Mass Transit: Challenges in Evaluating, Overseeing, and Funding Major
Transit Projects (Testimony, 03/08/2000, GAO/T-RCED-00-104).

Pursuant to a congressional request, GAO discussed the challenges the
Federal Transit Administration (FTA) faces in evaluating and overseeing
proposed mass transit construction projects, focusing on: (1) FTA's
process for evaluating proposed transit projects; (2) FTA's oversight of
transit projects under construction; (3) the ever-increasing competition
for federal transit construction dollars; and (4) the costs, schedules,
and financing of six ongoing transit projects.

GAO noted that: (1) FTA has responded to the direction in the
Transportation Equity Act for the 21st Century (TEA-21) that it develop
a systematic process for evaluating potential New Starts projects
competing for federal funding; (2) FTA's revised process uses a range of
financial and project-related criteria and places proposed projects into
three categories--highly recommended, recommended, or not recommended;
(3) FTA uses these ratings to propose funding for New Starts projects to
Congress; (4) FTA gives first preference to projects with federal grant
agreements, it gives next preference to projects that are rated highly
recommended or recommended and ready to complete a final design and a
grant agreement within the next fiscal year (FY); (5) to prepare for the
FY 2001 budget process, FTA evaluated 48 projects, rated 32 as highly
recommended or recommended, and proposed that 15 new projects receive
funding through grant agreements; (6) FTA has improved the quality of
the federal grants oversight program since the early 1990s, when the
program was placed on GAO's high-risk list because it was vulnerable to
fraud, waste, abuse, and mismanagement; (7) since GAO removed the
program from its high-risk list in 1995, FTA has also established a
process to target its limited oversight resources; (8) GAO's ongoing
work shows that FTA is improving its oversight of grantees with
large-dollar transit projects; (9) FTA recently began using financial
management consultants to review each proposed large-dollar project's
finance plan to determine if the grantee has the financial capacity to
build and operate the project; (10) the 14 ongoing projects and the
additional 15 projects proposed in FTA's 2001 budget would consume more
than the total New Starts commitment authority provided by TEA-21; (11)
if all of these new grant agreements were executed as proposed, FTA
would not be able to commit funds to any more New Starts projects during
the last 2 years of TEA-21; (12) because many more projects are planning
to compete for federal funds in the next several years, GAO recommends
that FTA in the future prioritize the projects it rates as highly
recommended or recommended and ready for New Starts funds; (13) last
year, GAO reported on the costs, schedule, and financing of 14 ongoing
projects with grant agreements; (14) GAO has updated information on six
projects; and (15) ongoing reviews of the finance plans for two of these
projects indicate that each project has secured adequate state and local
funds to cover its cost growth.

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

 REPORTNUM:  T-RCED-00-104
     TITLE:  Mass Transit: Challenges in Evaluating, Overseeing, and
	     Funding Major Transit Projects
      DATE:  03/08/2000
   SUBJECT:  Mass transit funding
	     Mass transit operations
	     Federal grants
	     Grant administration
	     Internal controls
	     Cost control
	     Federal aid for transportation
	     Grant award procedures
IDENTIFIER:  FTA New Starts Program
	     Tren Urbano Rapid Rail Line Project (San Juan, Puerto
	     Rico)
	     South Boston Piers Transitway Project (Boston, MA)
	     Salt Lake City (UT)
	     Los Angeles (CA)
	     St. Louis (MO)
	     San Francisco Bay Area Rapid Transit System (CA)

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Testimony

Before the Subcommittee on Transportation, Committee on Appropriations,
House of Representatives

For Release on Delivery

10:00 a.m. EST

Wednesday

March 8, 2000

MASS TRANSIT

Challenges in Evaluating, Overseeing, and Funding Major Transit Projects

Statement of Phyllis F. Scheinberg,

Associate Director, Transportation Issues,

Resources, Community, and Economic Development Division

GAO/T-RCED-00-104

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss the challenges the Federal
Transit Administration (FTA) faces in evaluating and overseeing proposed
mass transit construction projects. The 1998 Transportation Equity Act for
the 21st Century (TEA-21) authorizes funds to construct these projects under
FTA's New Starts program. Full funding grant agreements set the terms and
conditions for federal participation in these projects. FTA's role is
important: It evaluates and recommends proposed projects for funding, and it
oversees the development and construction of those projects. FTA's
performance affects the 6 million people who depend on transit every day and
influences how well the federal government's transit investment-over $100
billion since 1964-is spent.

My testimony today presents information based on a number of completed GAO
reviews as well as ongoing work that is being conducted at the request of
this Subcommittee and others on FTA's programs. Specifically, we will
discuss (1) FTA's process for evaluating proposed transit projects, (2)
FTA's oversight of transit projects under construction, and (3) the
ever-increasing competition for federal transit construction dollars. In
addition, we will provide information on the costs, schedules, and financing
of six ongoing transit projects.

