los
Angeles. Expected to cost about $2 billion, the project has not
yet been fully designed, and limited construction has begun.
Its costs may change after contractors submit their bids in 1998
or when project officials finish evaluating the impact of a
December 1997 Internal Revenue Service ruling limiting the
components of the project that can be financed through
tax-exempt revenue bonds. Funding for the project will come
primarily from the private sector and will be supplemented by a
$400 million federal loan and by grants from the ports and the
Los Angeles County Metropolitan Transportation Authority. As of
December 1997, project officials had secured about half of the
needed funding but face challenges in securing the remainder,
including challenges in demonstrating to financial markets that
the project is a good credit risk and in obtaining all of the
funds committed by the financially strapped Authority.
According to the project's ambitious schedule, major
construction is to begin in 1999 and to be completed within 3
years, achieving time savings of a year through the use of
design-build contracting procedures. However, delays in
constructing a 10-mile section of the project in a 30-foot
trench could postpone the start of revenue operations, scheduled
for 2001. (App. VIII provides detailed information on this
project.)
--------------------
\1 Transportation Infrastructure: Progress on and Challenges to
Central Artery/Tunnel Project's Costs and Financing (GAO/RCED-97-170,
July 17, 1997).
AGENCY COMMENTS
------------------------------------------------------------ Letter :3
We provided the Department of Transportation with draft copies of
this report for review and comment. We also provided each of the
eight projects with a draft copy of the report pages containing
information on the project. We met with Department
officials--including the Federal Highway Administration's Deputy
Administrator--and with high-level officials at each project to
obtain their comments. The Department and project officials provided
technical and editorial comments to clarify cost, financing, and
scheduling issues for each project. Where appropriate, we
incorporated these comments throughout the report. The Alameda
Corridor project provided more detailed comments on the project's
costs and financing. A discussion of these comments and our response
appear in appendix VIII.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :4
To identify issues surrounding the costs, financing, and schedules of
the projects, we reviewed project-specific documents, including
environmental impact statements, finance plans, project oversight
reports, and construction status reports. We also interviewed
federal, state, local, and private-sector officials responsible for
planning, designing, constructing, and overseeing the projects. We
performed our review from July 1997 through January 1998 in
accordance with generally accepted government auditing standards.
The cost estimates for the projects discussed in this report
represent the sum of the nominal dollars that will be spent
irrespective of the years in which they are spent. Anticipated cost
escalation during the construction period is taken into account, but
these estimates do not represent present values.
---------------------------------------------------------- Letter :4.1
We will send copies of this report to the cognizant congressional
committees; the Secretary of Transportation; the Administrator,
Federal Highway Administration; the Administrator, Federal Transit
Administration; the Administrator, Federal Railroad Administration;
and other interested parties. We will make copies available to
others upon 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
IX.
Sincerely yours,
John H. Anderson, Jr.
Director, Transportation Issues
BART EXTENSION TO THE SAN
FRANCISCO INTERNATIONAL AIRPORT
=========================================================== Appendix I
The San Francisco Bay Area Rapid Transit system (BART) intends to
construct an 8-mile extension of its existing transit line to provide
direct service to the San Francisco International Airport. BART
estimates that the project will cost $1.167 billion--an estimate the
Federal Transit Administration (FTA) approved when it signed a full
funding grant agreement with BART in June 1997. Under the grant
agreement, BART will finance the project through contributions from
federal, state, and local agencies. FTA will contribute $750
million, or 64 percent of the project's total cost. However, BART's
finance plan projects that expenses will exceed revenues during
construction and produce annual cash shortfalls that will peak at
$184 million in 2001. Accordingly, BART has established a short-term
borrowing program to address these financing gaps. However, the
financing gap may be larger than BART has projected in its most
recent finance plan because the plan assumes that the federal
contributions will be provided sooner than those specified in the
grant agreement. As a result, cash shortfalls could reach almost
$290 million, and BART may need an additional $29 million to finance
these shortfalls. BART has established a capital reserve account to
meet the added financing requirements. Whether the current funding
of the reserve account is sufficient will depend on the actual rate
of construction expenditures and the revenues flowing into the
account from BART sources.
BACKGROUND
--------------------------------------------------------- Appendix I:1
The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA)
authorized $568.5 million for two BART projects--the Colma Station
extension\1 and the BART extension to the San Francisco International
Airport--and one light rail project in Santa Clara County. ISTEA
further directed the Secretary of Transportation to issue a full
funding grant agreement to complete the projects, using, if
necessary, the full amount of the unobligated balance in the Mass
Transit Account of the Highway Trust Fund. Since ISTEA's enactment,
the Metropolitan Transportation Commission (the local metropolitan
planning organization) and BART have studied numerous alternatives
for linking the BART system to the airport. In 1995, BART selected a
final design for the project, which calls for about 8 miles of
straight mainline track running south from the end of the existing
line at the city of Colma to the city of Millbrae, with an
incorporated "Y-stub" aerial line diverging from the mainline track
and running southeast into the airport and then southwest out of the
airport to Millbrae (see fig. I.1). The aerial line would include a
transit station adjacent to an international air terminal and would
be linked to the airport's light rail system to circulate passengers
through the airport. Besides the stations at the airport and
Millbrae, the project includes stations at South San Francisco and
San Bruno.
Figure I.1: The BART Extension
to the San Francisco
International Airport
(See figure in printed
edition.)
Source: GAO's adaption of data from BART.
The overall purpose of the BART airport extension is to help relieve
existing and anticipated highway congestion and improve air quality
in the region. The traffic on local highways--including Interstate
280, Interstate 380, and Highway 101--regularly exceeds existing
capacity. Between 1990 and 2010, the Metropolitan Transportation
Commission forecasts a 52-percent increase in traffic to and from the
airport. San Francisco International Airport is proceeding with a
$2.3 billion expansion and projects an annual increase of 21 million
passengers between 1990 and 2006. In addition, the BART extension is
one of the key transportation-related antipollution measures for the
San Francisco Bay area. In 1996, the governor of California
designated the BART airport extension as one of the state's top three
transportation priorities.
The BART airport extension is one of four projects selected by FTA to
demonstrate innovative contracting procedures. The project will
employ design-build contracting. Under the design-build process, a
public agency awards a single contract to a private firm for the
design, construction, and start-up of a facility.\2 After certifying
that the work is complete, the contractor turns the facility over to
the agency. This contrasts with the conventional procurement
process, under which a public agency is responsible for managing a
project from its design through its completion and awards separate
contracts for its design and construction. BART intends to award
four design-build contracts on the project and anticipates that it
will achieve cost and time savings using this process. The
design-build bids will be solicited on extensive engineering packages
whose designs are typically 30 percent to 50 percent (in some areas,
as much as 100 percent) complete and are accompanied by BART's design
criteria, specification standards, and drawings. According to the
grant agreement, contractors will bid on the design-build packages,
and contracts will be awarded to the low bidder. BART anticipates
that the use of design-build contracting will allow the extension to
open for revenue operations on September 30, 2001, earlier than if
BART had used conventional contracting practices.
--------------------
\1 This extension, which runs from Daly City to Colma, is complete.
\2 For the BART airport extension's four design-build contracts, BART
will be responsible for the start-up.
BART AND FTA HAVE AGREED ON A
TOTAL COST OF $1.167 BILLION,
INCLUDING ALLOWANCES FOR
CONTINGENCIES AND INFLATION
--------------------------------------------------------- Appendix I:2
In approving the June 1997 full funding grant agreement, FTA accepted
BART's cost estimate of $1.167 billion for the project. This amount
includes $113 million in project-related construction that the San
Francisco International Airport will undertake. FTA also approved
the project's proposed contingency allowance and accepted BART's
method of cost escalation.
FTA accepted this baseline cost estimate, noting that it was derived
from cost estimates for the individual contracts that will make up
the project and reflected appropriate project schedules. FTA will
use these baseline costs to monitor BART's compliance with the grant
agreement; BART must submit periodic cost reports to FTA. The
project's costs are broken out in table I.1. As indicated, the
largest of these is for the four design-build construction contracts,
which constitute almost half (46 percent) of the project's costs.
Table I.1
Costs of BART Airport Extension, by
Major Items
(Dollars in millions)
Percentage of
Cost item Estimated cost total cost
------------------------------ ------------------ ------------------
Environmental $8 0.7
Construction management 108 9.3
BART project management 39 3.3
Insurance 25 2.1
Prerevenue testing 3 0.3
Right-of-way 113 9.7
Vehicles 100 8.6
Site preparation and utility 15 1.3
relocation
4 design-build contracts 539 46.2
Project contingency 80 6.9
Financing costs 24 2.1
Airport-related activities 113 9.7
======================================================================
Total $1,167 100.2
----------------------------------------------------------------------
Note: Percentages do not total 100 because of rounding.
Source: BART project finance plan, April 1997.
The project's budget allows about $131 million, or about 11 percent
of the total cost estimate, for contingencies. A general contingency
allowance of $80 million may be used to cover increases in costs. In
addition, each of the five construction contracts contains a
12-percent allowance for contingencies, totaling $51 million, to
cover increases in construction costs. FTA determined that this
level of contingency funding was sufficient for grant approval.
To account for inflation, BART's finance plan escalates the cost of
each major cost item. The plan escalates construction costs by 11.6
percent, assuming that construction will be half completed in the
third quarter of 1999. The plan uses the same rate and method to
escalate the costs of four of the seven major nonconstruction
activities--construction management, BART management, vehicles, and
prerevenue testing. The costs of the other nonconstruction
activities, which will be completed earlier in the project, are
escalated at lower rates--environmental at 2.4 percent, right-of-way
at 5.1 percent, and insurance at 5.1 percent.
WHILE OVERALL FINANCING IS
COMPLETE, DEBT FINANCING MAY
EXCEED CURRENT ESTIMATE
--------------------------------------------------------- Appendix I:3
FTA signed a full funding grant agreement on June 30, 1997,
committing $750 million in federal funds to the project, an amount
covering 64 percent of the project's total $1.167 billion cost. The
remaining $417 million will come from state and local sources.
BART's finance plan projects cash shortfalls beginning in 1999, when
expenses will exceed available revenues. However, these shortfalls
will be greater than projected because the finance plan does not
reflect the slower pace of federal contributions defined in the full
funding grant agreement. To offset the shortfalls, BART may incur an
additional $29 million in financing costs.
CAPITAL FINANCING WILL COME
FROM FEDERAL, STATE, AND
LOCAL SOURCES
------------------------------------------------------- Appendix I:3.1
The $750 million federal commitment includes $113.8 million in
federal funds provided for the project through fiscal year 1998 and
$636.2 million in New Starts Program funds that remain to be
provided. The grant agreement calls for federal funding to rise from
$56.4 million in fiscal year 1998 to $100 million in fiscal years
2003 and 2004. Under the grant agreement, the last federal
installment of $91 million will be provided in 2005. The grant
agreement specifies that this constitutes the total federal
commitment and that BART must provide for any additional financing
needs.
The remaining $417 million commitment, covering 36 percent of the
project's total cost, comes from state and local sources. FTA
determined that these sources were sufficiently secure to approve the
full funding grant agreement. The largest local contributor is the
San Francisco International Airport, which will provide $200 million
to the project: $87 million directly to BART for design work,
systems procurement, and the installation of track on airport
property and $113 million for interrelated activities that the
airport will complete. The interrelated activities include, for
example, constructing two aerial BART guideway structures into the
airport, the BART airport station and ancillary facilities, and
enhancements to the airport's International Terminal, such as
escalators for BART's riders. FTA excluded the $113 million for
airport-funded activities from the full funding grant agreement
because these facilities are designed and built directly by the
airport. The airport will issue general revenue bonds to support its
$200 million contribution.
Other funding comes from a variety of sources. The $108 million
state commitment comes from State Transit Capital Improvement (TCI)
funds ($58 million), Proposition 116\3
($10 million), and State Flexible Congestion Relief (FCR) funds ($40
million). San Mateo County Transit District's (SAMTRANS) $99 million
commitment will come from existing cash reserves. BART will
construct the airport extension largely in San Mateo County--south of
San Francisco. Because San Mateo County is not in BART's service
district, SAMTRANS entered into an agreement with BART under which it
will contribute $330 million to various BART projects (including $99
million for the airport extension) in exchange for BART's extending
service into the county. Finally, the Metropolitan Transportation
Commission will use tolls from the Bay Bridge to finance its $10
million contribution. BART will not directly contribute to the
project's capital funding. However, BART may issue commercial paper
to pay financing costs if the existing debt financing arrangements do
not cover the project's short-term borrowing needs.
--------------------
\3 In 1990, California voters approved Proposition 116, which allowed
the state to sell about $2 billion in general obligation bonds to
fund transit projects across the state.
PROJECT WILL HAVE HIGHER
DEBT FINANCING COSTS
------------------------------------------------------- Appendix I:3.2
BART's use of design-build contracting is intended to save time by
expediting the project's design and construction. However, because
these activities will be expedited, the project will incur expenses
faster than it will receive funding, requiring BART to borrow funds
to fill the gap between revenues and expenses. BART intends to use
short-term commercial paper as the borrowing mechanism to fill the
gap. BART's April 1997 project finance plan--the most current plan
available--assumes a maximum annual cash shortfall of $183.7 million.
The short-term borrowing program that BART will use to finance the
shortfalls will produce $24 million in financing costs.
However, BART's April 1997 finance plan, which FTA used to approve
the full funding grant agreement, assumes that federal funds will be
paid out over 6 years, rather than 8 years, as specified in the June
1997 grant agreement. Thus, for example, BART's finance plan assumes
federal funding of $110 million to $160 million for fiscal years 2000
to 2003 while the full funding grant agreement provides federal
funding of only $80 to $100 million for the same period. Even if the
federal government provides the full funding as scheduled in the
agreement, which is not certain,\4 BART will need to finance
additional cash shortfalls not included in the finance plan. As our
analysis in table I.2 shows, these additional financing demands will
begin in 1999, and by 2001, BART will have cash shortfalls of $288
million. In addition, because all state and San Mateo County Transit
District funds will have been provided to the project before 2001,
BART will not be able to close this funding gap by accelerating
contributions from these sources. Given the schedule of funding in
the full funding grant agreement, if BART's current assumptions hold
about interest rates, inflation, and the rate at which the project
will incur expenses, the project's total financing cost will be about
$53.5 million, more than double the $24 million that BART budgeted in
its finance plan. In commenting on a draft of this report, BART's
general manager stated that they acknowledge and are planning for
higher financing costs, and believe that through aggressive
management BART will be able to keep financing costs lower than the
$53.5 million we have cited. According to the BART official
responsible for developing the finance plan, BART will revise the
finance plan on the basis of the schedule of expenditures derived
from the first two design-build contracts, which cover most of the
project's construction costs. Once BART has better information on
the contracts' final costs and the timing of expenses, it will be
able to more accurately determine its financing needs. BART
anticipates completing this revised plan in March 1998.
