Rail Investigation Police Operation Fact Finding

At Least $1.25B Has Been Spent on Rail So Far, But Where Has All the Money Gone?

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(Source: Honolulu Civil Beat)

The rail project has been in the works for more than 10 years but city and HART officials still can’t — or won’t — say what the money has been spent on. Secrecy over tens of millions of dollars in payments to subcontractors is only one troubling aspect.

City Council members aren’t the only ones worried they’re getting the runaround when it comes to following how the money is being spent on Honolulu’s $6 billion and countingcommuter rail project.

State lawmakers say they too want some answers on the spending habits of the Honolulu Authority for Rapid Transportation that last month raised the specter of huge cost overrunson construction of the 20-mile rail system stretching across the southern girth of Oahu.

On the line is a proposed tax increase. Both HART officials and Honolulu Mayor Kirk Caldwell want lawmakers to make permanent a half-percent surcharge on the state’s general excise tax to help pay for the project.

HART has already begun laying the groundwork for seeking a surcharge extension and the borrowing of millions of dollars secured by the city’s general fund, revealing last month that it expects a shortfall of up to $910 million.

Dan Grabauskas, HART’s executive director and CEO, announced in December his agency has come up at least $41 million short in GET surcharge revenues, its major source of funding, and expressed concern over the dwindling balance in the rail project’s contingency fund.

But a review of financial and other project documents by Civil Beat suggests that while HART may be suffering increasing financial discomfort, there’s really no way to assess just how bad the situation is.

What nobody knows, least of all taxpayers footing the bill, is precisely how much money has already been spent on the project since the first rail-related contract was awarded almost 10 years ago, or the details of what is being spent today.

No comprehensive accounting of rail related expenditures over the past decade appears to exist. And despite continuing claims of transparency, secrecy is pervasive, especially when it comes to contracting details, making it difficult, if not impossible, for outsiders to determine who’s getting what and how much.

It’s doubtful a detailed accounting will come anytime soon. City and HART officials have been obfuscating for years and dodging many questions by auditors and others, including some lawmakers who suspected the numbers didn’t add up.

One of the biggest skeptics is Honolulu City Councilwoman Ann Kobayashi. She supported rail when initial plans showed it going to the University of Hawaii at Manoa. But now she says it’s an abomination born of broken promises and political maneuvering.

Kobayashi struggled for more than a decade trying to follow the money that’s been spent on rail. She hasn’t been successful. But as the head of the city’s budget committee she now stands in the way of HART’s desire to issue debt to help finance construction. Any GET surcharge will also require council approval.

“It’s very tricky to trace everything,” Kobayashi said. “They want it to be that way. I think it’s so nobody can figure out where the money came from and where it’s going.”

But Grabauaskas says that’s not so. He often speaks of transparency when it comes to building the rail line, which is the largest public works project in the state’s history.

Many of the project documents are online, he noted in a recent interview, including monthly progress reports that provide construction updates and show how much money has been spent. If anyone wants more information all they have to do is ask, he says.

“Anything that we are required by law to report and make available to the public, we do that. We are a transparent organization and one that adheres to the law, and we are,” Grabauskas told Civil Beat Thursday. “Beyond that there are laws that also protect proprietary information and equally require not to disclose some information that may be protected by law, like people’s personal information or medical records that we may have on file at HART.”

Following the Money

For decades Honolulu has envisioned commuters riding the rails, zipping past the increasing volume of vehicle traffic crowding the highways. The problem has always been paying for it.

A fixed guideway system was first studied in 1963. Since then it has been the subject of clamorous debate, suffering multiple false starts that cost untold amounts in wasted effort, and money.

The project finally gained momentum in 2005 when the Legislature approved a half-percent general excise tax surcharge to help Honolulu build a railroad, and the city council authorized tax collections to begin on Jan. 1, 2007.

But even before that money started flowing into city coffers, contracts were executed for preliminary studies using money from the general fund and the highway fund.

Still, it’s unclear exactly where the money came from and where it went: City records don’t tell the whole story.

Honolulu City Council Vice-Chair Ikaika Anderson confers during break with fellow councilmember Ann Kobayashi at Memorial Auditorium at the Honolulu Mayor's Office of Culture and Arts on June 4, 2014.

Honolulu City Council Vice-Chair Ikaika Anderson confers during break with fellow councilmember Ann Kobayashi at Memorial Auditorium at the Honolulu Mayor’s Office of Culture and Arts on June 4, 2014.