In summary, we found the following:

   * FTA has responded to the direction in TEA-21 that it develop a
     systematic process for evaluating potential New Starts projects
     competing for federal funding. FTA's revised process uses a range of
     financial and project-related criteria and places proposed projects
     into three categories-highly recommended, recommended, or not
     recommended. FTA uses these ratings to propose funding for New Starts
     projects to the Congress. In making annual funding proposals, FTA gives
     first preference to projects with federal grant agreements; it gives
     next preference to projects that are rated highly recommended or
     recommended and ready to complete a final design and a grant agreement
     within the next fiscal year. To prepare for the fiscal year 2001 budget
     process, FTA evaluated 48 projects, rated 32 as highly recommended or
     recommended, and proposed that 15 new projects receive funding through
     grant agreements.

   * FTA has improved the quality of the federal grants oversight program
     since the early 1990s, when the program was placed on GAO's high-risk
     list because it was vulnerable to fraud, waste, abuse, and
     mismanagement. For example, FTA improved the guidance and training
     provided both to its staff and all grantees and developed standardized
     oversight procedures. Since we removed the program from our high-risk
     list in 1995, FTA has also established a process to target its limited
     oversight resources. In addition, our ongoing work shows that FTA is
     improving its oversight of grantees with large-dollar transit projects.
     Specifically, FTA recently began using financial management consultants
     to review each proposed large-dollar project's finance plan to
     determine if the grantee has the financial capacity to build and
     operate the project.

   * More state and local transit agencies than ever are competing for New
     Starts funds. However, the 14 ongoing projects and the additional 15
     projects proposed in the Department's 2001 budget would consume more
     than the total New Starts commitment authority provided by TEA-21. If
     all of these new grant agreements were executed as proposed, FTA would
     not be able to commit funds to any more New Starts projects during the
     last 2 years of

TEA-21. Because many more projects are planning to compete for federal funds
in the next several years, we recommend that FTA in the future prioritize
the projects it rates as highly recommended or recommended and ready for New
Starts funds.

   * Last year, in work done for this Subcommittee, we reported on the
     costs, schedule, and financing of 14 ongoing projects with grant
     agreements. We have updated information on six projects: three with
     large cost increases above the original estimates in the grant
     agreements-BART in San Francisco; Tren Urbano in San Juan, Puerto Rico;
     and the South Boston Piers project-and three located in Salt Lake City,
     Los Angeles, and St. Louis. Appendixes II through VII provide detailed
     information on each project. Our ongoing reviews of the finance plans
     for two of these projects-BART and Tren Urbano-indicate that each
     project has secured adequate state and local funds to cover its cost
     growth. However, because of contractor problems, additional delays and
     related cost increases for Tren Urbano may still occur. We expect to
     soon receive the finance plan for the third project-South Boston-and
     will report to you on that project later this spring.

Background

To meet the nation's transportation needs, many states and localities are
planning or building large-dollar mass transit projects to replace aging
infrastructure or build new capacity. These transit projects present major
challenges to state and local transportation officials. First, they are very
costly and require large commitments of public resources, which may take
several years to obtain from federal, state, and local sources. 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 issues before and during construction. To keep the projects on
schedule and within budget, federal, state, and local officials must
carefully oversee their planning, development, and construction.

TEA-21 authorized a total of $36 billion in "guaranteed" funding through
2003 for a variety of transit programs, including financial assistance to
states and localities to develop, operate, and maintain transit systems. One
of these programs, the New Starts program, provides grants to local transit
providers for constructing or extending certain types of mass transit
systems. Other federal funds available through the Department of
Transportation's highway and transit formula and federal loan programs can
be used to develop, plan, and/or construct these projects.

To obtain New Starts funds, a project must first progress through a local or
regional review of alternatives, develop preliminary engineering plans, and
meet FTA's approval for final design. FTA assesses the technical merits of a
project proposal and its finance plan and recommends to the Congress that
the project receive New Starts funding through a grant agreement. The
agreement establishes the terms and conditions for federal participation,
including the maximum amount of federal funds-no more than 80 percent of the
estimated net cost of the project. While the grant agreement commits the
federal government to providing the federal contributions to the project
over a number of years, these contributions are subject to the annual
appropriations process. State or local sources provide the remaining
funding. The grantee is responsible for all costs exceeding the federal
share, unless the agreement is amended.