Table I.2
Project's Financing Under the June 1997
Full Funding Grant Agreement (dollars in
thousands)
Fiscal year
------------------------------------------------------------------------------
Re
ve
nu Throug
e h 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total
-- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Fe $83,92 $56,39 $74,00 $84,00 $80,00 $80,60 $100,0 $100,0 $91,07 $750,0
d 3 5 0 0 0 5 00 00 7 00
e
r
a
l
St 26,921 31,079 0 0 0 0 0 0 0 58,000
a
t
e
T
C
I
St 5,000 0 10,000 25,000 0 0 0 0 0 40,000
a
t
e
F
C
R
St 0 10,000 0 0 0 0 0 0 0 10,000
a
t
e
b
o
n
d
s
Ba 1,375 3,000 3,000 2,625 0 0 0 0 0 10,000
y
B
r
i
d
g
e
Ai 4,317 8,395 18,521 29,909 20,614 5,244 0 0 0 87,000
r
p
o
r
t
Sa 19,700 10,000 69,300 0 0 0 0 0 0 99,000
n
M
a
t
e
o
==================================================================================
To $141,2 $118,8 $174,8 $141,5 $100,6 $85,84 $100,0 $100,0 $91,07 $1,054
t 36 69 21 34 14 9 00 00 7 ,000
a
l
Ex 84,084 159,94 199,01 306,11 215,99 64,842 0 0 0 1,030,
p 7 3 5 9 000
e
n
s
e
s
==================================================================================
Cu
m 141,23 260,10 434,92 576,46 677,07 762,92 862,92 962,92 1,054,
u 6 5 6 0 4 3 3 3 000
l
a
t
i
v
e
r
e
v
e
n
u
e
s
==================================================================================
Cu
m 84,084 244,03 443,04 749,15 965,15 1,030, 1,030, 1,030, 1,030,
u 1 4 9 8 000 000 000 000
l
a
t
i
v
e
e
x
p
e
n
s
e
s
==================================================================================
Cu
m 57,152 16,074 (8,118 (172,6 (288,0 (267,0 (167,0 (67,07 24,000
u ) 99) 84) 77) 77) 7)
l
a
t
i
v
e
b
a
l
a
n
c
e
Fi
n 0 0 448 9,527 15,892 14,733 9,217 3,700 0 53,517
a
n
c
i
n
g
c
o
s
t
s
----------------------------------------------------------------------------------
Sources: FTA-BART full funding grant agreement, BART project finance
plan (Apr. 1997), and GAO's analysis.
As part of its finance plan, BART has established a capital reserve
account to pay for costs in excess of the project's $1.167 billion
budget. This account can also be used to finance costs in excess of
those projected for short-term borrowing. Funding for the account,
scheduled to come from several BART revenue streams, will allow BART
to issue at least $65 million in bonds, as needed, to offset cash
shortfalls.\5 The adequacy of the account ultimately will depend on
the size of any cash shortfalls and the costs of debt financing to
cover them. Moreover, as previously noted, the reserve account may
need an additional $29 million to cover higher financing costs, given
current assumptions about federal funding, interest rates, inflation,
and expenses.
--------------------
\4 For example, the Congress provided $29.9 million in fiscal year
1998, $26.5 million less than called for in the full funding grant
agreement.
\5 BART expects to receive (1) $2.5 million annually from surcharges
at the Daly City station, from which BART could finance $32.5 million
in bonds; (2) $3 million to $4 million annually from premium fares at
the airport station, from which BART could generate about $32.5
million in bonds; and (3) about $650,000 annually from concessions
and advertising at extension stations, as well as possible joint
development and parking revenues. BART did not specify the amount in
bonds that it could finance through this last revenue stream.
MAJOR CONSTRUCTION IS SCHEDULED
TO BEGIN IN 1998
--------------------------------------------------------- Appendix I:4
Construction has begun on the BART airport extension, which is
expected to open on September 30, 2001. Table I.3 outlines the
schedule for the project's major construction activities, as outlined
in the full funding grant agreement.
Table I.3
Schedule for Major Construction
Activities
Date of notice to Approximate
Activity proceed completion date
------------------------------ ------------------ ------------------
Project administration May 1993 September 2001
Third-party contracts May 1993 September 2001
Acquire right-of-way June 1997 June 2001
Site preparation/utilities June 1997 June 2000
Construction contract--line September 1997 June 2001
trackwork/systems
Purchase rail cars February 1998 October 2000
Construction contract-- January 1998 September 2001
San Bruno Station
Construction contract-- January 1998 September 2001
Millbrae Station
Construction contract--South February 1998 June 2000
San Francisco Station
----------------------------------------------------------------------
Source: FTA-BART full funding grant agreement.
According to the BART's deputy general manager, as of December 15,
1997, BART had awarded the contract for site preparation and utility
relocation, had advertised the design-build contract for line,
trackwork and systems, was acquiring the right-of-way for the
project, and was working to resolve right-of-way issues with
cemeteries in the city of Colma. BART expects to award the line,
trackwork and systems design-build contract and the Millbrae Station
design-build contract by February 1998. Based on the schedule,
BART's finance plan shows that the extension will begin revenue
operations in September 2001.
SEVERAL OTHER ISSUES HAVE BEEN
RESOLVED
--------------------------------------------------------- Appendix I:5
Since we last reported on this project in March 1997, several
impediments to the BART project's progress have been resolved:
-- Airlines' concerns over using airport funds to help pay for the
project have been resolved. As part of an agreement with the
airport, BART will pay $2.5 million per year to lease the
airport station for 50 years. In addition, BART will give
airline employees a 25-percent discount for trips beginning or
ending at the airport station. By 2010, this fare reduction
will cost BART $1 million in lost revenues annually. BART
anticipates that both these expenses could be offset by (1)
reducing the surplus anticipated from the airport extension's
operations or (2) increasing the fare at the six other stations
in San Mateo County by 15 to 20 cents.
-- Opposition to the project by a local gambling interest has been
resolved. BART, the owner of a gambling facility, and the city
of San Francisco have reached an agreement on a new parking
lease and ways to mitigate construction-related parking problems
at the gambling facility. As of December 17, 1997, the new
lease agreement required final approval by the San Francisco
Board of Supervisors.
-- Local opposition to the BART parking facility at Millbrae led to
a referendum intended to limit the number of parking spaces at
the end of the BART line. However, the referendum failed in the
November 1997 election.
-- In September 1997, a strike by BART unions resulted in a labor
agreement increasing wages for BART employees. Over time, this
agreement will increase BART's systemwide operating costs.
However, according to BART's deputy general manager, the
cumulative wage increase is within the level BART originally
offered the unions, and BART can absorb the increase without
jeopardizing its operating budget.
LOS ANGELES RED LINE PROJECT
========================================================== Appendix II
In January 1998, the Los Angeles Metropolitan Transportation
Authority (MTA) decided to suspend construction, for at least 6
months, on two of the four remaining extensions of the Los Angeles
Red Line subway while it addresses severe financial difficulties.
This decision responded to MTA's financial problems, which are
limiting MTA's ability to complete the Red Line and other projects as
planned. A number of factors have contributed to its fiscal crisis,
including an October 1996 consent decree that forced MTA to shift its
funding priority from completing the Red Line to expanding its bus
service--a program that MTA estimates will cost about $1 billion
through 2013. This revised focus--together with increased costs and
shortfalls in federal, state, and local funding for the Red Line--has
left MTA with insufficient funds to complete the subway, whose
estimated costs now total $6.14 billion. MTA has already spent about
$2 billion in federal funds for the Red Line's design and
construction. In January 1997, the Federal Transit Administration
(FTA) directed MTA to develop a recovery plan that addresses cost and
schedule concerns. Whether and to what extent the federal government
will continue to support the subway will not be known until the
project's managers have completed this plan, which will spell out the
federal government's future commitment. MTA has not set dates either
for resuming work on the suspended rail projects or for completing
the recovery plan.
BACKGROUND
-------------------------------------------------------- Appendix II:1
MTA is responsible for planning, designing, constructing, and
managing an integrated transportation network, including an
integrated light and heavy rail system for Los Angeles County called
the Metro System. The two light rail portions of the system, the
Blue and Green Lines, were constructed without federal funds. A Blue
Line light rail extension (called the Pasadena Blue Line) was being
constructed using state and local funds until the project was
suspended in January 1998. Construction of the heavy rail portion of
the system, known as the Red Line, is being funded by federal, state,
and local sources.
Between 1986 and 1997, MTA signed four full funding grant
agreements\1 with FTA to help pay for the final design and
construction phases of the Red Line.\2 These agreements commit the
federal government to fund $2.8 billion, or about 51 percent, of the
Red Line's projected final design and construction costs of $5.5
billion.
The 23.4-mile Red Line project consists of three segments. Segment
one--4.4 miles--is in service. Segment two--6.7 miles--is divided
into two extensions. The Wilshire extension is in service, and about
92 percent of the Vermont extension has been constructed. Segment
three--12.3 miles--is divided into three extensions. As of November
1997, the construction of the North Hollywood extension was 54
percent complete; the final design of the East Side extension was 86
percent complete: and the design of the Mid-City extension was on
hold while MTA assessed other alignment options.
The day-to-day design activities of the Red Line are managed by an
engineering management consultant, while the construction activities
are managed by several construction management consultants, all under
contract to MTA. FTA approves and oversees expenditures of federal
funds for the project and has hired its own project management
contractor to help ensure that MTA maintains a reasonable process for
successfully designing and constructing the project and to monitor
MTA's development and implementation of the project.
--------------------
\1 The agreements were signed in 1986, 1990, 1994 and 1997.
\2 The Red Line has been redesigned several times. In 1983, it was
18.6 miles long with 18 stations. In 1988, it was redesigned to 17.3
miles long with 16 stations to avoid areas where methane gas was
found. In 1993 and 1994, the system was expanded to include two
additional extensions, increasing the total length of the system to
23.4 miles and 22 stations.
COST INCREASES AND FUNDING
SHORTFALLS HAVE CREATED SERIOUS
FINANCIAL PROBLEMS
-------------------------------------------------------- Appendix II:2
As of November 1997, MTA estimated that the total cost of the Red
Line project would be $6.14 billion, or about 12 percent above the
$5.5 billion estimated in the full funding grant agreements. We
reported in May 1996\3 that construction problems, new construction
requirements, and enhancements to the project had increased its
estimated cost to $5.9 billion. According to MTA officials,
estimated cost increases since May 1996 are primarily due to design
and construction delays on segment three.
As of November 1997, MTA had obligated about $4.2 billion to the Red
Line project: $2.3 billion in federal funds; $403 million in state
funds; and $1.5 billion in local funds. Before suspending work on
the Eastside and Mid-City extensions, MTA planned to fund $3.1
billion of the Red Line project's $6.14 billion cost with federal
funds and the remainder with state and local funds. Most of the
federal funds--$2.8 billion--are from FTA's New Starts Program. An
additional $280 million is coming from other federal programs,
including the Surface Transportation Program (STP) and the Congestion
Mitigation and Air Quality Program (CMAQ), that provide states with
funds that can be used for transit projects.
As of November 1997, California had committed about $745 million to
the project. Of this amount, about $705 million was expected to be
provided from state gasoline tax revenues, which are allocated to
both highway and transit projects. The remainder of the state's
funding is to come from revenues generated from general obligation
bonds for rail capital projects.
Local funding for the project--about $2.3 billion--was expected to
come from three sources: Los Angeles County, the city of Los
Angeles, and assessments levied on properties adjacent to the planned
stations.
Table II.1 shows the funding sources for the Red Line as projected at
the time of the suspension.
Table II.1
Project's Financing Plan, by Segment, as
of November 1997
(Dollars in millions)
Segment Segment Segment
Funding source one two three Total
---------------------- ---------- ---------- ---------- ----------
======================================================================
Federal (FTA) $696 $722 1,641 $3,059
New Starts 696\a 667 1,416 2,779
STP/CMAQ 0 55 225 280
======================================================================
Nonfederal match 754 919 1,403 3,076
State 214 133 398 745
Local 540 786 1,005 2,331
======================================================================
Total $1,450 $1,641 $3,044 $6,135
----------------------------------------------------------------------
\a MTA used $91 million in urbanized formula funds for completing
segment one.
Source: GAO's presentation of data from MTA.
--------------------
\3 Los Angeles Red Line: Financing Decisions Could Affect This and
Other Los Angeles County Rail Capital Projects (GAO/RCED-96-147, May
14, 1996)
THE RED LINE PROJECT'S COSTS
COULD CONTINUE TO INCREASE
------------------------------------------------------ Appendix II:2.1
MTA's decision on January 14, 1998, to suspend work for at least 6
months on the Eastside and Mid-City extensions could increase the
project's overall costs. For instance, MTA estimates that
demobilizing the extensions could cost about $28 million.\4 A tunnel
advisory panel told MTA that "completed" design work should have a
"shelf life" of 12 to 48 months, depending on the availability of the
original design team. Beyond that period, a major redesign of the
extensions by a new team would be necessary and could have a
significant impact on the project's costs. Furthermore, these
extensions have already experienced cost increases and schedule
delays. At the time of the suspension, the Eastside extension was
scheduled to be completed in 2004, 2 years later than scheduled, and
to cost $1.049 billion, or $69 million more than specified in the
grant agreements. The Mid-City extension was scheduled to be
completed in 2008, 9 years later than scheduled, and to cost $683
million, or $192 million more than agreed. For budgeting purposes,
MTA estimated a cost increase of $192 million for the Mid-City
extension, which is the cost of one of the alternative alignments
being considered. According to MTA officials, the recent decision to
further delay these extensions will most likely produce additional
cost overruns if and when work is resumed.
Other factors could increase the project's total cost beyond the
current $6.14 billion estimate if construction is resumed. For
example, because high concentrations of hydrogen sulfide gas were
discovered in the tunnel planned for the Mid-City extension, MTA was
considering three alternative configurations that would increase the
extension's cost by $167 million to $279 million.
Pending lawsuits could also increase costs. As we reported in May
1996, a lawsuit by a construction contractor fired by MTA for poor
performance could increase the project's costs because it includes a
financial claim against MTA.\5 The contractor is suing for about $120
million for breach of contract and other claims; MTA has a filed a
countersuit for fraud and breach of contract. In addition, the
family of a man who was killed while working on the subway's
construction in February 1997 has filed a lawsuit against MTA for
violating safety regulations. MTA officials told us that, in this
case, they are insured for a maximum exposure of $2 million. Whether
these actions affect the project's costs will depend on the outcome
of the lawsuits and the ability of MTA's existing insurance to cover
any awards against MTA.
--------------------
\4 Demobilization costs do not cover expenses such as employee
severance pay or the costs of preserving and maintaining the sealed
design packages. These costs will be considered in MTA's fiscal year
1999 budget.
\5 All but one lawsuit by owners of retail establishments affected by
ground settlement along Hollywood Boulevard were settled by MTA's
insurance carrier for a total of $10 million (or 1 percent of the $1
billion claim). In addition, MTA settled the suit by other parties
to the bus consent decree, who were seeking to recover their legal
expenses. MTA paid their legal fees from last year's budgeted funds.
FEDERAL, STATE, AND LOCAL
FUNDING COMMITMENTS HAVE NOT
BEEN FULLY REALIZED
------------------------------------------------------ Appendix II:2.2
We reported in May 1996 that the project had $380 million in federal,
state, and local funding commitments that may not be realized. As of
November 1997, the Red Line's total funding shortfall had increased
to $617 million. At the federal level, the Congress had provided
$302 million less than FTA had committed in the grant agreements.
Under these grant agreements, the federal government had committed,
subject to the annual appropriations process, $2.8 billion for the
expected life of the project. The agreements break this total down
into yearly amounts. In fiscal years 1995 through 1998, the full
amounts identified in the grant agreements were not provided by the
Congress, resulting in the funding shortfall. While the grant
agreements allow the federal government to provide additional funds
later to cover any annual shortfalls, federal budget constraints
could make it difficult to make up existing or additional shortfalls
in the future. What impact the suspension will have on past federal
commitments to the Red Line remains to be seen.
State and local funding shortfalls have also affected the Red Line
project. For example, because the California state legislature
recently diverted $50 million in funds slated for MTA's bus
operations to Los Angeles County health programs, MTA transferred $50
million that had been committed to the Red Line project to the bus
program. The state is also withholding $20 million in funds, slated
for segment three, until a recovery plan for the project is approved.
Some of MTA's local revenue commitments may not be realized.
Although Los Angeles has an agreement with MTA to contribute $200
million toward the completion of segment three, it has provided only
$56 million. The city's contributions are, to a large extent,
contingent on MTA's achieving certain milestones, such as
accelerating the completion of the Mid-City extension by a year and
developing a rail line to the San Fernando Valley area. In addition,
the agreement with MTA removes the obligation for the city to pay its
share of cost overruns on segment two, which includes $62 million
toward the repair of a 70-by-70-foot-wide sinkhole that occurred in
1995 on Hollywood Boulevard. Furthermore, MTA does not expect to
receive $39 million in estimated revenues from assessments levied on
retail properties adjacent to the planned stations for segments two
and three because retail property owners oppose the assessment.
