Fixing rail’s $3 billion shortfall

August 28, 2017

Pacific Business News
Anna Hrushka Reporter
August 24, 2017, 3:17pm HST

https://www.bizjournals.com/pacific/news/2017/08/24/fixing-rails-3-billion-shortfall.html

Stanford Carr is frustrated with the lack of progress he’s seeing regarding the construction of Honolulu’s $10 billion rail project.

“The session ended in May. This should have been put to bed already,” the developer, and owner of Stanford Carr Development, said about the lack of consensus among the state’s lawmakers regarding the rail’s funding mechanism.

Carr speaks for a lot of people in the business community who want to see the project completed as well as favor an extension to the 0.5 percent surcharge on the state general excise tax to pay for the project’s nearly $3 billion shortfall — “It’s already been accepted, and we’ve been doing this for years,” he said.

Carr — who is the incoming co-chair of Move Oahu Forward, a five year-old coalition of Hawaii business and community leaders that support the project — told Pacific Business News the state should not be dwelling on past mistakes.

“We should be focused on the future,” he said.

Delays

Legislators spent this week preparing for a special session — tentatively scheduled to start Monday — to determine how to fund the construction of the over-budget 20-mile rail line.

After PBN went to press on Wednesday, state lawmakers reached a tentative deal on Thursday to solve rail’s funding shortfall.

The daily newspaper reported sources said the deal includes raising the state’s transient accommodations tax and extending Oahu’s surcharge of the general excise tax for another three to four years.

Lawmakers have gone back and forth over what type of funding options would be fair or reliable to finance the Honolulu rail project, mulling such options as extending Oahu’s G.E.T. surcharge and increasing the state T.A.T., the tax that tourists pay on hotel rooms — an option the visitor industry and Neighbor Islands have been vocal in opposing.

At stake is $1.55 in federal funding, and the city is under a deadline to let the Federal Transit Administration know where the money is coming from.

Ending the project at Middle Street, which some have suggested, would be a “waste of breath,” said Carr, whose Keauhou Place mixed-use condominium project is the site of one of the planned rail stations. “It just makes sense to finish it. We are already half built and taking our sweet time does not resolve anything.”

Business groups that have been formed to voice an opinion on rail favor finishing the project, and paying for it with an extension of the G.E.T. surcharge.

Move Oahu Forward, whose board members include co-chair Hawaiian Electric Industries president and CEO Connie Lau, First Hawaiian Bank Chairman and CEO Bob Harrison and Matson Inc. President and CEO Matt Cox, took out a full-page ad endorsing the surcharge extension in the daily newspaper in May.

Another business group called Friends of Rail says it supports the project, but board member Emmanuel Zibakalam would not discuss which funding option it would support. The group’s members include the Kapolei Chamber of Commerce, the West Oahu Economic Development Association, the Hawaii Laborers-Employers Cooperation and Education Trust and several labor unions.

“We are leaving that decision in the hands of the legislators,” Zibakalam said.

The Hawaii Business Roundtable, whose members include the CEOs of the largest companies in Hawaii, supports the rail project, but Gary Kai, the organization’s president, declined to discuss the project’s controversial funding options.

Kai said that the cost increases, while concerning, are understandable, given the magnitude of the project.

“It’s almost like asking a major developer when you’ve got a project that will take 15 years, ‘How long, how much?’ They wouldn’t even try to answer the question,” he said.

Move Oahu Forward is funded by leaders in the business community and private individuals who share Carr’s belief in the project, he said. Carr has donated thousands of dollars to the group in an effort to support rail, which he says will benefit the state in construction wages and jobs.

“I’m putting my money where my mouth is,” he said. “I believe in it and this is how I can support it, aside from testifying.”

Kai, who is also on the board of Move Oahu Forward, said supporting the rail project makes sense for business.

“The Hawaii Business Roundtable supports rail because we support quality of life and fairness,” he said, adding the impact that the 20-mile rail route would have for commuters is significant for local businesses.

“I can understand the concerns that the public has, but when you look at a project like rail, the issues we deal with now will be mitigated by the long-term nature of the project,” he said.

Kai said there is no other choice other than to finish the project. “We’re not going to build more highways. It’s all about the quality of life,” he said.

The G.E.T. surcharge

Honolulu’s 0.5 percent county surcharge on the state’s G.E.T. has been a funding source for the project since 2007, but in April, House and Senate leaders appeared to come to an agreement on raising the state’s transient accommodations tax from the current 9.5 percent to 12 percent to help make up for the rail project shortfall. The deal ultimately fell through, ending in the legislative session closing without a funding solution.

“They obviously are going to be comparing different kinds of funding sources,” said Tom Yamachika, president of the Tax Foundation of Hawaii, on what will take place during the upcoming special session.