FTA Has Implemented a Revised Evaluation Process to Rate and

Propose Transit Projects for Federal Funding

As we reported in April 1999, FTA has revised and expanded its New Starts
evaluation process in accordance with TEA-21 requirements. FTA's revised
project evaluation process requires that proposed projects be rated on four
project justification criteria identified by TEA-21-the extent of mobility
improvements, operating efficiencies, environmental benefits, and cost
effectiveness. Similarly, to evaluate a project's financial commitment, the
project is rated on its capital and operating plans and the local share of
project costs. Once these individual ratings are completed, FTA combines the
project justification and financial commitment summary ratings and assigns
an overall rating of highly recommended, recommended, or not recommended. To
determine which new projects it will propose for funding through a New
Starts grant agreement, FTA only considers projects with a rating of highly
recommended or recommended. It also considers a number of other "readiness"
factors before proposing funding for a project. For example, FTA only
proposes funding for projects that are expected to enter the final design
phase and be ready for grant agreements within the next fiscal year.

In making its funding proposal each year, FTA gives first preference to
projects with existing grant agreements. Following that, consideration is
given to projects that are ready to begin final design and execute grant
agreements. For example, to prepare for the fiscal year 2001 budget process,
FTA evaluated 48 projects, rated 32 as highly recommended or recommended,
and proposed executing grant agreements for the 15 projects it believes will
be ready in fiscal year 2001. FTA officials told us that the number of
highly recommended or recommended projects is expected to double in the next
2 years. FTA is required to notify the House and Senate Committees on
Appropriations, as well as the authorizing committees, 60 days prior to
executing a grant agreement.

FTA's Oversight of Transit Projects Has Improved

FTA has improved the quality of the grants management oversight program
since the early 1990s, when GAO designated it as high-risk because it was
vulnerable to fraud, waste, abuse, and mismanagement. In 1995, after FTA had
improved its oversight activities-by upgrading its guidance and training of
staff and grantees, developing standardized oversight procedures, and
employing contractor staff to strengthen its oversight of grantees-we
removed the program from our high-risk list. In a 1998 report following up
on FTA's grants oversight activities, we also reported that FTA had improved
its process to target limited oversight resources, which provides a strong
foundation for improved oversight.

Furthermore, our ongoing work indicates that FTA is now conducting more
specialized reviews of individual large-dollar projects by making better and
more frequent use of consultants. For example, in order to anticipate
problems before they occur, FTA is now using consultants to assess the
financial capacity of transit operators before a project receives a grant.
In the past, the stability and reliability of a grantee might not have been
rigorously assessed until a major problem occurred. For example, in 1997,
management and financial difficulties caused FTA to require the Los Angeles
subway project to prepare a "recovery plan." A financial consultant's review
of that plan found that revenues for the local transit operator would be
much lower than expected. Subsequently, the transit operator had to suspend
the construction of two planned extensions to the subway because it did not
have sufficient funds. Since then, FTA's financial capacity oversight
activities have evolved and are much more comprehensive and structured. FTA
believes that its forward-looking assessments of a potential grantee's
fiscal capability to fulfill its grant obligations will prevent the need for
future recovery plans.

For projects that already have grant agreements, FTA focuses on the
grantee's ability to finish the project on time and within the budget
established by the grant agreement. For example, FTA recently performed
financial capacity assessments on three ongoing projects that are
experiencing cost increases-the South Boston Piers transitway; San Juan's
Tren Urbano rapid rail line; and San Francisco's BART airport extension.
Because these projects were already under construction, FTA's contractors
evaluated the grantees' financial capacity to complete the projects
according to the financial assumptions in the grant agreements. In all
cases, FTA's goal is to ensure that the Los Angeles situation is not
repeated and that each project is financed prudently without jeopardizing
existing service.

FTA has also increased its use of project management oversight contractors
to provide technical on-site monitoring of selected construction projects
expected to cost over $100 million. According to FTA, these contractors are
hired to monitor a specific transit project on a continuing basis and to
provide frequent information to FTA regional staff on the status of the
project's cost, schedule, and performance. This effort is financed by
setting aside 0.75 percent of the funds available each year under the New
Starts program.

Many Transit Proposals Are Competing for Limited Federal

Transit Dollars

More state and local transit agencies than ever are competing for New Starts
funds. However, the 14 ongoing projects and the additional 15 projects
proposed in the Department's 2001 budget would consume more than the total
New Starts commitment authority provided by TEA-21, if all of these new
grant agreements are executed as proposed. If this occurs, FTA would not be
able to commit funds to any more projects during the last 2 years of
TEA-21-through fiscal years 2002 and 2003-even though many additional
projects may soon be eligible for funding.

According to FTA, it has already committed $4.1 billion of its total
available authority of $8.4 billion to the 14 ongoing projects. After
accounting for other requirements (such as the cost of the project
management oversight program), which are expected to total about $1.2
billion through 2003, about $3.1 billion remains for future grant
agreements. The Department's fiscal year 2001 budget proposes $316 million
for 15 additional projects. However, the $316 million requested for these
new projects for 2001 is only a down payment on what would be a total
federal commitment of $3.9 billion if no changes are made to current grant
agreement proposals. This $3.9 billion commitment is $800 million more than
FTA's remaining commitment authority of $3.1 billion. Figure 1 shows FTA's
limited commitment authority under TEA-21.