MTA FACES SERIOUS FINANCIAL
PROBLEMS
------------------------------------------------------ Appendix II:2.3
Several other factors are affecting MTA's overall financial
condition, further limiting MTA's ability to finance the Red Line
project and other transportation projects as planned. First,
projected local sales tax revenues that are used to fund a number of
MTA's projects, including the Red Line, are significantly lower than
expected.\6 For both its annual budget and its long-range plan, MTA
used a 7-percent annual growth rate to project its sales tax
revenues. However, actual sales tax revenues have grown at a rate of
3.5 to 5.5 percent over the past few years.\7 A 1997 report by the
mayor of Los Angeles states that a more reasonable forecast of growth
in MTA's sales tax base would be 4 to 5 percent. According to MTA
officials, this significant reduction will result in revenues of
about $4.6 billion less than expected through 2013.
Second, in October 1996, the bus riders' union (and others) entered
into a consent decree that requires MTA, among other things, to
expand its bus service.\8 MTA has made implementing the consent
decree its first priority and estimates that doing so will cost it
about $1 billion through 2013. Over the next 12 years, MTA also
plans to upgrade its aging bus fleet by purchasing more buses and
decreasing their average age to 6 years.
Third, as of June 1997, MTA had a cumulative operating deficit of
about $98 million. According to MTA officials, since about the end
of fiscal year 1992, operating expenses have been exceeding operating
revenues. For instance, transit fare revenues have been lower than
projected. The 1997 mayor's report estimates that this year's
operating deficit could be as high as $58 million. MTA forecasts a
$51 million operating deficit but states that it will be mitigated
through several revenue enhancements (one-time credits) and
efficiencies, such as staff reductions.
Financial problems have forced MTA to make some difficult management
decisions, as well as assign priorities to its transportation
projects. According to MTA, the North Hollywood extension of segment
three will be completed on time but work on the Red Line's Eastside
and Mid-City extensions and Pasadena Blue Line are being delayed for
at least 6 months. In addition, a portion of the planned expansion
of carpool and bus lanes is being delayed for about 2 years. MTA
officials told us that getting MTA's fiscal house in order and
implementing the consent decree are MTA's top priorities at this
time.
--------------------
\6 Los Angeles County dedicates revenues from its 1-cent sales tax to
MTA for existing transit systems and new transit projects in the Los
Angeles area. Some funds from the county's dedicated sales tax are
returned to the surrounding cities.
\7 Since the sales tax is critical to the bus and the rail
construction programs, using a lower forecast could require MTA to
scale back its long-range transportation plan.
\8 The agreement, among other things, requires MTA to (1) freeze the
bus fare at $1.35 and offer an $11 weekly bus pass for 2 years and
(2) add 102 more buses and 50 more limited-service vehicles to the
street over the next 2 years.
NEW MANAGEMENT IS SEEKING
STABILITY THROUGH REVISED
TRANSPORTATION PLANS
-------------------------------------------------------- Appendix II:3
Staffing at the executive level at MTA has been extremely unstable.
Two chief executive officers (CEO) and two executive officers of
construction have left in the last 2 years. MTA has not had a
permanent CEO since January 1997. In August 1997, the Los Angeles
mayor hired a recognized expert in turning around financially
troubled companies, who agreed to remain as acting CEO for up to a
year. In the meantime, the search for a permanent CEO has been
suspended.
The new acting CEO has made some difficult financial and management
decisions in an effort to put MTA on a better financial footing. For
instance, in October 1997, he laid off 82 employees and eliminated
about 100 vacant positions as a first step in addressing MTA's
operating budget deficit. In addition, to reduce operating costs, he
recommended, and the MTA board approved, that the contract for
transit safety activities be awarded to the Los Angeles Police
Department and that MTA's security force be disbanded. It was his
recommendation, which the MTA board accepted in January 1998, to
finish constructing the Red Line's North Hollywood extension but to
suspend work on the Eastside and Mid-City extensions and on the
Pasadena Blue Line until MTA is better prepared to follow through on
its financial commitments. As a next step, MTA managers are now
working with FTA to better match MTA's financial abilities and
construction goals.
Over the years, FTA has taken a number of steps to address the impact
of MTA's funding shortfalls and management problems on the Red Line
project. For instance, after excessive surface settlement occurred
on Hollywood Boulevard in the summer of 1994, FTA took action to stop
tunneling in that area and suspended federal funding from October 5
to November 10, 1994. In January 1997, FTA again expressed concerns
about MTA's ability to manage the Red Line project's construction in
light of the escalating costs, delays, and management issues and
required MTA to develop a recovery plan for completing segments two
and three. As stated earlier, FTA also hired a financial management
consultant to review and report on MTA's financial capacity. On the
basis of the consultant's and other contractors' reports, FTA
rejected MTA's two successive draft recovery plans. FTA said that
the plans had "serious deficiencies and questionable assumptions,
both technical and financial" and did not demonstrate MTA's ability
to continue constructing the Red Line and to comply with the legal
and financial obligations set forth in the grant agreements and
consent decree. Finally, in August 1997, FTA told MTA that no
federal funds could be used for the Eastside extension and no new
contracts could be awarded until the plan is approved.
As of November 1997, MTA was working on a more realistic recovery
plan. MTA and FTA agreed that the plan will be more a "restructuring
of the project" than a "recovery" plan.\9
MTA's recent decision to suspend work on the Eastside and Mid-City
extensions and the Pasadena Blue Line will likely delay the approval
of both the restructuring plan and MTA's long-range transportation
plans. MTA has not set dates either for resuming work on the
suspended rail projects or for completing the restructuring and
long-range transportation plans.
The Conference Report on the 1998 Department of Transportation
Appropriations Act directed GAO and the Department's Inspector
General to conduct reviews of the recovery plan after it is approved
by FTA and report to the House and Senate Appropriations Committees.
--------------------
\9 In November 1997, MTA officials told us that MTA's restructuring
plan will evaluate their commitments to MTA's transportation
projects, including the bus program, the Pasadena Blue Line, and the
Alameda Corridor.
PHASE I PITTSBURGH AIRPORT
BUSWAY/WABASH HOV FACILITY
========================================================= Appendix III
The Port Authority of Allegheny County, Pennsylvania, is currently
building phase I of the Pittsburgh Airport Busway/Wabash HOV
Facility, according to a June 1997 recovery plan, which substantially
revised the initial scope of the busway project. This project
originally consisted of a 7-mile exclusive busway from the borough of
Carnegie to downtown Pittsburgh; a 1.1-mile high-occupancy vehicle
(HOV) lane through the currently unused Wabash Tunnel; and six
park-and-ride lots. Developed in response to a series of cost
increases and schedule delays, the recovery plan created a revised
design that is to (1) provide nearly all of the benefits of the
initial design at the original estimated cost--about $327
million--and (2) allow the project to be completed by 2001, a year
earlier than planned. Financing for the revised project appears
sufficient because federal funds covering 80 percent of the project's
costs--about $257 million--have already been made available to the
project and state funding covering the remaining 20 percent is
assured through state transportation bonds. Although the Federal
Transit Administration (FTA) planned to deobligate $19.4 million in
federal funds after the scope of the project was reduced, the
Conference Report on the 1998 Department of Transportation
Appropriations Act directed FTA not to do so.
BACKGROUND
------------------------------------------------------- Appendix III:1
The Port Authority of Allegheny County operates a fleet of about 900
buses, making it the 12th largest public transit operator in the
United States. It also operates a 25.2-mile light rail system that
includes a 1/2-mile, three-stop subway system in downtown Pittsburgh;
two inclines--cable-driven railways that transport passengers on
gondola-type cars up and down the cliff overlooking Pittsburgh; and
two exclusive busways--the South Busway and the Martin Luther King,
Jr., East Busway.
THE BUSWAY PROJECT WAS
SELECTED AS THE BEST CHOICE
TO ADDRESS A CRITICAL
TRANSPORTATION NEED
----------------------------------------------------- Appendix III:1.1
A 1988-89 multimodal study performed by the Southwestern Pennsylvania
Regional Planning Commission recommended that a transit facility be
built between downtown Pittsburgh and the new airport, in an area
known as the Parkway West corridor, to reduce extensive congestion on
the existing parkway. The study recommended that the transit
facility be built in phases and that phase I, from downtown
Pittsburgh to the borough of Carnegie, be constructed first. After
considering numerous alternatives, the Port Authority determined that
a busway was the best transportation solution. (The busway is to be
a two-lane road dedicated solely to bus traffic leading into and out
of the city of Pittsburgh, with access ramps along the route leading
to and from surrounding communities. Stations along the busway will
accommodate park-and-ride lots, where possible, and passengers from
nearby neighborhoods.) The April 1994 environmental impact statement
noted that phase I could be constructed separately, prior to the
other phases, and still achieve the transportation benefits needed in
the corridor. Phases II and III, which would extend the busway from
Carnegie to the airport, have not been programmed.
As originally designed, the phase I busway project was to consist of
a 7-mile exclusive busway from the borough of Carnegie to Station
Square in the city of Pittsburgh. The busway was to parallel freight
train tracks along the southern shores of the Ohio and Monongahela
rivers for about 2 miles in an area known as the CONRAIL Shelf. The
project also included a 1.1-mile HOV lane through the currently
unused Wabash Tunnel and onto a new bridge that was to be constructed
over the Monongahela River into downtown Pittsburgh. The busway was
to give commuters an alternative to driving and to reduce increasing
congestion in the Parkway West corridor. The HOV facility through
the Wabash Tunnel was to provide carpool commuters with an
alternative route to downtown Pittsburgh.
In June 1994, FTA determined that the project's planning process had
satisfied federal requirements related to the project's environmental
impact and that the project could proceed into the final design and
construction stages. In October 1994, with less than 20 percent of
the project designed, FTA executed a full funding grant agreement
with the Port Authority that set the project's budget at $326.8
million. Under the grant agreement, revenue operations were to begin
in June 1998, and the project was to be completed in December 1999.
EVENTS INCREASED THE COSTS
OF THE PROJECT AND DELAYED
ITS SCHEDULE
----------------------------------------------------- Appendix III:1.2
Two years after the full funding grant agreement with FTA was signed,
the project's estimated costs had escalated by $188 million to about
$515 million, and the project's completion date was extended to 2002.
Problems with the placement of the new Monongahela bridge, CONRAIL's
construction of a second line of tracks on the "shelf" bordering the
river, and higher-than-expected construction bids were primarily
responsible for these changes.
Under the original plan, the new Monongahela bridge was to be
constructed in the midst of the Station Square complex, requiring the
permanent relocation of the Gateway Clipper Fleet--a riverboat
tourist operation--downstream but still within the Station Square
complex. To facilitate this move, Gateway Clipper bought additional
riverfront property rights in the Station Square area. Subsequently,
however, the Station Square complex was sold, and the new owners
sought to have the purchase of the additional property rights
nullified. As a result, the Port Authority was unable to finalize a
relocation agreement with Gateway Clipper, thereby delaying the
construction of the new bridge. In addition, the Port Authority was
unable to agree with the new owners of Station Square on the terms
under which the new bridge would be built over the complex.
Consequently, all property acquisition and relocation activities came
to a standstill, and progress on the busway project was delayed.
During negotiations over property rights in the Station Square area,
the design of the new bridge proceeded, and bids for construction
were requested. However, project officials stated that the actual
bids were "millions of dollars" more than estimated in the full
funding grant agreement. In addition, bids for other portions of the
busway project and for the construction of the Wabash and Berry
Street tunnels far exceeded the original estimates.
At the same time, the Port Authority was negotiating for the right to
use CONRAIL's right-of-way for approximately 2.2 miles along the
shelf where the busway would parallel an existing freight line track.
However, after the full funding grant agreement was signed, CONRAIL
constructed a second track on the shelf, leaving little room for the
busway. Had the Port Authority chosen to proceed with its original
plan, it would have had to pay to relocate both of CONRAIL's tracks
to make room for the busway on the shelf. Also, after the full
funding grant agreement was signed, CONRAIL refused to allow track
outages and single-track operations during the construction of the
busway on the shelf. The Port Authority concluded that this refusal
would increase the project's costs because it would not allow
construction work to be scheduled systematically and predictably.
A RECOVERY PLAN WAS INITIATED
TO CONTROL THE PROJECT'S COSTS
AND SCHEDULE
------------------------------------------------------- Appendix III:2
In December 1996, when the project's estimated costs had reached
about $515 million, the Administrator of FTA directed the Port
Authority to develop a recovery plan to address cost and schedule
problems. The Administrator also asked the Port Authority to detail
the steps it planned to take to implement the project and to mitigate
the risks associated with the revised plan. Over the next several
months, the Port Authority revised the project's construction
strategy so that the project could be completed at the original cost,
earlier than planned in the current schedule, and still achieve most
of the original transit benefits. The recovery plan was completed in
June 1997.
The recovery plan that the Port Authority issued to FTA contained
three major changes in scope. First, it removed the busway from the
CONRAIL Shelf and provided a new connection to Carson Street, which
runs parallel to, but below, the shelf. This change not only
obviated the need to move the recently constructed track and the
original CONRAIL track to make room for the busway but also reduced
the long-term costs of maintaining the shelf, which the Port
Authority would have incurred. Because Carson Street is, and will
remain, a facility for mixed traffic use, the state and city will be
responsible for its maintenance.
The recovery plan also deferred construction of the new bridge across
the Monongahela River. The cost to construct this bridge had reached
$125 million. Furthermore, the problems in obtaining the needed
rights-of-way along the Station Square waterfront had postponed the
bridge's construction for so long that the project could not have
been completed until at least 2002. In addition, a majority of the
current Allegheny County commissioners and various community and
business interests opposed the planned location of the new bridge.
Consequently, the Port Authority decided to defer the construction of
a new bridge and to have the busway and HOV facility use the existing
bridges.
Finally, the recovery plan called for connecting the Wabash Tunnel to
Carson Street and provided for HOV traffic to use an existing bridge
with the buses and other mixed use traffic. Under the original plan,
the tunnel would have carried HOV traffic directly onto the new
bridge across the Monongahela River into downtown Pittsburgh. Port
Authority officials believe that planned improvements to existing
bridges will still allow the original design's transit benefits to be
achieved. See figure III.1 for the project's current scope.
Figure III.1: Current Scope of
the Pittsburgh Airport Busway
(See figure in printed
edition.)
Source: Port Authority of Allegheny County.
TRANSIT BENEFITS REMAIN;
PROJECT'S COSTS RETURN TO
ORIGINAL ESTIMATE
----------------------------------------------------- Appendix III:2.1
According to the Port Authority's recovery plan, the average travel
time from the borough of Carnegie to downtown Pittsburgh during the
morning rush hour is 39 minutes. The project's original plan would
have reduced the average travel time by over 27 minutes to about 11.5
minutes. The recovery plan indicates that once the busway project
has been completed, travel time during this period should be about
12.6 minutes. Likewise, Port Authority officials note that evening
travel times will be reduced under the revised project, but not as
much as expected under the original plan. Project officials believe,
however, that the marginally longer expected travel time under the
current plan is justified by the approximately $188 million reduction
in the project's costs.
According to Port Authority officials, the cost to carry out the
recovery plan is estimated at $326.8 million, the same amount
originally estimated in the full funding grant agreement signed with
FTA in 1994. In addition, environmental studies, which FTA required
for the revised project, will cost about $98,000, according to Port
Authority officials. However, these studies will be funded
separately, and they are not to increase the total cost of the
project.
The project's scheduled completion date is December 2001. As of
October 31, 1997, the project was 72 percent designed and 31 percent
constructed.
FUNDING FOR THE PROJECT
APPEARS SECURE
----------------------------------------------------- Appendix III:2.2
The federal government is providing 80 percent of the funds for the
Pittsburgh busway project, or $256.8 million, while the state
government is providing 20 percent, or $70 million. Table III.1
identifies the sections of the Intermodal Surface Transportation and
Efficiency Act (ISTEA) of 1991 that authorized, and the programs that
provided, federal funds to the project.