Honolulu Mayor Kirk Caldwell supports extending the G.E.T. surcharge, a source of funding he calls reliable.

During a briefing on the Honolulu City Council’s budget for fiscal year 2018, Caldwell called the tax a fair way to “reduce the burden on the taxpayers of this island” because one-third is paid by non-residents, visitors, military and others.

Yamachika, however, said research conducted by the Tax Foundation doesn’t quite reflect those numbers.

“Caldwell keeps on saying one third of the G.E.T. is paid by tourists. He says if we don’t use the G.E.T. then we’ve got to rely on property tax and then that makes it on us, which isn’t true,” he said.

Yamachika says the Tax Foundation’s own study concluded that only 15 to 20 percent of the G.E.T. is paid by visitors, adding the discrepancy might be a matter of semantics.

Only by expanding the definition of tourists to include other nonresidents, such as the military or the federal government, does the percentage come closer to 30 percent, Yamachika said.

Increasing the T.A.T.

Neighbor Island counties and the visitor industry have vocalized their opposition to raising the T.A.T, which they say would loop the entire state into funding Honolulu’s rail project.

Ed Case, a former congressman and state representative who is Outrigger’s senior vice president and chief legal officer, testified on behalf of the state’s largest industry, urging lawmakers to look elsewhere when it comes to raising taxes, and county mayors from the Neighbor Islands expressed concern that they will be tied to the project, funding a transit system that they ultimately won’t use.

But Yamachika says the argument falls flat in the face of previous state-funded infrastructure projects.

“You have state money that pays for projects everywhere,” he said. “When the T.A.T. was first introduced, why was it introduced? To pay for the convention center. Guess where the convention center is? It’s here. Nobody was screaming and yelling, ‘The Convention Center is not going to be on Maui so I’m not going to pay a dime of this T.A.T.’”

And the reason they’re doing it now? Yamachika thinks the project’s cost overruns and delays have contributed to the backlash.

“People are reaching for reasons to disavow it or oppose it or not get behind it,” he said. “The argument sounds good, but I think it’s got some holes in it.”

In addition to a $3 billion funding shortfall and a looming Sept. 15 deadline to submit its financial plan to the FTA, the Honolulu Authority for Rapid Transportation is also facing calls for an audit.

During the City Council’s Budget Committee meeting last week, City Auditor Edwin Young told council members that an April 2016 audit revealed HART’s internal controls were so weak that if fraud, waste and abuse were to occur, the agency would not have been able to detect it.

While the council voted unanimously in favor of Resolution 17-199, calling on Young to conduct an economy and efficiency audit of the project, a local nonprofit research group says it isn’t enough, and is calling for a forensic audit of the agency.

“The fundamental problem that people all agree upon, whether they are for the rail or against the rail, is that there have been problems with the financing,” Kelii Akina, president and chief executive officer of the Grassroot Institute of Hawaii, told Pacific Business News. “It’s taken too long and it costs too much. And that’s not a controversial issue, whether people are for or against rail.”

Akina said previous audits of the agency have not been designed to reveal the reason behind the project’s escalating costs.

“Forensic audits are typically done to see if financial improprieties exist, like fraud or embezzlement,” Stacey Katakura White, president of Hawaii-based accounting firm Accumulus, told Pacific Business News. “It looks for validation that procedures and policies are being followed and proper approvals are obtained for decision-making.”

HART, which has been headed by Interim Executive Director Krishniah Murthy since October, after Dan Grabauskas resigned a year ago, says it is subject to a financial audit once a year by an independent financial firm.

“This is a long process in which the auditors visit the HART office and review the project’s financials via documents stored in the project library. This process can last up to four months,” the agency said in a statement.

“The city is in an interesting situation where the city auditor himself has pointed out that their process is not geared to doing a forensic audit,” Akina said, referring to the April 2016 audit conducted by Young.

Akina said he’s seen a shift among city lawmakers as well as the mayor when it comes to support for auditing HART, which recently named Bombadier Transportation executive Andrew Robbins as Grabauskas’ replacement.

“There was great resistance to doing an audit, expressed by HART, the mayor and other political parties, including most legislators when a call for the audit first came,” Akina said. “What has happened is a shift that has taken place over the last two months. There has been such a groundswell of support for an audit that politicians have jumped on board the bandwagon.”

But Akina said, in light of HART’s financial woes, it has become politically correct to support an audit. “In my opinion, there’s been some kind of political sleight of hand here,” he said.

Akina said he thinks City Council members are calling for a “watered-down” audit, one that won’t yield any more insight into potential fraud, waste and abuse issues that prior audits might have missed.