Figure 1: TEA-21 Commitment Authority for New Starts Projects and the
Department of Transportation's Fiscal Year 2001 New Starts Budget Request

Dollars in billions

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

FTA officials told us that the agency decided to propose exhausting the
remaining authority in its fiscal year 2001 budget proposal-rather than
withholding some authority for new projects in the remaining years of
TEA-21-because New Starts funds have traditionally been provided to all
eligible projects on a first-come,

first-served basis. Furthermore, according to these officials, executing
grant agreements with the 15 new projects allows projects that are ready to
move forward to begin construction.

In addition to the 29 ongoing and proposed projects in the 2001 budget,
TEA-21 identified more than 160 other projects as eligible for New Starts
funds. According to FTA, as many as 40 of these projects could be ready to
receive a grant agreement and begin construction in the next several years.
Because of this impending transit "budget crunch," we recommend that in the
future, FTA prioritize the projects it rates as highly recommended or
recommended and ready to receive New Starts funds. FTA officials, including
FTA's Director, Office of Policy Development, agree with our recommendation
and told us that they would consider various ways to prioritize eligible
projects.

Several Major Ongoing Transit Projects Continue to Experience

Cost and Schedule Problems

The oversight improvements FTA has developed in recent years are designed to
help control the costs of new projects. However, some ongoing projects
continue to experience cost and schedule problems. Our August 1999 report on
the 14 ongoing projects identified a number of instances in which projects
had exceeded their initial cost estimates or had delayed their target
opening dates. Of the 14 projects, 6 had exceeded the initial cost
estimates, and 3 of these, located in San Francisco, San Juan, and Boston,
had experienced significant cost increases over the original
estimate-ranging from 27 to 34 percent. The other three projects had
experienced cost increases of less than 10 percent. Five of the six projects
with cost increases also had delayed their projected opening dates, as had
one project that was within budget. We have updated our information on six
projects: the three with large cost increases-San Francisco, San Juan, and
South Boston-and three located in Salt Lake City, Los Angeles, and St.
Louis. A summary of the cost and financing plans for each of these six
projects appears in appendix I. Appendixes II through VII provide detailed
information on each project.

While the San Francisco, San Juan, and Boston projects have experienced
large cost increases, FTA has no plans to provide additional New Starts
funds to help complete them. Instead, the transit operators have developed
plans to generate these funds from other federal, state, and local
resources. The additional state and local funds required for these projects
will likely delay other needed transportation improvements. For example,
since our initial review of BART, state and local agencies have had to
provide an additional $316 million to complete the project. These funds
could have been used to pay for other transportation projects.

Clearly, vigorous FTA oversight of these large-dollar transit projects is
needed to safeguard the federal investment. Your Subcommittee called for
more oversight and as a result, FTA, GAO, and the Department of
Transportation's Inspector General are assessing the finance plans of the
San Francisco, San Juan, and Boston projects. Federal funds provided for
these projects for fiscal year 2000 are being held in abeyance until this
oversight is completed. Our ongoing work on the San Francisco and San Juan
projects indicates that each project has secured adequate state and local
funds to cover the cost increases. However, additional delays and related
cost increases for San Juan may still occur. We just received the finance
plan for the South Boston Piers project and will report to you the results
of our review of that plan later this spring.

-- -- -- -- -- -- -- --

Mr. Chairman, this concludes my prepared statement. I will be pleased to
answer any questions that you or Members of the Subcommittee may have.

Contact and Acknowledgement

For information regarding this testimony, please contact Phyllis F.
Scheinberg at

(202) 512-3650. Individuals making key contributions to this testimony
include Jack Bagnulo, Bob Ciszewski, Cathy Colwell, Helen Desaulniers, Susan
Fleming, Libby Halperin, Kirk Kiester, Dave Lehrer, Carol Ruchala, and Ron
Stouffer.

.

Summary of the Financing Plans for Six

Transit Projects, as of February 2000

Dollars in millions

           South       San             San                        Los            St. Louis/
 Funding   Boston      Francisco/BART  Juan/Tren  Salt Lake       Angeles/North  Light Rail
 source    Piers       Airport         Urbano     City/University Hollywood      Extension-Area
           Transitway  Extension       Rapid Rail Line            Extension      College to Air
                                       Line                                      Force Base
 Federal
 New Starts$331.0      $750.0          $307.4     $84.6           $681.0         $60.0
 Highway
 funds                                 259.9                      254.9
 Formula
 funds     150.0                       141.0
 Nonfederal
 match
 State     120.0       152.0                                      225.7
 Local                 581.2           662.4      21.1            173.2          17.0b
 Other                                 300.0a
 Total     $601.0      $1,483.2        $1,670.7   $105.7          $1,334.8       $77.0

a Tren Urbano managers expect to be awarded a $300 million low-cost federal
loan that will be repaid with local funding sources

b Project managers expect the $17 million to be funded through a combination
of state and local funding sources, yet to be determined.