Table III.1
Sources of Federal Funds for the Busway
Project
(Dollars in millions)
ISTEA section/federal program Amount
---------------------------------------- ----------------------------
Section 5309; New Starts $136.0
Section 5309; Bus Projects 18.9
Section 1108; Priority Intermodal 9.6
Projects
Section 1069; Miscellaneous Highway 15.8
Projects
Section 1008; Congestion Mitigation and 76.5
Air Quality Improvement\a
======================================================================
Total $256.8
----------------------------------------------------------------------
\a Flexible highway funds under ISTEA.
The full funding grant agreement, signed in October 1994, included a
federal commitment of $121 million in New Starts Program funding.
However, the agreement also stipulated that if the funds authorized
by section 1069 of ISTEA for the project were not appropriated, the
Port Authority could seek additional funds to cover the shortfall
through an amendment to the full funding grant agreement. To date,
an additional $15 million in New Starts funding has been provided to
the project as a result.
After the Port Authority revised the scope of the project and deleted
two costly elements--the construction of the busway along the CONRAIL
Shelf and the construction of the new bridge over the Monongahela
River--FTA proposed to reduce the federal share of the project's
funding. Specifically FTA said that it planned to deobligate $19.4
million of the New Starts funds that had not yet been disbursed.
This amount was commensurate with the reduced contribution of funds
to the project from the New Starts Program.\1 However, the conference
report on the 1998 Department of Transportation Appropriations Act
directed FTA not to deobligate the funds.
The entire $70 million in state funding comes from the Port
Authority's share of Pennsylvania's transportation bonds. To date,
approximately $25.8 million of these funds has been made available to
the project. The Port Authority incurs no debt service obligation
because these funds are from bonds issued at the state level.
According to Port Authority officials, the remaining state funds for
the project are guaranteed but will not be made available until
federal resources are expended. This action is in accordance with
the full funding grant agreement's concurrence with the Port
Authority's request for deferred local share.
--------------------
\1 While the total federal share of the Pittsburgh busway project is
about 80 percent, the New Starts funding ($121 million under the full
funding grant agreement) represents about 37 percent.
UNCERTAINTIES REMAIN, BUT THE
REVISED PROJECT FACES FEWER
RISKS THAN THE ORIGINAL PROJECT
------------------------------------------------------- Appendix III:3
Although some uncertainties remain, the revised busway project faces
fewer design risks than the original project. Furthermore, other
uncertainties--including the outcomes of actual construction bids and
a pending lawsuit--are unlikely to delay the project's completion
within budget and on time, according to Port Authority officials.
FTA is monitoring the project's costs and progress.
The revised busway project faces fewer design risks than the original
project because it is smaller in scope and much farther along in the
design process--72 percent designed, compared with 17 percent when
the original full funding grant agreement was signed in 1994.
According to Port Authority officials, the original project's cost
overruns and schedule delays--particularly those associated with
CONRAIL's laying of a second track and with obtaining rights-of-way
for the proposed new bridge--could have been avoided, or at least
mitigated, if the agreement had been entered into later in the design
process. Although the ongoing environmental assessment could
disclose unanticipated problems, Port Authority officials believe
that, given its reduced scope, the revised project is less likely
than the original project to encounter environmental problems. In
addition, as of October 31, 1997, engineering construction estimates
were about $20 million less than budgeted. And even if the actual
bids for the remaining contracts do exceed the estimates, the
officials said, contingency funds could, to some degree, cover the
difference.
Port Authority officials do not expect an ongoing lawsuit--filed over
the condemnation of a property along a portion of the busway from
Carnegie--to directly affect the project. Port Authority officials
said that an adverse ruling was possible but should have no impact on
the project's costs because contingency funds are available.
FTA has controls in place to ensure that federal funds are used
properly and efficiently to complete the recovery plan. The agency
is completing a triennial review of the Port Authority that found no
major deficiencies or weaknesses. In addition, FTA's Philadelphia
Regional Office receives quarterly progress and status reports from
the Port Authority, which allow FTA to compare the project's budgeted
and actual costs and planned and actual progress. FTA has also
assigned a project management oversight contractor to monitor the
Port Authority's implementation of a project management plan and
quality assurance/quality control program. This contractor further
assists FTA in overseeing the design and construction of the project
and provides FTA with monthly reports on the project's status.
Additionally, the contractor helped FTA assess the Port Authority's
recovery plan.
ST. CLAIR EXTENSION OF THE ST.
LOUIS METROLINK SYSTEM
========================================================== Appendix IV
Scheduled to be completed in 2001, the St. Clair extension will be
the first addition to the St. Louis MetroLink light rail system
since the system began operating in July 1993. This 17.4-mile
segment will cost an estimated $339 million to complete. Consultants
under contract to the Federal Transit Administration (FTA) and the
Illinois Department of Transportation considered this estimate
reasonable. The proposed alignment will pass near known
archeological remains and through an old railroad right-of-way
potentially containing hazardous wastes. Although project officials
stated that costs could increase, they believe that they have taken
sufficient measures to limit any cost growth resulting from these
factors. Federal New Starts Program funds will cover $244 million of
the project's costs, and local funds will cover the remaining $95
million. Because the federal funds will not be available as early as
planned and will therefore not be on hand when the project's costs
come due, the project's management will issue grant anticipation
notes to cover the temporary shortfall. The cost of financing the
notes will add $25 million to the total cost of the project.
Although the extension is expected to be completed on schedule,
funding has not yet been secured for an additional 8.6-mile segment
that would extend the St. Clair line to Illinois' new Mid-America
Airport.
BACKGROUND
-------------------------------------------------------- Appendix IV:1
The St. Louis MetroLink light rail system currently consists of 17
miles of primarily double track running electrically powered cars
from Lambert-St. Louis International, the region's chief airport,
through downtown St. Louis and across the Mississippi River to East
St. Louis, Illinois. The system is owned and operated by the
Bi-State Development Agency, the primary transit agency in the St.
Louis metropolitan area. Currently, MetroLink serves 19 stations,
including those near the University of Missouri-St. Louis, a museum
and zoo complex, Busch stadium, and the central business district.
As originally planned, the St. Clair extension would have added 26
miles to MetroLink. But because of federal funding limitations, the
project was divided into two segments, and only the first segment was
funded. According to its sponsors, the project is needed to reduce
congestion on St. Clair County's main transportation corridors,
particularly on two Mississippi River bridges during the morning and
evening rush hours.
The St. Clair extension will start at the eastern terminus of the
MetroLink system--the 5th and Missouri Station in East St.
Louis--and will run for 17.4 miles in an easterly to southeasterly
direction to Belleville Area College, serving eight new stations.
Besides the track and stations, the project will include 15-20 new
vehicles, 3,500 new parking spaces, and 41 new bus bays at stations.
Construction is scheduled to begin in the spring of 1998, and
operations are to start on or before September 30, 2001.
The second segment was planned to continue for another 8.6 miles
beyond Belleville Area College to the new Mid-America Airport. It
would have served three additional stations. Local officials are now
seeking funds to complete the second segment of the extension.
Figure IV.1 depicts the existing MetroLink line and the two segments
of the proposed St. Clair extension.
Figure IV.1: MetroLink Line
and St. Clair Extension
(See figure in printed
edition.)
Source: GAO's adaptation of a map from the Bi-State Development
Agency.
CAPITAL COST ESTIMATES ARE
CONSIDERED REASONABLE BUT ARE
SUBJECT TO SOME UNCERTAINTIES
-------------------------------------------------------- Appendix IV:2
The estimated capital cost of building the St. Clair extension (17.4
miles) is $339.2 million. This estimate is based on current
engineering costs, actual costs of constructing the initial MetroLink
line, adjusted for inflation, and provides for contingencies.
However, the extension is subject to some risks that could increase
its costs.
Table IV.1 breaks down the cost estimate as of September 1997 for the
St. Clair extension, showing construction costs (79 percent) and
other project management costs (21 percent), as well as allowances
for contingencies, which are 14 percent of the estimated construction
and project management costs.
Table IV.1
Capital Costs for the St. Clair
Extension
(Dollars in thousands)
Base cost
plus
adjustment
for Contingency
Cost element inflation allowance Total cost
---------------------------- ------------ ------------ ------------
Construction and equipment\a
$234,803 $30,334 $265,138
Project management and real
estate\b 62,339 11,633 74,032
======================================================================
Total cost $297,203 $41,967 $339,170
----------------------------------------------------------------------
\a Covers elements such as trackwork, utility relocation, alignment
construction, and station construction and systems installation.
\b Covers supporting expenses such as right-of-way purchase,
construction insurance, and project administration.
Source: Bi-State Development Agency.
Estimates for most of the project's construction and equipment costs
(e.g., for trackwork, transit vehicles, and stations) are based on
current engineering cost estimates and were validated using the
actual construction costs for the original MetroLink. Estimates for
the project's management costs (e.g., for designing the project and
soliciting and procuring construction contracts) are calculated as a
percentage of each construction element. According to the final
environmental impact statement, the real estate costs and related
legal and administrative costs were estimated by an independent
appraiser. The cost estimates were increased by 3 percent to cover
increases from inflation occurring during the life of the project.
Finally, the contingency allowances were added to the estimated costs
to provide for unanticipated work that may prove necessary during the
design and construction of the project. The contingency allowances
vary with the uncertainties associated with each cost element, from a
low allowance (10 percent) for the cost of the transit vehicles
(comparable to those recently purchased for the MetroLink line) to a
high allowance (100 percent) for acquiring the real estate for the
project.
COSTS COMPARE FAVORABLY WITH
THOSE OF RECENT PROJECTS
------------------------------------------------------ Appendix IV:2.1
Experts reviewing the project's cost estimates have judged them
reasonable. According to a consultant hired by the Illinois
Department of Transportation, the cost estimates were prepared using
state-of-the-art engineering techniques and compare favorably with
the costs of other light rail transit systems recently built
throughout the United States. The consultant found, for example,
that the average cost of building the line--39 percent of the
project's total cost--compared favorably with the average cost of
building the lines--40.5 percent--for five recently built projects.\1
Furthermore, according to both the consultant and the project's
engineers, the total cost estimate may be conservative because the
extension is not as complicated to construct as the original
MetroLink line, which required laying track through old tunnels and
on a historic bridge spanning the Mississippi River. Finally, a
management consultant for FTA, who is monitoring the project, stated
that the cost estimates and associated contingency allowances are
reasonable.
As of October 1997, the project's total estimated capital cost had
not exceeded the amount included in the project's full funding grant
agreement, approved in October 1996. Bi-State officials told us that
as the project proceeds through the design phase, any increases on
one aspect of its design will be offset by decreases in another
aspect. For example, the cost of adding a bridge to the line between
Washington Park and Memorial Hospital was offset by a reduction in
the cost of other components--utility lines were not relocated, grade
crossings were eliminated, and allowances for contingencies were
reduced. To help Bi-State meet its cost goals, cities have also
provided funds to pay for desired modifications to their stations.
--------------------
\1 The projects were in Los Angeles, Pittsburgh, Portland,
Sacramento, and San Jose.
UNCERTAINTIES COULD INCREASE
COSTS
------------------------------------------------------ Appendix IV:2.2
Although cost estimates have been refined throughout the project's
design--now 90 percent complete--previously undetected hazardous
materials or undiscovered archeological resources may be found, or
inflation may be higher than projected, during the final design and
construction. Project officials stated that although uncertainties
could increase the project's costs, they had taken steps such as
changing the project's alignment to avoid known archeological sites
and completing detailed archeological surveys to identify any
potential problems.
Ten miles of the 17.4-mile extension will be constructed on an
abandoned railroad right-of-way. Officials acknowledge that this
land has the potential to contain hazardous waste because such waste
was dumped along the right-of-way. The final environmental impact
statement found various types of hazardous waste along the project's
alignment, including a leaking underground storage tank, asbestos and
lead-based paint in buildings to be demolished, and household debris.
Subsequent site investigations and sampling found not only asbestos
and lead but also arsenic. Although sampling for hazardous waste has
been completed, demolition and construction have not begun. Local
project officials stated that they plan to sign a contract for about
$1.2 million for completing demolition and mitigating identified
hazardous wastes. This is in line with the $1.3 million estimate
made early in the project's design. If hazardous waste is found in
greater quantities than projected, the costs of mitigation or removal
could exceed the contracted amount.
In addition, the extension will pass near the site of an ancient
Native American settlement that was once the most sophisticated human
settlement north of Mexico. Over 100 large earthen mounds were built
in the area for daily activities, religious ceremonies, and burial.
Some of these mounds, known as the East St. Louis Bottoms Mound
Group, are of primary archeological concern to Illinois preservation
officials. Although the current alignment avoids known
archaeological sites, the final analysis or actual construction could
identify some archeological resources that need to be preserved,
potentially increasing the project's costs.
The project's use of a 3-percent cost escalation factor for inflation
is based on the current costs published in the Engineering Cost
Record and on engineers' experience. The accuracy of this estimate
will be tested in the spring and summer of 1998, when construction
contracts are let, and will depend on how much major construction
work is taking place at the time. According to Bi-State and St.
Clair County officials, determining a cost escalation factor can be
risky. However officials believe that given the current economic
conditions, the 3-percent adjustment will be adequate to cover
increases in the project's estimated costs.
CHANGES IN THE FEDERAL FUNDING
SCHEDULE WILL INCREASE LOCAL
FINANCING COSTS
-------------------------------------------------------- Appendix IV:3
The St. Clair extension will be paid for with a combination of
federal and local funds. However, because sufficient revenues will
not be available as the project's costs come due, the project's
management will issue grant anticipation notes to cover the deficit.
According to the most recent cash flow analysis, this issuance will
result in about $25 million in short-term financing costs.
FTA WILL PROVIDE THE BULK OF
THE PROJECT'S FINANCING
------------------------------------------------------ Appendix IV:3.1
In October 1996, FTA and the Bi-State Development Agency signed a
full funding grant agreement stipulating that the $339 million cost
of the St. Clair extension project will be paid for with a
combination of federal and local funds. According to the agreement,
the federal government will provide $244 million, or 72 percent of
the project's capital costs. These funds, subject to the annual
appropriations process, are to be provided over 7 years, beginning in
fiscal year 1996 and ending in 2002. The full funding grant
agreement further states that the remaining $95 million--or 28
percent of the project's capital costs--will come from local sources.
The St. Clair County Transit District, a local mass transit taxing
body that currently contracts with the Bi-State Development Agency to
provide bus service in the county, will provide the local share.
Most of the district's revenue for the extension comes from two
county sales taxes: a 1/2-cent tax dedicated to the capital and
operating costs of the St. Clair extension and a 1/4-cent tax
dedicated to transit services in the county. In fiscal year 1996,
these two sources provided revenues of about $14 million. The
Illinois Department of Transportation originally planned to
contribute to the project. However, the state will not contribute
because the state legislature did not approve the bonding authority
necessary to support state mass transit capital assistance.
ISSUING NOTES TO BRIDGE
FUNDING GAP WILL RAISE
SHORT-TERM FINANCING COSTS
------------------------------------------------------ Appendix IV:3.2
Recent changes in assumptions about the federal funding schedule
necessitated changes in the extension's financial plan. Whereas the
original financial plan assumed that the entire federal share ($244
million) would be provided before the end of fiscal year 2000, the
revised September financial plan assumes that only $140 million will
be provided through the end of that year and the balance by the end
of fiscal year 2003. According to a Bi-State Development Agency
official, this change was made because amounts provided through the
annual appropriations process are expected to be provided later than
scheduled in the full funding grant agreement. Figure IV.2 compares
the federal funding assumptions underlying the original and the
revised financial plans.
Figure IV.2: Estimate of
Cumulative Federal Funds Under
the Original and Revised
Financial Plans
(See figure in printed
edition.)
Source: GAO's analysis of data from Bi-State Development Agency and
St. Clair County Transit District.
Primarily because of the new assumptions about the availability of
federal funds, the revised financial plan shows that sufficient funds
will not be available to cover the project's costs as they come due.
