Feds not yet counting rail ‘stress test’ that borrowing could patch

Always Investigating

The city insists it has long pegged the shortage to finish building rail at $3 billion, but there is disagreement over a “stress test” gap of $548 million that some feel the state shouldn’t need to cover. Always Investigating and another possible source of cash for that has long been contemplated by the city as the go-to source in case of other revenue coming in low.

Last week Honolulu Mayor Kirk Caldwell wrote to lawmakers adding a half-billion dollar stress figure into project costs and warning the Federal Transit Administration would require covering that in a recovery plan due Sept. 15. Always Investigating found past stress test projections were intended to be covered with short-term borrowing.

Bonds like those currently being used to patch rail cost gaps could still be drawn from if the construction costs rise again beyond tax collections to pay them, and beyond the $1.1 billion contingency already penciled in to the $8.2 billion rail cost projection.

Lawmakers heard today the feds don’t require any additional stress test gaps to be set aside in other projects and are unlikely to demand it in Honolulu’s financial plan. The Federal Transit Administration told Always Investigating only the project costs need to be addressed in the financial plan due within weeks.

The mayor says state lawmakers’ proposed $2.4 billion bailout it short hundreds of millions of dollars, mostly because of a stress test the city had HART crunch numbers on last week which came out to another $548 million dollar add-on to the rail’s cost above the $8.2 billion it had been at just before the special session.

“They’re going to ask to find out if it’s stressed, how much more money would they need,” Caldwell said, “and in the Full Funding Grant Agreement of 2012 they did that and they stressed it at 10 percent. So, HART has told us that it would be stressed again, and that likely it’ll be a 10 percent stress level.”

KHON2 asked the mayor did he confirm with the FTA since last week that they’d require that half-billion dollars to be covered?

“I’ve not confirmed and I don’t think they would give me an answer to that question,” Caldwell said. “I go to FTA on a regular basis and ask them to confirm all kinds of things and to write letters saying certain things. They do not want to get involved in the legislation nor do they want to get involved in political decisions. But talking to people at HART who used to work at the FTA, just hearing from those around the FTA, these FMOCS (consultants) will stress the construction number at some percentage, and it’s likely to be in that range.”

Two of Hawaii’s congressional delegates told lawmakers the state plan looks like enough money that the feds would likely be OK without any added stress test covered.

“I do not speak for the FTA but I will say this,” Sen. Brian Schatz testified, “based on my analysis of discussions between hart and the FTA, my read is that this revenue package is likely to be viewed as serious and sufficient. And on the specific question of the issue of the stress test, I can confirm that as far as I can gather, that it is not the practice of the FTA to make the stress test amount a financial requirement.”

“One of the things that concerns us,” said Rep. Colleen Hanabusa, “is when we hear that ‘the FTA requires’ or ‘the FTA wants something.’ Know that what the FTA has indicated is that there is a time when they must evaluate the sensitivity of a financial plan to plausible adverse changes in key assumptions and to gauge the city’s capacity to accommodate those changes. That is what is called the stress test that you’ve heard so much about, but also know that the stress test doesn’t come into reality until you do a financial plan, and that is where we are now. So you don’t have to worry about it because you don’t have a financial plan to worry about, and what you have done, in my opinion, is to address the costs in a very systematic and logical manner.”

Late Monday the FTA told Always Investigating the plan due by Sept. 15 only has to “cover the delta between the original and the revised estimated total project cost,” the $8.2 billion HART presented before the special session.

As to why a stress test isn’t a number that gets added to a project cost, FTA explains: “The stress test should be interpreted as examining the ability to fund the project if revenues are less than anticipated.”

They added, “Once received, FTA will examine the assumptions made within the finance plan to determine its reasonableness. FTA is not familiar with the $548 million figure. That appears to be a number provided by the Mayor…To date, FTA has not received details of the finance plan for analysis.”

So why the worry about it? The mayor says the administration and HART have brought up stress tests, contingency and a $3 billion gap including financing frequently in testimony. In a 2012 rail financial plan chapter on risk, HART tabulated a 10 percent cost overrun scenario.

VIEW: Honolulu Rail Transit Project Final Financial Plan for Full Funding Grant Agreement (June 2012 – see pages 4-3 and 4-4)

The city and HART told KHON2 on Monday that’s the reason the stress test was added in at the same 10 percent range last week to show the $548 million figure.

That same 2012 chapter goes on to say “The city expects to use TECP (short-term borrowing) capacity for any additional funding requirements generated by this stress test scenario.” The city’s own projections from last week show the TECP credit line clear to be drawn on by 2025, and HART confirmed to KHON2 that TECP borrowing “is one of many options that can be used to cover” a gap.

We also asked the mayor’s office if there were any reason the short term borrowing described in the 2012 plan to cover a stress test gap could not be used in any future stress test projection; we’ll update the story when we receive their response.

Any borrowing has to be paid back ultimately by tax or fare revenue, something the 2012 stress test scenario achieved, and is currently being done with short-term draws. City lawmakers remain wary of any hit to bond ratings as a result of property tax being needed for funding, or too-steep draws on city bonds.

“We cannot float enough bonds in the city to cover the cost of this project, our own bond raters have told us that,” said Honolulu City Councilman Joey Manahan at Monday’s press conference with the mayor. “Once we start using property taxes and other in the financial plan of rail then our bond rating potentially starts to slip.”

The mayor asked lawmakers to be ready to step in again if the state plan comes up short.

“If in fact the numbers do prove to be correct and we do not face a shortfall, I will breathe a sigh of relief,” Caldwell told lawmakers at the special session public hearing Monday afternoon. “But I ask all of you here today to make a public statement that should there not be sufficient funding from the perspective of the City & County of Honolulu you will step up with us as our partners in a legislative session somewhere in the future to address that shortfall.”

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