South Boston Piers Transitway

The Massachusetts Bay Transportation Authority (MBTA) is building an
underground transitway connecting its existing transit system with the South
Boston Piers area, which is undergoing significant economic development. The
first phase of the South Boston Piers transitway project is a 1-mile,
three-station bus tunnel between South Station and Boston's World Trade
Center.. The project is expected to cost $601 million-a 46-percent increase
(or $188 million) over the $413 million projected in the full funding grant
agreement that was approved in November 1994. The grant agreement committed
about $331 million in New Starts funds to the project.

The project management oversight contractor, the Federal Transit
Administration (FTA), and the grantee attribute the project's cost increase
primarily to schedule delays and the fact that the original cost estimate
was based on the project's early design, which has since been modified. The
construction delays are due, in part, to coordination problems on the joint
construction contracts with the Central Artery/Tunnel project-one of the
most expensive and complex highway projects ever undertaken-and
complications with relocating utilities and differing site conditions.
Currently, most major contracts have been awarded, construction is underway,
and the transitway is expected to open for service in December 2003, 3 years
later than originally projected.

To address cost increases and schedule delays MBTA submitted a "recovery
plan" to FTA in January 1999. The plan concluded that MBTA would pay for the
changes that had occurred since the grant agreement was signed. In October
1999, MBTA submitted a capital plan to FTA that outlined how it would pay
for the project's increased cost. Under this plan, the amount of New Starts
funds remains the same-$331 million. In addition, MBTA plans to use $150
million in federal transit formula funds and $120 million in state bond
funds to finance the remaining costs to the project. The project's current
budget includes $40 million for project and construction contingencies for
future change orders. Also, at FTA's request, MBTA has established a $50
million capital reserve bond fund to cover any additional cost increases
that may occur beyond the current $601 million estimate. FTA requested the
reserve to address the risks associated with the remaining construction.

A September 1999 report by FTA's financial management oversight consultant
concluded that MBTA has the financial capacity to complete the project and
maintain its existing transit system. However, the consultant determined
that MBTA did not have an official, comprehensive finance plan for the
transitway project. In January 2000, FTA requested MBTA to incorporate
project financial information into a plan that delineates both the full
costs of completing and operating the project and the manner in which the
grantee expects to pay these costs. FTA also requested that the plan address
the effect of recent state legislation that changed the manner in which MBTA
generates funding for its capital program-specifically, bonds issued by MBTA
will not be guaranteed by the state after July 1, 2000. A statewide sales
tax will be dedicated to MBTA for its operations.

Once FTA approves the finance plan, it will amend the current grant
agreement in order to reflect the project's cost increases, use of federal
formula funds, and current schedule. In addition, FTA does not anticipate
that the recent large increase in the estimated cost of the Central Artery
project will have an impact on the South Boston Piers project because all of
the major joint contracts with the Central Artery project have been awarded
and sufficient funding has been secured. We just received the Boston finance
plan and will report to the Congress the results of our review later this
spring.

San Francisco/BART Airport Extension

The Bay Area Rapid Transit District (BART) is building an 8.7-mile,
four-station extension to its existing rail system to provide service to the
San Francisco International Airport. According to BART officials, the
project is about 40-percent complete and is expected to open on July 1,
2002-9 months later than estimated when the grant agreement was awarded in
June 1997. As of January 2000, the project was expected to cost $1.483
billion-$316.2 million (or 27 percent) above the $1.167 billion estimated in
the grant agreement. Of this amount, BART officials attribute almost half,
or $155 million, to higher-than-expected construction bids. Other reasons
for the cost increase include higher-than-expected costs for right-of-way,
utility relocation, unanticipated mitigations, and third-party contracts for
such things as engineering services and construction oversight.

In order to reflect the project's cost increases and new financial
arrangements, BART submitted a new finance plan to FTA in November 1999 and
applied for a grant agreement amendment on January 21, 2000. The proposed
finance plan identifies sufficient funds to pay the current $1.483 billion
estimated cost to complete the airport extension. Under the proposed plan,
the federal contribution would remain the same-$750 million (or 51 percent
of the total cost). The remaining $733 million will be financed by a
combination of state and local funding sources. The state of California will
provide $152 million. Local funding sources will provide the remaining $581
million-BART ($181.7 million), San Francisco International Airport ($200
million), San Mateo County Transit District ($171 million), the Metropolitan
Transportation Commission ($26.5 million), and San Mateo County Flood
Control District ($2 million). BART has agreements in place securing all of
these funds.