The project will have cash shortfalls between 1999 and 2002, peaking
at $92 million in 2000. As a result, the project's management will
issue grant anticipation notes\2 valued at $117.6 million. According
to the revised financial plan, summarized in table IV.2, the costs of
financing these notes will be about $25 million and will be paid by
the district. These financing costs will raise the project's total
costs to $364 million--a 7-percent increase over the original
financial plan's projections. The notes will serve as a bridge loan,
which will be paid off when sufficient revenues become available.\3 A
Bi-State official said that the agency plans to issue the notes in
May 1998.
Table IV.2
Revised Financial Plan, September 1997
(Dollars in thousands)
Fiscal year
----------------------------------------------------------------
Throug
Revenues h 1997 1998 1999 2000 2001 2002 2003 Total
----------------------- ------ ------ ------ ------ ------ ------ ------ --------
=========================================================================================
Federal share $39,70 $30,00 $35,00 $35,00 $35,00 $35,00 $34,22 $243,931
8 0 0 0 0 0 3
Local share
-----------------------------------------------------------------------------------------
1/2-cent county tax 18,901 10,156 11,095 10,198 5,273 1,086 0 56,709
1/4-cent county tax 3,216 4,371 4,608 4,508 4,695 5,123 4,219 30,740
Other local funds 0 0 2,153 2,349 2,349 979 0 7,830
Long-term bonds 0 23,825 1,318 22 0 0 0
=========================================================================================
Total revenues 61,825 68,352 54,174 52,077 47,317 42,188 38,442 364,375
Costs (11,20 (56,50 (169,1 (91,62 (9,998 (703) 0 (339,171
1) 3) 44) 2) ) )
Annual balance 50,624 11,849 (114,9 (39,54 37,319 41,485 38,442
70) 5)
Cumulative balance 50,624 62,473 (52,49 (92,04 (54,72 (13,32 25,204
7) 2) 3) 8)
Grant anticipation 0 117,57 0 0 0 0 0 117,575
notes 5
Grant anticipation 0 0 0 0 (37,15 (39,14 (41,27 (117,575
note 5) 5) 5) )
principal repayment
Grant anticipation note 0 (2,380 (3,367 (6,391 (6,391 (4,404 (2,270 (25,203)
financing costs ) ) ) ) ) )
Revised balance $50,62 $177,6 $59,33 $13,39 $7,168 $5,104 $1
4 68 1 5
-----------------------------------------------------------------------------------------
Note: Totals may not add because of rounding. The grant
anticipation notes' financing costs are reduced by $6.123 million to
reflect the interest earned on the balance of these funds in 1998 and
1999.
Source: GAO's analysis of data from Bi-State Development Agency and
St. Clair County Transit District.
--------------------
\2 The Bi-State Development Agency will also issue long-term debt,
but this was anticipated in the original financing plan.
\3 Bi-State officials told us that they had used similar instruments
in the past--revenue anticipation notes--to fund transit operations
in anticipation of state or federal operating assistance. The
several revenue anticipation note issues ranged between $10.5 million
and $19.5 million. According to a representative of the underwriter,
Paine Webber, having the county sales tax as a revenue base enhances
the notes' marketability.
THE PROJECT IS ON SCHEDULE
-------------------------------------------------------- Appendix IV:4
The project's design is about 90 percent complete. Construction is
scheduled to begin in the spring of 1998, and local officials expect
revenue service to begin in May 2001. Two steps remain before
construction can start--finishing the project's design and obtaining
a wetlands permit. Other activities, such as archeological
preservation and the remaining right-of-way acquisition can occur
during construction. Table IV.3 shows the project's milestones and
their actual or estimated completion dates.
Table IV.3
Project's Milestones and Completion
Dates
Milestone Completion date
---------------------------------------- ----------------------------
Final environmental impact statement Aug. 1996\a
Record of decision Sept. 1996\a
60 percent design Oct. 1997\a
90 percent design Jan. 1998
Wetlands permit Feb. 1998
100 percent design Mar. 1998
Archeological review and mitigation
completed May 1998
Right-of-way obtained Oct. 1998
All contracts awarded Oct. 1999
Construction completed Dec. 2000
Testing/start-up Apr. 2001
Service started May 2001
----------------------------------------------------------------------
\a Completed actions.
Source: Bi-State Development Agency.
The full funding grant agreement between FTA and Bi-State provides
for revenue service to begin on or before September 30, 2001. The
project's local managers plan to begin revenue service in May 2001.
This 4-month leeway should help the project meet the full funding
grant agreement's September date if construction faces any delays.
Although the project is still on schedule to begin operating in May
2001, the design of the Illinois maintenance facility has been
delayed because, according to FTA's contractor, the project's
management decided to select an alternative site for the facility.
The originally selected site relied on property owned by a freight
railroad. According to the project's management, the railroad was
unwilling to sell the property at a reasonable price; therefore,
extra time was needed to find a suitable alternative site. FTA's
contractor said that the facility should still be completed in time
to meet the May 2001 operation date.
FUNDING FOR THE EXTENSION'S
SECOND SEGMENT IS UNCERTAIN
-------------------------------------------------------- Appendix IV:5
Local officials are seeking federal or state funding for the second
segment of the St. Clair extension. According to Bi-State
officials, this $88 million project will not be feasible unless the
state government can pay a significant portion of its costs.
Currently, neither federal nor state financial assistance is certain.
For the second segment of the St. Clair extension to receive federal
funding, the Bi-State Development Agency would have to apply for an
amendment to the full funding grant agreement, which currently
applies only to the first segment. An Illinois state official said
that such an application might encounter resistance from supporters
of another high-priority light rail project, the Cross-County
corridor extension, planned for development in the city of St. Louis
and St. Louis County, Missouri.\4 Supporters of this project expect
to receive New Starts Program funding early in the next decade and
believe that additional federal funds for the second segment of the
St. Clair extension could delay their federal funding.
According to an Illinois Department of Transportation official, the
state may issue a grant covering between 50 and 100 percent of the
cost of the second St. Clair segment. In part, such a large share
would compensate for the state's not having contributed to the first
segment. However, such state assistance is not assured because the
legislature has yet to approve a bond issue to support mass transit
capital assistance grants.
--------------------
\4 Altogether, nine transportation corridors could be served by
MetroLink extensions, according to a 1991 systems analysis developed
by St. Louis-area transportation planners.
SALT LAKE CITY SOUTH LIGHT RAIL
TRANSIT
=========================================================== Appendix V
Project officials expect the Salt Lake City South Light Rail Transit
system to be completed within budget, ahead of the original schedule.
Many of the major contracts for the $312.5 million project have been
awarded at amounts lower than expected, allowing for the
implementation of several enhancements to the system. According to
project officials, the 15-mile system will begin operations by March
2000--10 months ahead of schedule and well before the opening of the
2002 Winter Olympic Games in Salt Lake City.
BACKGROUND
--------------------------------------------------------- Appendix V:1
A local transportation planning process for Salt Lake County, begun
in 1982, determined that the north-south Interstate 15 (I-15)/State
Street Corridor in Salt Lake County warranted major capital
investment in both its transit and its highway systems. The
resulting transit capital project is the $312.5 million, 15-mile
Transit Express Salt Lake Area Light Rail System, known as "TRAX"
(see fig. V.1., as provided by the Utah Transit Authority). TRAX's
principal objective is to provide capacity improvements in the
corridor, especially during peak commuting periods.
TRAX will largely parallel I-15, the major north-south highway that
is also being improved as a result of the same local planning process
(see app. VII), from the northern end of downtown Salt Lake City
through the downtown and the southern suburbs. TRAX service will be
coordinated with bus service and be connected to an east-west light
rail line currently under consideration.
Initially, the 15-mile TRAX system will serve 17 passenger
stations--5 downtown and 12 in the southern suburbs. Within the
downtown area, TRAX will operate on city streets within the
established speed limit (currently 25 miles per hour); south of
downtown, TRAX will operate on an existing railroad right-of-way at a
maximum speed of 55 miles per hour. Except for two bridges in the
southern suburbs, the entire system is double-tracked. These bridges
may be upgraded to become double-tracked in the future if funds
become available.
Figure V.1: Map of the Salt
Lake City South Light Rail
Transit System
(See figure in printed
edition.)
CONTRACTS' COSTS WERE LOWER
THAN EXPECTED, ALLOWING FOR
ENHANCEMENTS
--------------------------------------------------------- Appendix V:2
As of December 31, 1997, the project's total estimated cost had not
changed from the $312.5 million\1 projected in the August 1995 full
funding grant agreement. As of that date, the total planned
obligations for the project's tasks were $273 million; the balance of
the project's costs are for financing ($25 million) and reserves
($14.6 million). Table V.1 shows the planned breakdown of
obligations for tasks and other cost elements.
Table V.1
Breakdown of Project's Planned Costs, as
of December 31, 1997
(Dollars in millions)
Cost element Planned cost
---------------------------------------- ----------------------------
Tasks
Project management and administration $14.8
Final design and engineering 12.5
Construction management 5.2
Railroad right-of-way 18.5
Real estate 15.5
Construction 131.7
Procurement 71.1
Start-up and testing 3.5
======================================================================
Subtotal for tasks $272.9
Reserve 5.6
Local match reserve 9.0
Financing 25.0
======================================================================
Total cost $312.5
----------------------------------------------------------------------
Source: Utah Transit Authority TRAX Executive Summary Report,
December 1997
According to Utah Transit Authority (UTA) officials, bids and award
amounts for many of the TRAX contracts were lower than budgeted. UTA
officials attribute those differences to the competitive construction
environment created, in part, by the I-15 highway project. UTA was
able to use the difference between the budgeted and the actual bid
prices to enhance some aspects of the system. For example, UTA was
able to upgrade single-tracked segments of the system to
double-tracked segments and to enhance the communications system
throughout the project.\2 UTA routinely reports to the Federal
Transit Administration (FTA) on its contracts' status and costs, and
FTA reviewed and approved each TRAX enhancement funded with contract
savings.
As of December 31, 1997, UTA had obligated $190.8 million, or about
70 percent of the project's total $273 million task budget. This
obligation amount is $68.8 million, or about 27 percent, less than
planned for the project at this point in its construction schedule.
According to UTA officials, the majority of the $68.8 million
obligation underrun occurred because contracts were awarded for
amounts lower than anticipated; in addition, about $15 million in
obligations planned for November were not made.
As of December 31, 1997, UTA had expended $89.2 million--33 percent
of the $273 million task budget. These expenditures are $11.5
million (12 percent) less than the amount projected for this date in
the expenditure plan. Between December 1997 and November 1998, UTA
is projected to expend about $150 million, almost twice the amount
already expended.
--------------------
\1 This amount does not include about $8.8 million spent by the Utah
Transit Authority for preliminary engineering costs or $22 million in
project-related investments made by Salt Lake City.
\2 UTA officials were not able to provide the costs of these
enhancements because they are not readily distinguishable. Some of
the enhancement work was added to existing contracts, and some was
incorporated into new bid packages. Additionally, some of the
enhancements eliminated the need for other investments, such as
mechanisms to move trains between single and double tracks.
PACE OF CONSTRUCTION WILL
REQUIRE SOME SHORT-TERM
BORROWING
--------------------------------------------------------- Appendix V:3
The Intermodal Surface Transportation Efficiency Act (ISTEA) required
FTA to enter into a full funding grant agreement with UTA, which
includes $131 million in federal transit New Starts Program funds for
the initial segment of the TRAX project. In August 1995, FTA and UTA
signed an agreement committing the federal government to fund no more
than 80 percent of the project's actual net costs or no more than
$241.4 million, whichever is lower.\3 The full funding grant
agreement states that, in addition to the $131 million authorized by
ISTEA and the $12.5 million that FTA provided to TRAX before entering
into the full funding grant agreement, FTA intends to obtain $97.5
million for TRAX for fiscal years 1998 through 2000 under the
legislation reauthorizing ISTEA. Through fiscal year 1997, TRAX had
been provided a total of $70.8 million of the $241.4 million, $12.5
million of which predated the full funding grant agreement. The 1998
Department of Transportation Appropriations Act provided $63 million
for TRAX; $10 million of ISTEA's authorization for TRAX has yet to be
provided.
As of December 31, 1997, UTA had received a total of $58.3 million in
federal funds--including about $46 million from the amount committed
in the full funding grant agreement and $12.5 million received under
a previous FTA grant for acquiring a railroad right-of-way. UTA
anticipates that over the next few months it will draw down most of
the available remaining federal funds as the expenditure rate
increases.
Local funds for the construction of TRAX are projected to total $71
million.\4 These funds are to come from bond proceeds, as well as
from cash that UTA has on hand. In October 1997, UTA issued $27.7
million in sales tax and transportation revenue bonds, which
generated $24.8 million for the project's construction. As of
October 15, 1997, UTA had expended $20 million on construction from
its cash on hand, had set aside an additional $17 million in cash,
and planned to expend $9.3 million in the future from its cash
reserves.
Additionally, during the second quarter of fiscal year 1998, UTA
plans to issue $50 million to $75 million in grant anticipation notes
or bonds backed by the expectation that it will receive federal funds
in fiscal years 1999 and 2000 as specified in the full funding grant
agreement. These bonds are to address the cash-flow shortage that is
expected to occur as UTA continues to construct TRAX and pay its
contractors before federal funds are available for reimbursement.
Federal funds will be used to repay the bonds, assuming TRAX is
funded as planned.
--------------------
\3 According to UTA officials, FTA attributes the $9 million
difference between $241 million and 80 percent of $312.5 million
($250 million) to a calculation error. FTA may address this error by
changing the maximum federal funding commitment to $250 million.
\4 Or $62.5 million if FTA corrects its calculation error and
provides a total of $250 million for the project.
OPERATIONS ARE EXPECTED TO
BEGIN AHEAD OF SCHEDULE
--------------------------------------------------------- Appendix V:4
The full finding grant agreement commits UTA to begin TRAX service to
the general public no later than December 31, 2000, the same date
currently shown on UTA's official master schedule. However, UTA
projects that TRAX service will begin in March 2000--10 months ahead
of schedule. Although some delays have been noted with individual
contracts, UTA does not expect any of these to delay the system's
completion.
Construction of the light rail system began in June 1997 and, as of
November 1997, was under way in the downtown and suburban portions of
the system. A downtown segment and station were completed in early
November. Test tracks are being installed and are scheduled to be
ready for operation by April 21, 1998; the first TRAX vehicle is
currently scheduled to arrive on March 1, 1998.
At this stage in construction, environmental problems could still
arise and slow the completion of the project, as well as increase its
costs. For example, excavation for the stations along the southern
portion of the system will take place near the existing freight
railroad track, where hazardous materials--a potential legacy of
freight operations--may be found. The project is not scheduled to be
completed to the point that these risks are eliminated until
September 30, 1999.
THE CENTRAL ARTERY/TUNNEL PROJECT
========================================================== Appendix VI
The Central Artery/Tunnel project is one of the most expensive, and
in many ways, the most complex federally assisted highway project
ever undertaken. As we have reported in a series of reports and
testimonies, state managers have worked to control the costs of the
project and are taking steps to reduce them. However, the state is
not meeting its aggressive cost containment goals and, unless further
savings can be found, construction cost increases seem likely to push
the project's total net cost higher than the current $10.8 billion
estimate.
Massachusetts' October 1997 project finance plan will meet the
funding needs of the Central Artery/Tunnel project if costs remain as
forecast and if funding is received as projected. However, the
project's funding needs could be larger than projected in the state's
finance plan because (1) additional costs of some magnitude seem
likely and (2) federal funding could be nearly $1 billion less than
projected, according to the multiyear highway bills pending in the
Congress. In addition, for this project, the use of grant
anticipation notes to borrow against future federal funding presents
challenges.
BACKGROUND
-------------------------------------------------------- Appendix VI:1
The Central Artery/Tunnel project will substantially complete the
federal Interstate Highway System. It will link air, sea, rail, bus,
and subway facilities and will, according to the project's managers,
support sustained economic growth and environmental benefits. The
project is managed by the Massachusetts Turnpike Authority. Its
day-to-day design and construction activities are managed by a
management consultant--a joint venture of Bechtel/Parsons
Brinckerhoff--under contract with the state.
The Central Artery/Tunnel project will build or reconstruct about 7.5
miles of urban highways (about 160 lane miles)--about half of them
underground. As figure VI.1 shows, it will (1) extend route I-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 I-93 through downtown Boston--with an underground roadway;
and (3) replace the I-93 bridge over the Charles River. The project
entails numerous and complex construction challenges in tunneling
under densely populated downtown Boston. For example, the project
will burrow close to buildings and subway tunnels, often with only a
few feet to spare. Construction plans include underpinning the
existing elevated Central Artery so that this structure 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 VI.1: Map of the
Central Artery/Tunnel Project
(See figure in printed
edition.)
Source: Central Artery/Tunnel project office.
STATUS OF COST AND SCHEDULE
-------------------------------------------------------- Appendix VI:2
Massachusetts reported that as of September 30, 1997, the total
estimated net cost of the Central Artery/Tunnel project was $10.8
billion. A total of $6 billion, including $4.9 billion in federal
funds and $1.1 billion in state funds, has already been obligated for
the project. As we reported in July 1997, the total funding needs
for the project are $11.6 billion, about $800 million more than the
project's cost estimate.\1 This is because the $10.8 billion cost
estimate includes a credit to the cost of the project of about $800
million, which represents the future receipt of insurance proceeds.
However, these proceeds, if realized, will not be available until
2017, well after the project's completion; therefore, they cannot be
used to help pay for the project.\2 The project's obligations and
remaining funding needs are shown in table VI.1.
Table VI.1
Central Artery/Tunnel Project's
Obligations, Funding Needs, and Cost, as
of September 30, 1997
(Dollars in billions)
Obligations, funding needs, and cost Amount
---------------------------------------- ----------------------------
Obligations through September 30, 1997 $6.0
Remaining obligations through fiscal $5.6
year 2005
======================================================================
Total funding needs $11.6
Insurance proceeds in 2017 ($0.8)
======================================================================
Total net cost $10.8
----------------------------------------------------------------------
Source: GAO's analysis of state data.
Construction began in 1991, and the project achieved its first major
milestone when the Ted Williams Tunnel opened to commercial traffic
in 1995 and to passenger vehicles on a limited basis in 1996. As of
September 30, 1997, the project's final design was 94 percent
complete and was scheduled to be substantially complete by mid-1998.
As of the same date, construction was 32 percent complete and most of
the remaining 30 construction contracts were planned to be awarded by
2001. The project is scheduled to open to traffic in stages--the
permanent connections of I-90 to the Ted Williams Tunnel in December
2001, the northbound Central Artery in July 2002, and the southbound
Central Artery in May 2003. The entire project is scheduled to be
substantially complete in December 2004. As of September 30, 1997,
Massachusetts reported that the project was meeting all of its
milestones except that the opening of the southbound Central Artery
was 3 months behind schedule.\3 Project officials attributed this
projected delay to the additional construction time needed when the
project's plans to incorporate an existing tunnel into the
underground Central Artery were revised in response to concerns
raised by the Federal Highway Administration (FHWA). Officials
stated that this delay, if it occurs, will not delay the overall
project's substantial completion in 2004.
--------------------
\1 Transportation Infrastructure: Progress on and Challenges to
Central Artery/Tunnel Project's Costs and Financing (GAO/RCED-97-170,
July 17, 1997).
\2 The insurance proceeds are estimated savings that 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
that, along with other insurance-related funds, will earn interest
until all claims are paid, at which time these remaining funds will
be returned to the state. Project officials estimate that this will
occur in 2017--13 years after construction is completed. According
to project officials, the industry's standard practice is to assume
that claims are paid over a 13-year period after the project is
completed.
\3 The southbound portion is currently projected to open in August
2003 instead of its scheduled opening date of May 2003. Previously,
the scheduled opening date was October 2002; it was changed on June
30, 1997. Project officials told us that the southbound segment has
been behind schedule since early 1995.
CONSTRUCTION COST INCREASES
COULD RAISE TOTAL COSTS AND
FUNDING NEEDS
-------------------------------------------------------- Appendix VI:3
The Central Artery/Tunnel project's total net cost and funding needs
have remained relatively constant in the 6 months since we reported
on them in July 1997.\4 Cost increases, such as a $15 million
increase in property acquisition costs, were substantially offset by
corresponding savings, such as a $22 million reduction in the
estimated cost of police details at construction sites. The largest
of the increases reported during this period was around $50 million
in the estimates of construction contracts being designed. The
largest cost savings reported during this period to maintain the
project's total cost was a $130 million reduction in the estimated
cost of future construction contracts.
The estimated savings on future contracts was achieved by reducing
the assumed rate of annual inflation from 3.35 percent to 2.35
percent, a reduction justified by recent inflation trends in the
Boston area, according to state and FHWA officials. However, recent
contract awards suggest that these savings may not be realized. The
state awarded three construction contracts after reducing its cost
estimate on future construction contracts when we completed our
review; each exceeded the state's estimates, adding about $74 million
to the cost of the project. Therefore, while a variety of factors
can influence the price of contracts and contractors do not
traditionally reveal their assumptions about future inflation, some
portion of the savings attributable to the revised inflation
assumption may have been lost already. FHWA and state officials
believe the lower inflation assumptions will prove to be correct, and
they attributed the higher costs to factors such as the complexity of
the work and changing market conditions, which resulted in less
competition for the contracts than anticipated.
Massachusetts has established aggressive goals to contain and control
the project's construction costs; however, as we last reported in
July 1997, the state is not meeting those goals. In 1995, the state
established an overall goal of holding the costs 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 rate of growth
in contract costs at that time.\5 Cost increases above these goals
have occurred on contracts awarded both before and after November
1994, as shown in table VI.2.
Table VI.2
Percentage Increase in Costs on Awarded
Construction Contracts for the Central
Artery/Tunnel Project, as of September
30, 1997
(Dollars in millions)
Cumulative Goal for Cost
awarded cost growth
Number of contract growth (in (in
Awarded contracts contracts price percent) percent)
---------------------- ---------- ---------- ---------- ----------
Contracts awarded 36 $1,108 25.0 28.4
through November 1994
Contracts awarded 42 $3,863 7.0 9.6
after November 1994
======================================================================
All awarded contracts 78 $4,970 10.7 13.8
----------------------------------------------------------------------
Source: GAO's analysis of state data.
The 13.8-percent growth in the costs of the project's awarded
contracts represents an improvement over the 17.4-percent growth we
reported in July 1997. However it may not be indicative of a
downward trend because it includes a large number of contracts that
have not been in effect for very long. Of the 42 contracts awarded
since November 1994 and shown in table VI.2, 18, representing $2.8
billion of the $3.9 billion in contracts, are less than 25 percent
complete. Cost growth for contracts that are further along tends to
be greater than the cost growth that is reflected in the average for
all contracts. For example, the cost growth for contracts that are
more than 50 percent complete is 14.1 percent, compared with the 9.6
percent for all contracts awarded after November 1994, as shown in
table VI.3.
Table VI.3
Rate of Cost Growth on Contracts Awarded
After November 1994, by Percentage of
Contract Completed
(Dollars in millions)
Cumulative
awarded
Percentage of contract price Rate of cost
contract Number of (percent of growth (in
completed contracts total awarded) percent)
---------------- ---------------- -------------- ------------------
Less than 25% 18 $2,783 7.4
(72%)
25 to 50% 4 602 16.5
(16%)
More than 50% 20 478 14.1
(12%)
======================================================================
Total 42 $3,863 9.6
(100%)
----------------------------------------------------------------------
Source: GAO's analysis of state data.
While we cannot predict the total increase in the costs of all the
project's construction contracts, we believe that meeting the goals
set in 1995 and avoiding increases in the cost of the project will be
difficult. To prevent further increases in the project's
construction costs, Massachusetts must not only meet but beat its
cost containment goals. For example, assuming that awarded
construction contracts experienced no further cost growth, the 30
unawarded contracts could only grow by less than 1 percent to meet
the cost containment goal of 10.7 percent. If on the other hand, the
costs of these unawarded contracts and of the contracts awarded after
November 1994 experienced the same 14.1 to 16.5 percent cost growth
as the awarded contracts that are 25 percent or more complete, the
cost of the project would increase by about $270 million to $400
million.
In July 1997, we reported that the state's goals form the basis for
the state's cost estimate and finance plan. We recommended that the
state decouple its cost containment goals from the project's cost
estimate and revise that estimate to more closely reflect the state's
actual experience with its cost containment program. State
officials, however, believe that the existing goals are essential to
provide designers and contractors with an incentive to control
contract changes and restrict cost growth. Even so, state officials
agreed that the project has ambitious cost containment goals for
construction that will be difficult to meet.
Massachusetts is continuing to take steps to lower costs. For
example, it is examining the remaining unawarded construction
contracts, whose costs total $1.5 billion, and, according to the
project director, hopes to reduce their scope by 10 percent and
achieve $150 million in savings. In addition, the state plans to
open negotiations with the utility companies, railroads, and others
who work on the project under contract to reduce the costs of their
work by between $16 million and $32 million. The state is also
reducing the project's administrative costs. According to project
officials, Bechtel/Parsons Brinckerhoff will reduce its staff by 5
percent by March 1998 to save around $10 million, and the state is
seeking further reductions in the costs of its contract with
Bechtel/Parsons Brinckerhoff to save an additional $40 million.
--------------------
\4 Our July 1997 report used March 1997 cost data; this report uses
September 1997 data.
\5 State and FHWA officials believe that the cost performance of
contracts issued after November 1994 is a more meaningful indicator
of the effect of cost containment efforts than the cost performance
of contracts issued before that date because the state did not have a
formal cost containment program in effect until 1995.
STATE'S ESTIMATE DOES NOT
INCLUDE THE COST OF
BORROWING
------------------------------------------------------ Appendix VI:3.1
The Central Artery/Tunnel project's cost estimate does not include
the costs of borrowing. The state issues bonds to finance its share
of most of its transportation projects and, according to state
officials, traditionally does not include the costs of this borrowing
as part of its cost estimates for projects. Cost-estimating
practices vary widely among the states, and FHWA has no standards or
requirements for the states to follow in preparing cost estimates for
projects. However, the Massachusetts Department of Administration
and Finance recently calculated that the borrowing costs for grant
anticipation notes and for other short-term borrowing associated with
the project would be $776 million. In addition, the Massachusetts
Turnpike Authority incurred interest costs when it issued $1.76
billion in bonds in September 1997 to, among other things, contribute
$700 million to the project.
FUNDING NEEDS MAY BE GREATER
THAN PROJECTED IN THE STATE'S
FINANCE PLAN
-------------------------------------------------------- Appendix VI:4
Massachusetts' October 1997 finance plan will meet the funding needs
of the Central Artery/Tunnel project if costs remain as forecast and
if funding is received as projected. However, as discussed earlier,
further cost increases of some magnitude seem likely. In addition,
the project's funding needs could be larger than projected in the
state's finance plan because the estimated level of federal funding
is greater in the plan than in the multiyear highway bills pending in
the Congress. Furthermore, the use of grant anticipation notes,
particularly on the scale contemplated by the plan, presents
challenges.
Under the state's current cost estimate, completing the project will
require $5.6 billion in additional obligations through fiscal year
2005. Nearly all of these obligations--$5.3 billion--will be
required in the next 5 years, through federal fiscal year 2002.
Massachusetts' finance plan assumes that $2 billion in federal funds
will be available to the project during the peak construction period
through fiscal year 2002, and $2.9 billion through fiscal year 2005.
While the amount of federal funding Massachusetts can expect will not
be known until the Congress reauthorizes the Intermodal Surface
Transportation Efficiency Act (ISTEA), Massachusetts' finance plan
assumes that federal funding will be the same as projected in the
administration's proposed National Economic Crossroads Transportation
Efficiency Act (NEXTEA). However NEXTEA would provide more federal
funding to Massachusetts than either of the two pending bills--the
Building Efficiency Through Surface Transportation and Equity Act of
1997 (BESTEA) in the House and the ISTEA II authorization bill in the
Senate. As table VI.4 shows, passage of BESTEA would create
additional funding needs of at least $144 million. Passage of the
Senate legislation would create additional funding needs of nearly $1
billion.
Table VI.4
Federal Funding for the Central Artery/
Tunnel Project Under Other Federal
Funding Scenarios
(Dollars in millions)
Federal funding to
the project, Additional funding
fiscal years 1998- needed to equal
Proposal 2005 NEXTEA's funding
------------------------------ ------------------ ------------------
NEXTEA $2,931
House BESTEA (Introduced) $2,619 $312
House BESTEA $2,783 $144
(Amended by Committee)
Senate ISTEA II $1,980 $949
----------------------------------------------------------------------
Note: The figures above are from FHWA's analysis of the
apportionment levels to the states under NEXTEA and the average
annual apportionment levels to the states under the other
reauthorization proposals. It also reflects Massachusetts' planning
assumption that 71 percent of the federal funds Massachusetts
receives will be used for the Central Artery/Tunnel project through
fiscal year 2002, and 50 percent thereafter. The House
Transportation and Infrastructure Committee adopted an amendment to
BESTEA, H.R. 2400, but a bill has not been reported to the floor.
Because federal funding, even under NEXTEA, is projected to be
insufficient to meet the project's financing needs, Massachusetts
plans to use other state sources including the following:
-- About $900 million in state bond funds will be used to match
federal funds and pay for parts of the project that are not
eligible for federal funding or for which federal funding was
not sought.
-- The Massachusetts Turnpike Authority will provide $700 million,
required by 1997 state legislation and financed by the sale of
$1.76 billion in revenue bonds in September 1997.
-- The Massachusetts Port Authority will provide $200 million, also
specified in state legislation, and implemented through a July
1997 memorandum of understanding with the state.\6 Under this
agreement, the Authority will, after completing a schedule of
payments, assume ownership of portions of the project being
constructed at Logan International Airport. The legislation and
the agreement also require the Authority and the state to
jointly study the feasibility of having the Authority contribute
an additional $100 million to the project.
-- Grant anticipation notes will be issued to provide $1.5 billion.
The state legislature authorized the issuance of $1 billion in
anticipation of federal funding, and the state plans to issue
the first notes in the spring of 1998. State officials plan to
seek additional authority from the legislature to issue more of
these notes.
According to Massachusetts' estimates, after 2002, the project will
require only $334 million in new obligations, and available funding
will exceed needs. Massachusetts plans to begin repaying the grant
anticipation notes in 2003 and to use one-half of the federal highway
apportionments it receives between fiscal year 2003 and fiscal year
2009 to meet the project's remaining expenses and to repay the notes.
As we reported in 1997, there is limited precedent for the use of
grant anticipation notes, particularly in amounts of this magnitude.
While the financial markets will ultimately determine the feasibility
of selling grant anticipation notes in the amount envisioned,
challenges remain to be overcome. For example, although
Massachusetts plans to use federal funds through 2009 to repay the
notes, the Congress is unlikely to enact reauthorizing legislation
for more than 6 years, which would provide the state with federal
funding authorizations through 2003. The state would then be
borrowing against federal funds that had not yet been authorized.
The state's finance plan does not specify how additional needs will
be met if costs increase or funding is less than predicted. In July
1997, we recommended that FHWA require Massachusetts to include a
contingency plan in its next finance plan to cover these
possibilities. FHWA stated that it believes such a plan is premature
until the level of future federal funding for Massachusetts is known.
According to FHWA, the state will be required to prepare another
finance plan after the federal highway program is reauthorized.
Massachusetts' October 1997 finance plan responds to our
recommendation by indicating that the state is exploring options for
securing additional state funding, if needed, and that it will
address those needs at the appropriate time.