According to the funding schedule in the current grant agreement, BART will
not receive all of the federal funds committed to the project until several
years after the project is completed. As a result, cash-flow shortfalls will
occur during the course of the project. For instance, the finance plan
anticipates a maximum cash deficit of about $265 million occurring in fiscal
year 2002. In order to cover this shortfall, BART has obtained a $300
million letter of credit secured by future federal appropriations.
Furthermore, to account for these shortfalls in its plan, BART revised the
total project's financing costs to $42.6 million, an increase of $18.6
million over the original amount. BART has also allocated an additional
$17.9 million in its proposed plan as a contingency for
higher-than-anticipated financing costs. FTA's financial management
oversight consultant has determined that the budgeted amount plus the
contingency should be sufficient to cover financing of cash flow shortfalls,
given present cost estimates.

Although our work to date indicates that BART has secured sufficient funding
to meet expected costs, two financing issues remain. First, the proposed
amendment to the grant agreement calls for a change in project scope to help
meet the $1.483 billion cost. Instead of purchasing 28 new railcars at a
cost of $100 million as planned, BART would like to achieve a net savings of
$30 million by improving certain maintenance facilities and tracks that it
estimates would cost $70 million. The improvements at the maintenance
facilities would allow BART to decrease maintenance backlogs and increase
the number of cars available for service across the entire system, thereby
providing the equipment needed for the airport extension.

Second, FTA's project management oversight consultant has identified the
potential for an additional $27 million in cost growth. BART strongly
maintains that the project can be completed at or below the revised cost
estimate and believes that adding the $27 million to the baseline project
financing is unnecessary. However, to address the potential cost growth
issue, BART has proposed a second capital reserve account, secured by
revenues from parking at the BART airport extension's stations. The use of
potential parking fees, however, would have to be approved by both the
boards for BART and the San Mateo County Transit District. BART and San
Mateo County Transit District officials told us that this action should take
place only if costs actually rise.

FTA's project management consultant has reviewed the project and concluded
that a July 2002 opening is possible. However, the consultant cautioned that
in order to meet this date, BART's contractor must expedite the work on the
line track and systems contract, which is currently proceeding more slowly
than planned and is 8 weeks behind schedule. The contractor also stated that
if BART experiences problems integrating the new extension project system
with the existing BART system, the potential exists for a later opening
date. BART officials told us that the contractor has identified several
measures that should expedite the work on this contract. We expect to
communicate the results of our review of BART's finance plan to the Congress
later this month.

San Juan/Tren Urbano Rapid Rail Line

The Puerto Rico Highway and Transportation Authority (the Authority) is
constructing a 10.7-mile, 16-station rapid rail line to serve existing and
projected development in the San Juan metropolitan area. The line is
expected to carry 113,300 riders a day in 2010. This project is one of FTA's
"turnkey" demonstration projects, which incorporate contracts to design,
build, operate, and maintain the system. The project is about 59 percent
complete and is expected to open on May 31, 2002-10 months later than
estimated when the grant agreement was signed in 1996. During 1996 and 1997,
seven design-build contracts were awarded for different segments of the
project. One of the contractors-known as the systems contractor-is also
responsible for installing all systemwide components and for operating and
maintaining the project for an initial period of 5 years, which could be
extended for an additional 5 years at the Authority's option.

The grant agreement committed about $307 million in New Starts funds for the
project, which was projected to cost $1.25 billion. As of January 2000, the
project was expected to cost about $1.7 billion-$426 million (or 34 percent)
higher than the original estimate. This cost growth is primarily due to
scope changes. Approximately 2 years elapsed between the preparation of the
original estimate used in the grant agreement and the award of all the
design-build contracts. During this period, the Authority changed and
refined the project's design by adding two stations and 10 rail cars and
made numerous alignment changes and station enhancements. The contract
awards were $172 million higher than the original estimate. Since the
contract awards, an additional $158 million has been approved for
enhancements and scope changes for such things as systems work for the added
stations, an enhanced fare collection system, and additional construction
management services. Moreover, costs have increased by $52 million (4
percent of the original estimate) to cover change orders or unforeseen work
not related to scope changes. Approximately $44 million for contingencies
remains in the budget to cover future claims or additional changes.

In order to reflect the project's scope changes, cost increases, and current
schedule, the Authority prepared a revised finance plan, and on July
19,1999, FTA amended the grant agreement. Under the revised agreement, the
amount of New Starts funds remained the same-$307 million (or 18 percent of
the cost). The amendment accounted for the project's scope changes, cost
increases, and planned use of FTA transit formula ($141 million) and federal
highway ($260 million) funds for the project. It also extended the opening
date to May 31, 2002.