--------------------
\6 Under the memorandum of understanding that the state signed with
the Massachusetts Port Authority, $105 million of the $200 million
payment will be made in 2003--after the peak construction period when
the funds are needed. To ensure that funding is available when
needed, the state plans to issue bond anticipation notes and borrow
against this expected payment. The state also expects to issue bond
anticipation notes for the payment of a $400 million contribution
from the Massachusetts Turnpike Authority, also expected in 2003, and
authorized by state legislation enacted in 1995.
INTERSTATE 15 RECONSTRUCTION
PROJECT, SALT LAKE CITY, UTAH
========================================================= Appendix VII
At an estimated cost of $1.59 billion, the Interstate 15 (I-15)
reconstruction project in Salt Lake City, Utah, is the largest
"design-build" highway project ever undertaken in the United States.
A substantial portion of the project's costs are covered under one
fixed-price contract that was awarded in March 1997 to a single
contractor to both design and construct the project. As a result,
many of the risks of cost growth associated with a traditional
highway project, such as increases that occur during the detailed
design process, have been minimized. Nevertheless, costs could still
grow because the state and the contractor have each agreed to assume
certain financial risks. The design-build process is relatively new
to the highway construction industry--there are few completed
projects, and little historical information is available to predict
possible changes to the cost of the project. Officials in states
where design-build contracts have been completed stated that
post-award change orders increased the costs of these contracts by
around 2.5 percent to around 8.5 percent. Changes of this magnitude,
if they occurred, would add roughly $35 million to $110 million to
the cost of the I-15 project.
While the Utah Department of Transportation (UDOT) is seeking federal
funds, it is prepared to complete the project using state funds if
necessary. As of October 1997, around $14 million in federal funds
had been obligated for the project, mostly for environmental studies
and property acquisition. The I-15 project is the largest component
of Utah's Centennial Highway Fund--a 10-year, $2.6 billion fund for
the construction and reconstruction of highways throughout Utah,
financed through the state's general revenues, earmarked increases in
the state's gasoline tax and vehicle registration fees, and other
sources. The state has requested $970 million in federal funding for
the project beyond its expected highway apportionments and has
planned on receiving about half that amount. State officials said
that if additional federal funds are not made available, Utah will
complete the project either by raising additional state funds or by
reducing or canceling some of the other 39 projects slated to be
financed from the Centennial Highway Fund.
BACKGROUND
------------------------------------------------------- Appendix VII:1
The I-15 reconstruction project, first proposed in 1992, will
reconstruct around 17 miles of Interstate highway in and around Salt
Lake City, Utah. The project will replace all existing pavement,
widen the road from 6 to 12 lanes, reconstruct several major
Interstate highway interchanges, replace 137 bridges and other
structures, and equip the corridor with an advanced traffic
management system. According to UDOT, traffic congestion, outdated
safety and design features, pavement and bridge deterioration, and
other factors combined to require the complete reconstruction of the
highway. State and Federal Highway Administration (FHWA) officials
told us that the project is critical to both the transportation
infrastructure of the Salt Lake City area and the city's and state's
ability to host the Winter Olympic Games in 2002.
The I-15 project is the largest design-build highway project ever
attempted in the United States. Whereas a traditional highway
project is fully designed by the state or its contractors and the
design plans are then provided to prospective contractors who prepare
proposals for building the project, a design-build project is both
designed and built by the same contractor. Although the state
identifies a desired end result and minimum design criteria,
prospective contractors prepare proposals for both the design and
construction phases of the project. While the design-build approach
is becoming more common in other industries, it has not yet been used
extensively on highway or transit projects in the United States.
STATUS OF COST AND SCHEDULE
------------------------------------------------------- Appendix VII:2
As of October 1997, Utah estimated the cost of the I-15 project at
$1.59 billion. This estimate consists of the $1.3 billion bid price
of the design-build contract, plus costs incurred outside the
contract, such as the cost of acquiring needed property. The
estimated cost of the I-15 project is shown in table VII.1.
Table VII.1
Estimated Cost of the I-15 Project as of
October 1997
(Dollars in millions)
Cost item Estimate
---------------------------------------- ----------------------------
Design-build contract and options $1,325
Award fees 50
Property acquisition 45
Program management and insurance 52
Other costs\a 118
======================================================================
Total $1,590
----------------------------------------------------------------------
\a These cover the acquisition of a traffic management system ($40
million), parallel street projects on the I-15 alignment ($39
million), and other costs that are not part of the design-build
contract.
Source: GAO's analysis of UDOT's data.
Around $14 million in federal funds had been obligated for the
project as of October 1997, mostly for environmental studies and
property acquisition that preceded the award of the design-build
contract. The design-build contract was approved by FHWA and awarded
under federal-aid advance construction provisions. These provisions
allow the state to seek federal reimbursement for expenses associated
with the design-build contract at a later date.
The project is scheduled to be completed in July 2001 and, as of
October 1997, was meeting its schedule. FHWA approved the use of a
design-build contract for the I-15 project in June 1996, and UDOT
awarded a contract to Wasatch Constructors to design and construct
the project in March 1997. The contractor began work in April 1997,
beginning the design effort as well as the construction of some
elements that were already fully designed.
MOST OF THE PROJECT'S COSTS ARE
UNDER CONTRACT, BUT SOME RISKS
REMAIN
------------------------------------------------------- Appendix VII:3
Most of the project's estimated costs--nearly $1.4 billion of the
$1.59 billion--are covered under the design-build contract, giving a
significant measure of stability to these costs. Furthermore, having
a single contractor responsible for both designing and constructing
the project could help to avoid potentially costly conflicts that can
occur between separate design and construction contractors.
Similarly, according to state officials, having a single contractor
responsible for construction along the entire corridor eliminates
conflicts that can occur between separate construction contractors
working on adjacent areas.
The cost of the project could still grow, however, because under
UDOT's agreement with the contractor, the state has assumed certain
financial risks. For example, while the contractor is financially
responsible for any design defects, differences between the final and
the proposed design, and problems in constructing the project as
designed, the state is responsible for, among other things, the
accuracy of the initial geotechnical (soil) and hazardous materials
investigations, which were conducted before the contract's award.
Should actual conditions found during the design process differ from
the conditions described in the state's report, UDOT would bear the
additional costs of any necessary design or construction changes.
According to the project manager, as of October 1997, the contractor
had submitted two claims for additional fees as the result of
differing on-site conditions, including one for which the contractor
was seeking an additional $2 million.
Because the design-build process is relatively new to the highway
construction industry, there are few completed projects, and
therefore there is little historical information for predicting the
magnitude of possible changes to the cost of the project. However,
should such changes occur, UDOT has provided little room in its
budget for contingencies. According to UDOT officials, the state's
strategy is to achieve savings through value engineering and other
means in order to build a contingency fund as the project progresses.
In states where design-build contracts have been used, experience has
been mixed. According to California officials, the final cost of the
San Joaquin Hills Corridor, a $778 million toll road, was 2.2 percent
above the contract award price. In Florida, the Blackwater Bridge,
virtually destroyed in a hurricane, was rebuilt at a cost of about
$33 million, experiencing post award change orders that totaled 8.5
percent. Changes similar to these would add roughly $35 million to
$110 million to the costs of the I-15 project.
STATE IS SEEKING FEDERAL
FINANCING BUT WILL USE STATE
FUNDS IF NECESSARY
------------------------------------------------------- Appendix VII:4
The I-15 reconstruction project is being funded by Utah's Centennial
Highway Fund. Established in March 1997, the fund is expected to
support a 10-year, $2.6 billion plan for constructing and
reconstructing highways throughout Utah.\1 As of October 1997, 40
projects were slated to be financed from the fund, of which the I-15
reconstruction project was by far the largest. These Centennial
Highway Fund projects are in addition to those that are funded
through the state's regular federal-aid highway program and listed as
part of Utah's State Transportation Improvement Program.
The state will raise over $2 billion for Centennial Highway Fund
projects. To accomplish this, over a 10-year period, UDOT is
planning on sources that include
-- a contribution of about $1 billion from the state's General
Fund, starting with an $85 million contribution in state fiscal
year 1999, to be increased by $5 million each year, and
concluding with a $125 million contribution in 2007 and
-- a contribution of around $800 million from the state's
transportation fund, to be funded by a 5-cent increase in the
state's gasoline tax, an increase in vehicle registration fees,
and a transfer of other revenues authorized in 1997 and
earmarked by state law for the fund.
In addition, the state plans to issue about $600 million in general
obligation bonds. Utah issued $340 million of these bonds in June
and August 1997.
Besides state sources, UDOT assumes that the Centennial Highway Fund
will receive federal funds. In February 1997, Utah requested $4.3
billion in federal funding for the state's transportation needs in
support of the 2002 Winter Olympic Games, including $970 million for
the I-15 project. However, the state has been more conservative in
its planning for the Centennial Highway Fund and is assuming that it
will receive $450 million from the federal government for the
project. The state further assumes that its allocation of federal
funds for the project will be in addition to its apportionments under
successor legislation to the Intermodal Surface Transportation
Efficiency Act (ISTEA) and that it will obligate these funds over a
6-year period between 1998 and 2003. According to UDOT's executive
director, if Utah does not receive a special allocation for the 2002
Winter Olympic Games but receives more funding under ISTEA's
successor legislation that it did under ISTEA, it will consider
committing the additional funding to the Centennial Highway Fund.
As of January 1998, no additional federal contribution for the
project had been secured. Utah officials stated that if no special
or additional federal funding is received, UDOT will continue to fund
the I-15 project either by raising additional state funds or by
reducing or canceling some of the other 39 projects slated to be
financed from the Centennial Highway Fund.
While future federal funding remains uncertain until the Congress
reauthorizes ISTEA, Utah may be able to realize most or all of its
plans under both the administration's proposed reauthorization and
the multiyear authorizations pending in the Congress. To obtain $450
million in federal funds by the end of 2003, Utah would have to
receive an annual increase in its federal apportionment of $75
million or more. Under the administration's proposed National
Economic Crossroads Transportation Efficiency Act (NEXTEA), the
House's Building Efficiency Through Surface Transportation and Equity
Act of 1997 (BESTEA), and the Senate's ISTEA II, Utah would receive
increased funding ranging from $46 million to $80 million a year, as
indicated in table VII.2. In addition, a number of provisions in
these bills could benefit Utah. For example, BESTEA contains a
provision allowing the Secretary to direct discretionary and other
federal highway funds to a state hosting the Olympic Games.
Table VII
2: Federal Highway Funding for Utah
Under Various Reauthorization Proposals
Increase over
Average annual ISTEA's funding
Legislation/proposal funding level levels
------------------------------ ------------------ ------------------
ISTEA $128.3
NEXTEA $174.9 $46.6
House BESTEA $208.6 $80.3
Senate ISTEA II $190.4 $62.1
----------------------------------------------------------------------
Source: GAO's analysis of FHWA's data.
As of October 1997, the Centennial Highway Fund faced a projected
deficit of around $245 million in state fiscal year 1999, which
begins in July 1998. This deficit was projected even if Utah secured
$450 million in federal funds between now and 2003; however, the
deficit was projected to be $62 million greater in state fiscal year
1999 if these federal funds were not received. State officials told
us in October 1997 that this deficit would require them to seek
additional funding from the state legislature in early 1998.
--------------------
\1 In addition to the $2.6 billion, the fund carries a balance of
$110 million provided by the state to UDOT in July 1996 to cover
initial expenses, including the costs of awarding the design-build
contract.
THE ALAMEDA CORRIDOR
======================================================== Appendix VIII
The Alameda Corridor project differs from other large-dollar
transportation projects discussed in this report in three important
ways: It is primarily a freight rail project; it relies heavily on
private funds for its financing; and it received a loan rather than a
grant from the federal government. The project is designed to
improve the movement of goods between the ports of Los Angeles and
Long Beach and railyards near downtown Los Angeles. Expected to cost
about $2 billion, this 20-mile dedicated rail link--which includes a
10-mile section of the project in a 30 foot deep trench--has not yet
been fully designed, and limited construction has begun. The
project's cost estimates could change after contractors submit their
construction bids on the trench section and after project officials
finish evaluating a December 1997 Internal Revenue Service (IRS)
ruling limiting the components of the project that can be financed
through tax-exempt revenue bonds. Funding for the project will come
primarily from the private sector, a $400 million federal loan, and
grants from the two ports and the Los Angeles County Metropolitan
Transportation Authority (MTA). As of December 1997, project
officials had secured about half of the project's total funding but
were facing challenges in securing the remainder. Specifically, they
must demonstrate to financial markets that the project is a good
credit risk and obtain all of the funds committed by a financially
strapped MTA. According to the project's ambitious schedule, major
construction is to begin in 1999 and to be completed within 3 years,
achieving time savings of 1 year through the use of design-build
contracting procedures. However, delays in constructing the trench
could postpone the start of revenue operations, scheduled for 2001.
BACKGROUND
------------------------------------------------------ Appendix VIII:1
The Alameda Corridor is designed to improve the movement of freight
between the ports of Los Angeles and Long Beach and railroad
switchyards near downtown Los Angeles. It will consolidate freight
traffic along 90 miles of street-level track on four separate rail
lines into a single double-tracked 20-mile corridor, half of which
will run 30 feet below street level in a trench. Currently,
bottlenecks on the four separate lines limit trains to average speeds
of 10 to 20 miles per hour, stall highway traffic, and create air
pollution. When trains begin operating in the Corridor in 2001, they
are expected to move faster--averaging about 40 miles per hour--and
to carry more freight. The planned operations are expected to
decrease shipping time and more readily accommodate growing volumes
of cargo, about 50 percent of which comes from out of state. In
addition, by reducing or eliminating train traffic at almost 200
rail-street intersections between downtown Los Angeles and the ports,
the Corridor is expected to reduce traffic delays by 90 percent,
reduce rail crossing accidents, and lower emissions from idling
trains, cars, and trucks. Figure VIII.1, as provided by the Alameda
Corridor Transportation Authority, shows the location of the
corridor.
Figure VIII.1: Map of the
Alameda Corridor
(See figure in printed
edition.)
The right-of-way for the Corridor is publicly owned by the two ports
as quasi-independent departments of the cities of Los Angeles and
Long Beach. The project is administered by the Alameda Corridor
Transportation Authority (ACTA), whose 10-member staff handles cost,
financing, scheduling, and management issues and works with
government and industry groups that have a stake in the Corridor.
The 85-person Alameda Corridor Engineering Team--an engineering
company consortium--handles the Corridor's design and provides
program management and construction oversight.
PROJECT'S ESTIMATED SHORT- AND
LONG-TERM COSTS ARE UNCERTAIN
------------------------------------------------------ Appendix VIII:2
ACTA estimates that the Alameda Corridor project will cost about $2
billion to complete. This is an estimate based on a 20-percent
design level; less than 5 percent of the project has been
constructed. The estimate could change when contractors' bids for
the trench are submitted in July 1998. Although ACTA has taken
actions to control cost increases during construction, it is too
early to assess the impact of these actions. A recent IRS ruling on
revenue bonds may increase the project's long-term financing costs.
TRENCH CONSTRUCTION COULD
INCREASE SHORT-TERM COSTS
---------------------------------------------------- Appendix VIII:2.1
According to ACTA officials, the trench is expected to be the most
expensive segment of the Corridor, costing about $700 million, or
about one-third of project's total estimated cost. The trench
responds to requests made during the environmental review process by
the six cities along the corridor; the cities favored this design as
a means of reducing the trains' visibility and noise, minimizing
right-of-way acquisition, and increasing safety. When constructed,
the trench will be 10 miles long, about 30 feet deep, and 50 feet
wide. As figure VIII.2 shows, it will be spanned by bridges for
pedestrians and vehicles at street crossings. A portion of Alameda
Street will overhang the trench for 3 miles where the right-of-way is
too narrow to accommodate the Corridor's full width. In this
section, the street will run above the rail line in a partially
covered trench.
Figure VIII.2: Illustration of
the Alameda Corridor Trench
(See figure in printed
edition.)
Source: Alameda Corridor Transportation Authority.
The trench will require vertical walls whose construction is expected
to cost about $350 million. Although ACTA officials consider the
trench less costly than a tunnel, they are encouraging potential
contractors to propose innovative methods in order to reduce the
costs of constructing the walls while keeping Alameda Street open to
traffic during construction. The Corridor's remaining 10 miles will
be at street level.
Other issues associated with constructing the trench may increase the
project's costs. For example, the trench will be built in an
industrialized area where, according to a railroad official, many
utility lines are buried. Relocating these lines could be costly, as
could any delays in relocating them. Clearing hazardous wastes from
the trench area could also increase the project's costs. According
to the Corridor's 1996 environmental impact statement, 46
high-priority hazardous materials sites were located within 400 feet
of the Corridor.\1 Removing underground water from the trench, if
necessary, and managing traffic along Alameda Street and its cross
streets could further increase the project's total cost.
--------------------
\1 According to ACTA, the railroads are obligated to share in the
costs of hazardous waste cleanup.
ACTA'S ACTIONS MAY HELP
LIMIT CONSTRUCTION COST
INCREASES
---------------------------------------------------- Appendix VIII:2.2
To cover potential construction cost increases, ACTA has established
contingency reserves that, as of December 1997, totaled about $221
million, according to ACTA officials. These funds are intended to
cover construction risks, a general reserve, and financing and legal
contingencies. While the complete terms of the project's
construction contracts will not be available until the fall of 1998,
it is unclear whether these reserves are adequate to cover potential
future increases in the project's costs.
To further control the project's costs, ACTA hired a controller and
has begun to install an accounting system that will be fully
operational by February 1998. U.S. Department of Transportation
(DOT) and California state officials have been working with ACTA to
ensure that the accounting system will track costs and trigger
actions if costs exceed a predetermined level for a segment of the
project. Tracking costs and expenditures can help provide early
warning of cost escalation. The controller will review the budget
with ACTA's board each quarter to analyze cost trends, determine
reasons for cost growth, and assess the project's overall financial
condition.
IRS RULING ON REVENUE BONDS
MAY AFFECT LONG-TERM
FINANCING COSTS
---------------------------------------------------- Appendix VIII:2.3
A December 1997 IRS ruling on the tax-exempt status of the Corridor's
revenue bonds set out the types of construction activities that were
for public purposes, such as highway overpasses, and therefore could
be financed through tax-exempt revenue bonds. The remaining
activities were for private, commercial purposes and were ineligible
for tax-exempt financing. When issuing tax-exempt revenue bonds, the
project will save on long-term financing costs, since it can pay bond
investors a lower interest rate. In contrast, the taxable bonds will
require higher interest rates to attract investors and will result in
larger payments over the life of the project. As a result, the
long-term costs of issuing the $866 million in revenue bonds as
planned could increase as the project's use of taxable bonds
increases. Project officials are evaluating the IRS ruling to
determine the mix of tax-exempt and taxable bonds to be issued. The
officials indicate that they expect final agreements with the
Corridor's users to strengthen the project's revenue stream enough to
offset the costs associated with an increased use of taxable bonds.
THE PROJECT'S FINANCING IS
INCOMPLETE
------------------------------------------------------ Appendix VIII:3
Funding for the approximately $2 billion project will come from a
variety of sources. As figure VIII.3 shows, the current financial
plan calls for the private sector to supply the largest part of the
funds by purchasing revenue bonds. The federal government, the two
ports, and MTA are also contributing substantially to the project.
Figure VIII.3: Funding
Sources, by Amount and
Percentage
(See figure in printed
edition.)
\a Bonds in the amount of $866 million are to be issued. They are to
cover financing costs and $785 million in construction costs.
Source: GAO's presentation of data from ACTA.
As of December 1997, ACTA had secured commitments for about $1
billion, or about 48 percent of the required funding. This amount
consists of
-- $400 million from a federal loan;
-- $386 million from the ports to purchase the rights-of-way for
the project;
-- $128 million from MTA, including $13 million already spent and
$115 million in a commitment to pass state transportation
improvement funds through to the project; and
-- $101 million from expected interest revenue and other state and
local sources.
According to ACTA officials, the project will use the federal loan
for the project's engineering, design, and construction. If revenues
from the completed project are sufficient, the project will repay the
federal loan by 2031--$1.6 billion in principal and interest. The
interest rates on the federal loan will be 6.5 percent during
construction--until about 2001--and 6.8 percent for 30 years from the
scheduled completion date--or until about 2031. These interest rates
are based on the 10-year and 30-year Treasury rates, respectively.
Two major pieces of the project's funding are less secure, and they
make up the remaining 52 percent of the total funding. According to
the project's financial plan, this funding will consist of
-- $866 million or more from revenue bonds that ACTA plans to issue
in late 1998 and
-- $218 million from MTA. MTA currently plans to raise $68 million
of this amount by issuing revenue bonds backed by countywide
sales taxes. According to MTA and ACTA officials, current plans
are for MTA to request the remaining $150 million from state
funds.
THE PROJECT MUST MEET
SEVERAL FINANCING CHALLENGES
---------------------------------------------------- Appendix VIII:3.1
ACTA faces several challenges in obtaining the remaining 52 percent
of the project's funding. These challenges include issuing revenue
bonds on favorable terms, obtaining the funds committed by MTA when
MTA is facing a severe financial crisis (see app. II), and working
within the constraints imposed by the terms of the $400 million
federal loan.
CHALLENGES IN ISSUING
REVENUE BONDS
-------------------------------------------------- Appendix VIII:3.1.1
Before ACTA can issue the revenue bonds on favorable terms, it will
need to demonstrate that the project, when completed, will generate
enough revenue to pay for the bonds, according to a rating agency
official. The rating agencies will evaluate the adequacy of the
project's revenue on the basis of the fees to be paid by the
railroads and the ports and the estimated cargo traffic. The rating
agencies will also consider the impact of IRS' ruling on ACTA, the
adequacy of the project's budgeting for contingencies, and ACTA's
ability to manage the project. Project officials are confident that
they can satisfy the rating agencies and obtain a favorable rating.
To help demonstrate that revenues will be predictable and sufficient
when the Corridor opens to traffic, the railroads and ports signed a
memorandum of understanding in December 1994. They agreed that the
loans and bonds for the project would be repaid with fees and
funds--60 percent from railroad user fees and 40 percent from port
sources. A railroad official stated that the user fees established
for the railroads in the memorandum of understanding are realistic
and sustainable. The Corridor's revenue structure will be
renegotiated and finalized in an operating agreement that is expected
to be signed in April 1998.
Projections of cargo traffic and revenue indicate that the project
will generate enough revenue to support the bond issuance. The
projections--done by firms such as Wharton Econometrics, Paine
Webber, and Goldman Sachs--have generally been conservative and have
forecast continuing growth, according to officials we interviewed
from the project, the railroads, and academia. On the basis of these
projections, project officials estimate that the completed project
will produce enough revenue to support a bond issuance of as much as
$1.2 billion. Thus, ACTA officials believe that the projected
revenue will be more than adequate to support the proposed $866
million bond issuance.
The bond-rating agencies need additional information before they can
assess the impact of IRS' ruling on ACTA and the adequacy of ACTA's
contingency funds. Because the balance between taxable and
tax-exempt bonds will influence the project's long-term financing
costs, the rating agencies will need to review the mix of bonds in
the complete bond issuance package. ACTA is currently determining
this mix. The adequacy of the project's contingency funds is also
important to the rating agencies because, as a Moody's Investors
Service official noted, these funds cushion the financial impact of
delays or unanticipated cost increases. After July 1998, when the
project is scheduled to receive bids on its costliest part--the
middle trench section--the rating agencies will be in a better
position to assess the adequacy of the $221 million budgeted for
contingencies. Project officials believe that this amount will be
adequate.
Finally, the rating agencies will evaluate ACTA's ability to choose,
manage, and oversee contractors. They will also assess ACTA's and
the general contractor's ability to manage a job of this scale. A
transportation expert whom we contacted believed that the ports'
experience in building large infrastructure projects will help
instill confidence in the project's success. ACTA officials told us
that they are confident that the revenue bonds to be sold in the fall
of 1998 will receive a good rating because international trade
through the ports provides a stable source of revenue to repay the
bonds.
CHALLENGES IN OBTAINING
FUNDS FROM MTA
-------------------------------------------------- Appendix VIII:3.1.2
On October 31, 1997, MTA signed an agreement with ACTA reconfirming
its commitment to provide the balance of the funds it has promised to
the project--$218 million out of a total of $347 million. To meet
its commitment, an MTA official stated in February 1998, MTA will
borrow $68 million using countywide sales tax revenue bonds and
request state funds for the remaining $150 million. This contrasts
with MTA's October 1997 agreement with ACTA, which noted MTA's plan
to fund the entire $218 million using sales tax revenue bonds. The
MTA official noted that the sources of funding remain open and may
change again over the next few months.
The October 1997 agreement provides that MTA funds will be made
available to ACTA starting in 1999. MTA officials are expecting
delays in the project, which could allow them to contribute MTA funds
later, when actually needed to pay for construction. However, if the
project meets its schedule, MTA could have difficulty in providing
its funding when needed. The financial difficulties that could
affect MTA's ability to borrow funds and to pay for the project on
time are discussed in appendix II. Because delays in MTA's funding
could create cash flow problems for ACTA, particularly in light of
the project's condensed design-build construction schedule, the bond
rating agencies will likely consider MTA's ability to borrow as a
factor when rating the project's revenue bonds.
FEDERAL LOAN PROVIDES
BENEFITS WITH REPAYMENT
RISKS
-------------------------------------------------- Appendix VIII:3.1.3
Some of the loan's provisions will make it easier for the project to
repay its obligations should problems arise, but other provisions
increase the risk that the government could lose the entire cost of
the loan should revenues fall short. According to a rating agency
official, the $400 million federal loan provides the project with
important financial support that the bond markets will look upon
favorably. The loan gives ACTA flexibility in the timing of
repayment should the project's schedule slip. For example, if fees
paid by the Corridor's users are less than anticipated and revenues
fall short, the project may defer federal loan repayments with
interest accumulating. This provision could prevent ACTA from
defaulting on the loan.
However, under the loan agreement, ACTA cannot issue more than $1
billion in revenue bonds that are to be paid ahead of the federal
loan. Recent financial models indicate that ACTA will issue $866
million in revenue bonds. In case of a revenue shortfall or default,
the repayment of up to $1 billion in revenue bonds will have priority
over the repayment of the federal loan. This provision may help the
project obtain more favorable bond ratings from the rating agencies
and more favorable interest rates on its borrowing, but it makes
repaying the federal loan more risky in the event of revenue
shortfalls. In addition, the provision could constrain ACTA's
financing options if the project's costs prove higher than expected.
For example, if construction bids are higher than anticipated, the
project's short- and long-term costs would increase and ACTA might
need to issue more bonds than planned to keep the project on
schedule.
THE PROJECT'S SCHEDULE IS
AMBITIOUS
------------------------------------------------------ Appendix VIII:4
According to ACTA and federal and local transportation officials, the
project has an ambitious schedule, and many tasks must be completed
before construction of the trench can start in February 1999.
Staying on schedule will be challenging, both before and after
construction begins.
Table VIII.1 summarizes the tasks that must be completed in 1998. If
contractors' bids prove higher than anticipated and ACTA needs either
to raise more money or negotiate with bidders to achieve needed
savings, it will have very little time to do so. Any delays in
completing the tasks summarized in the table could affect the amount
or the terms of the bond issuance, the revenue to be derived from
user fees to repay the federal loan and the bonds, and the project's
total cost.
Table VIII.1
Key Tasks to Be Completed Before
Construction Can Begin
Target date Action
---------------------------------------- ----------------------------
January 1998 ACTA solicits construction
bids from six prequalified
contractors
April 1998 ACTA signs an operating
agreement with the railroads
May 1998 ACTA completes memorandums
of agreement with the six
cities along the Corridor
July 1998 Contractors submit
construction proposals on
the trench section
July to September 1998 ACTA evaluates contractors'
proposals
August to October 1998 Rating agencies rate ACTA's
bonds
September 1998 ACTA chooses a contractor to
build the trench
November 1998 ACTA issues revenue bonds
February 1999 Construction of the trench
begins
----------------------------------------------------------------------
Source: GAO's presentation of data from ACTA.
The project's schedule faces additional challenges after construction
begins. First, the time savings from design-build contracting,
expected to be 1 year, could be less dramatic than anticipated. As
discussed in appendix VII, this innovative approach is intended to
save time over conventional contracting by awarding one contract to a
design-build firm rather than separate contracts to a design firm and
a construction firm. Hence, this approach allows the single
contractor to design and build concurrently rather than sequentially.
The planned time savings could strengthen investors' confidence in
the project's financial viability, improve the prospects for a
favorable interest rate on the project's revenue bonds, generate user
fee revenues sooner, and avoid potentially inflationary increases in
construction costs. However, actual experience with design-build
contracting for large transportation projects is limited,
particularly for a project as large and complex as the Alameda
Corridor. Moreover, problems in relocating utility lines, clearing
hazardous waste, or removing underground water could delay
construction, as could delays in completing the project's financing.
Finally, delays could occur if communities along the Corridor do not
issue construction permits on schedule or demand additional economic
development funds to mitigate the effects of construction. To
preclude such delays, ACTA is negotiating a separate memorandum of
understanding with each of the six Corridor cities to expedite their
approval of permits and address their preferences in scheduling.
These memorandums would also obtain cities' agreement not to sue the
project and to release the project from future liability claims in
exchange for financial settlements and assistance in minimizing
disruptions from construction.
AGENCY COMMENTS
------------------------------------------------------ Appendix VIII:5
We provided a draft of this report to the General Manager of the
Alameda County Transportation Authority and to the U.S. Department
of Transportation. ACTA officials noted two key concerns. First,
they said the report should note that ACTA officials believe--on the
basis of financial models and preliminary ratings of "no lower than
investment grade" from Standard and Poor's and Moody's--that the
project's funding package is solid; ACTA officials are confident that
the project can issue $866 million in revenue bonds and that the
revenue bonds will receive a good rating. Second, ACTA officials
stated that the report should reflect that MTA is prepared to fulfill
its obligation and commitment to ACTA and that funding from this
source should be regarded as firm. They indicated that MTA's funding
commitment to ACTA is legally binding and enforceable and said that
MTA has in good faith made budgetary adjustments to ensure that these
funds will be provided to ACTA when needed.
Regarding ACTA's first concern, we did not include information on
Moody's letter to ACTA or Standard and Poor's private credit opinion
because these were not public credit ratings; instead, they provided
early indications that there was no information at the time that
would prevent ACTA from eventually getting an investment grade
rating. Both Moody's and Standard and Poor's officials told us that
their final ratings will not be made until shortly before the bonds
are issued next fall and that they will be contingent on a number of
actions that will have been accomplished at that time, including the
completion of the operating agreement. Regarding ACTA's second
concern, we do note in this report that MTA has signed an agreement
regarding funding for ACTA. However, we believe that a portion of
MTA's funding commitment to the Corridor should be characterized as
less secure than other components of the project's funding,
particularly when compared with secure funding sources such as the
federal loan and the ports' already completed purchase of the
railroad right-of-way. As detailed in the Los Angeles Red Line
section of this report, MTA faces severe financial difficulties due
to a number of factors, continues to struggle with these
difficulties, and has not yet completed a restructuring plan
acceptable to the Federal Transit Administration.
DOT officials, in commenting on the report, stated that the federal
loan should be more strongly characterized as favorable to the
project's financing. We made changes to the report to reflect this
concern. Both ACTA and DOT officials provided additional editorial
and clarifying changes that we incorporated into the text of the
report.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IX
Paul Bollea
Joseph Christoff
Robert Ciszewski
Steven Cohen
Catherine Colwell
David Ehrlich
Elizabeth Eisenstadt
Susan Fleming
Lynne Goldfarb
Libby Halperin
Michael Hartnett
David Lichtenfeld
Lena Natola
Phyllis Scheinberg
Ronald Stouffer
Laurie Zeitlin
*** End of document. ***