Under the project's revised finance plan, $962 million in local funding will
go to the project, including $300 million to repay a federal loan over 35
years. (As of Mar. 1, 2000, the loan had not been completed.) Local funding
sources include the proceeds of gasoline taxes, diesel oil taxes, motor
vehicle license fees, highway tolls, investment earnings on bond proceeds,
and petroleum taxes that have been committed to the Authority by the
Commonwealth of Puerto Rico. FTA's financial management oversight consultant
reviewed the Authority's finance plan and reported in November 1999 that the
grantee had the financial capacity to complete the project without adversely
affecting its existing transit system (with or without the federal loan).

Our work to date indicates that the Authority has sufficient funding to meet
the expected costs of the project. The finance plan describes the grantee's
financial obligations and its plans for meeting these obligations. The
Authority receives substantial annual funding from its dedicated local
funding sources. From 1993 through 1997, the average revenue from these
sources were about $270 million a year. In 1998, the Commonwealth of Puerto
Rico committed an additional $120 million to its annual base from petroleum
tax revenues. In the current fiscal year, the dedicated revenues are
estimated to be $469 million.

While the project appears to have its financing in order, a number of
contractor issues could affect the project's schedule and cost. For example,
some of the contractors have had problems meeting agreed-upon construction
milestones because of the lack of skilled labor and other reasons. At the
request of FTA, project officials are developing an Integrated Project
Master Schedule that would integrate the individual segment contract
schedules. The Authority is taking additional steps to mitigate these
contractor problems, such as renegotiating the lead contract responsibility
for three of the seven segments. However, continued contractor delays could
result in additional cost increases and delay the project's opening date,
especially if they affect the ability of the systems contractor to perform
its work on schedule. We expect to communicate the results of our review of
the finance plan to the Congress by the end of this month.

Salt Lake City/University Rail Line

The Utah Transit Authority (UTA) began planning its light rail system in
1990. UTA's first line, the 15-mile, 16-station North/South Line, runs at
street level through Salt Lake Valley and into the southern suburbs. The
completed cost of the line, which opened in December 1999, was approximately
$20 million under the original $312.5 million estimated in the 1995 grant
agreement. UTA is seeking an amendment to this agreement to authorize the
acquisition of 10 additional light rail vehicles for arrival in time for the
Salt Lake City Winter Olympics in 2002. Currently, UTA and FTA are
considering several possible amendment structures, some of which would
authorize the use of surplus federal funds from the North-South grant
agreement. UTA officials told us recently that they are in the final stages
of completing an amendment. According to UTA officials, if an amendment is
approved prior to April 15, 2000, the vehicles can be obtained prior to the
Winter Olympics.

UTA is also proposing to construct a new 2.5-mile light rail line extending
from downtown Salt Lake City to the University of Utah-at a cost of $105.7
million, including a New Starts commitment of about $84.6 million (80
percent). The University Line would intersect the North-South line and is
the first segment in a planned East-West line that would eventually extend
from the University of Utah to the Salt Lake International Airport. UTA
originally sought to build the University Line under an amendment to the
existing North/South grant agreement. FTA officials told us however, that
they have evaluated it as a separate project and have included it as one of
the 15 new projects proposed for grant agreements in 2001.

According to UTA officials, UTA can complete construction of the University
Line before the Winter Olympics if a grant agreement is executed prior to
April 1, 2000. FTA officials stated that executing the grant agreement by
this date is not likely; however, the agency is considering allowing UTA to
begin construction using local funds without jeopardizing its ability to
obtain a grant agreement at a later date. UTA is now negotiating with
design-build contractors to obtain final price and schedule estimates. UTA
officials told us that if the project could not be completed by February
2002, they would suspend construction in October 2001 to avoid disrupting
the Winter Olympics and would resume construction in April 2002, after the
games were finished.

Los Angeles/North Hollywood Extension

Because of severe financial difficulties, in January 1998, the Los Angeles
County Metropolitan Transportation Authority was forced to suspend the
construction of two remaining Red Line subway extensions-Eastside and
Midcity-for which FTA had committed a total of about $735 million through
grant agreements; $647 million of this total is still available. Currently,
MTA is committed to finishing the Red Line's North Hollywood extension (6.3
miles), which is about 86 percent complete, and expects to open the
extension in June 2000-6 months earlier than projected in the grant
agreement. The project is estimated to cost $1.33 billion, about 2 percent
($24 million) above the $1.31 estimated in the grant agreement.

A 1996 consent decree resulting from litigation over MTA's bus program
required MTA to shift its funding priority from completing the Eastside and
Midcity extensions to improving its bus service. MTA estimates that full
compliance with the requirements of the bus consent decree will cost $468
million through 2004. However, because of recent consent decree rulings, MTA
may need to further accelerate its bus purchases, improve bus service and
reduce overcrowding on its buses. For example, according to MTA, a September
1999 order in federal district court required MTA to add 88 buses to service
by January 2000 and to purchase an additional 297 buses to further modernize
MTA's bus fleet. In response to MTA's appeal, the Ninth Circuit Court of
Appeals granted MTA a "stay," meaning no action is necessary pending the
outcome of the appeal. MTA estimates that implementing the September 1999
order would cost an additional $212 million. In addition, the "Special
Master" believes more steps are needed to reduce the number of persons
having to stand on a bus and to implement a 5-year bus service improvement
plan. To accomplish these goals, the Special Master estimates that MTA's
total cost could be closer to $1 billion.

Future consent decree rulings may impede MTA's ability to maintain the
current level of bus and rail service at existing fares and to continue
addressing its operating shortfalls. While having made significant progress,
MTA is still faced with an operating shortfall of $197 million to $297
million through 2004. The shortfall could increase further if MTA is
required to implement the September court order and provide additional bus
service beyond that specified in the current 5-year service implementation
plan. Despite this, MTA believes that it must address other transportation
needs and continue planning for the future. In this regard, in February
2000, MTA presented its board of directors with the results of studies that
looked at various options for providing transit service to the Eastside,
Mid-City and San Fernando Valley Corridors. These options include bus
service, light rail, a combination of bus service and light rail, and
subway. Depending on which project is selected for each corridor, costs will
vary. For instance, capital costs for the proposed Eastside project range
from $394 million to $1.18 billion, and annual operating costs range from
$24 million to $38 million. MTA plans to narrow the options, conduct
required state and federal environmental studies through October 2000, and
possibly begin construction on one of the corridors in 2004.

MTA would like to amend the existing grant agreements to reflect the change
in scope and financing for the two corridors and use the $647 million in
remaining New Starts funds that was authorized for the Eastside and Mid-City
subway extensions. At this time, FTA is not sure if an amended or new grant
agreement will be executed for the Eastside and Mid-City corridor projects.
In either case, FTA will evaluate and rate the projects and conduct a
financial capacity review. FTA also cautioned that the funds considered
committed to MTA may eventually be made available to a project that has met
FTA's New Starts criteria and is closer to final design and construction.

St. Louis/St. Clair Light Rail Extension

The Bi-State Development Agency (Bi-State) is developing a 26-mile extension
of the Metrolink light rail line from downtown East St. Louis, Illinois, to
the Mid-America Airport in St. Clair County, Illinois. Due to federal
funding constraints, Bi-State decided to build the extension in two phases
for an estimated cost of $461 million. The full funding grant agreement for
the first phase, signed on October 17, 1996, covers a 17.4-mile interim
segment from the current Metrolink terminal in downtown East St. Louis to
Belleville Area College. This phase is estimated to cost $339.2 million, of
which the federal share is $244 million (or 72 percent). The project is on
schedule and expected to meet the opening date of September 2001 projected
in the grant agreement. Bi-State officials believe that service could start
as early as May 2001.

The second phase is about 9 miles long and would extend the system to the
Mid-America Airport. In August 1999, Bi-State requested that FTA amend the
grant agreement to include the second phase, estimated to cost $120.8
million, with a federal share of $60 million, or about 50 percent. In
October 1999, Bi-State requested FTA to further amend the grant agreement to
limit federal involvement in the second phase to Scott Air Force Base. The
3.5-mile Scott Air Force Base segment of the project would cost $77 million.
However, Bi-State requested the same federal contribution---$60
million-which would be about a 78 percent share. The remaining 5.4-mile
segment to Mid-America Airport would be constructed with state and local
funds.

The grant agreement for the second phase has not yet been signed. The
Department of Transportation Inspector General's December 1999 report on the
project raised a number of issues, including low ridership projections, and
recommended that FTA evaluate the second phase project using the New Starts
rating process. FTA conducted such an analysis in December 1999 and rated
the project as "recommended"-even though three of the five project
justification criteria were rated low-medium or low. Of the 15 projects
proposed for grant agreements in the Department's fiscal year 2001 budget,
only two had a low rating for any of the five project justification
criteria.

In January 2000 FTA briefed the House and Senate authorizing committees and
the House Committee on Appropriations on the project and proposed amendment
to the existing grant agreement. On January 31, 2000, the Chairman of the
Subcommittee on Transportation, House Committee on Appropriations, sent a
letter to FTA indicating his concerns about the second phase of the
extension and directed the agency not to execute the amendment to the grant
agreement at this time. Subsequently, FTA received similar letters from the
Chairmen of the Senate Committee on Banking, Housing, and Urban Affairs and
Subcommittee on Transportation, Senate Committee on Appropriations.
According to an FTA official, federal involvement in the second phase of the
project is on hold at this time until FTA determines an appropriate course
of action.

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