Tracking the money has been complicated by the evolving structure of the municipal bureaucracy spending it. In fact, since rail was first considered a half-century ago, city officials have done a poor job of overseeing where the money has gone and whether it has been properly spent.

Although Honolulu established a separate Transit Fund in 2005 to account for the anticipated tax revenue, as well as any other income “generated by or received for the Transit Project,” the fund appears to have been dormant until 2007.

The city’s 2006 financial statement shows $10.2 million being appropriated for preliminary rail system studies, but provides no details on where that money came from. At the time, spending on rail-related activities was controlled by the city Department of Transportation Services, which also supervised the local bus system.

But once surcharge money began trickling in, the transportation department created a Rapid Transit Division to focus solely on the railroad.

Voters approved the formation of HART in 2010 in an attempt to streamline the project and take politics out of the decision-making. But opponents said this would only add more layers of bureaucracy and reduce transparency.

It appears they were right.

Where Has All the Money Gone?

At the time the RTD was handed a checkbook on July 1, 2007, the Transit Fund reported a balance of $48.6 million. A year later that amount had reached $194.9 million.

Once the RTD controlled surcharge revenues, it seemingly couldn’t write checks fast enough. The big question was whether the city knew what it was paying for.

Municipal disbursement documents show that, during the RTD’s inaugural year, it wrote 182 checks totaling nearly $20 million with some $3.9 million going to InfraConsult LLC under terms of an $11.5 million contract awarded in April 2007 to perform support services for preliminary engineering and environmental reports.

Another $15 million was paid to PB Americas (now Parsons Brinckerhoff) on an $86 million contract awarded in August 2007 for general engineering consultant services in support of a planned request for federal funding.

What makes tracking expenditures earmarked for the rail project difficult is the lack of details about specific expenses and what the city got for its money. The city’s rush to pass out contracts and write checks appears in retrospect to be a political decision by the administration of former Mayor Mufi Hannemann eager to show voters it was actually working on the railroad.

Despite Grabauskas’ insistence that rail financial records are readily available upon request, the city is hard pressed to provide any details of expenditures prior to July 2007, saying that accounting systems have changed or that HART has custody of the early records. Civil Beat has asked HART for this information under the state’s public records law but has yet to receive a response.

City financial records do, however, show at least $95.6 million actually being spent between August 2005 and Oct. 16, 2009 when the city received approval from the federal government to enter into preliminary engineering activities, the first step toward untying federal purse strings in Washington, D.C.

Between October 2009 and the day HART became a quasi-independent city agency another $179.9 million was spent. Between July 2011 and the point that HART officially applied for $1.5 billion in federal funding the city wrote checks totaling an additional $230.5 million. HART doesn’t have total control over its finances and relies heavily on the City’s Department of Budget and Fiscal Services to actually handle most of the money and write the checks.

What is virtually impossible to calculate are the costs of salaries and other expenses attributed to city employees engaged in rail-related activities during the years prior to HART’s creation.

But financial records show HART has paid millions to the city for performing administrative and other services under agreements with various city departments.

Under an agreement expiring next year unless renewed, the city receives a Central Administrative Services Expense fee of 5 percent of HART’s operating budget in addition to reimbursement for direct labor costs of employees and their fringe benefits – including pension and medical as well as expenses incurred by the city attorney for rail-related work. To date these costs are estimated to have exceeded $12 million.

Another agreement required HART to pay the Honolulu Board of Water Supply almost $1 million to reimburse a contractor change order involving relocation of water lines.

No Lack of Cash

So far there’s been plenty of money to spend.

Hawaii Department of Taxation reports show that through Dec. 31, 2014, the state has collected almost $1.6 billion in surcharge revenues, passing along slightly over $1.4 billion to the city with the state skimming $156 million off the top in administrative fees. This money ended up in the Transit Fund along with $312 million in federal funds received through last October.

Surcharge revenue travels a circuitous route from the State Capitol. Every three months, it goes first to the city’s general fund and then is transferred to the Transit Fund from which rail project expenses are paid. This process hasn’t changed since HART’s creation, with the exception that now HART’s board of directors appropriates money needed for the project each year and the city writes the checks.

Of course, HART didn’t begin life penniless.

The agency began operations with about $447 million in the bank, mostly the unspent portion of the $715 million in GET surcharge money the city had collected before HART existed. In addition, $303.4 million in rail-related assets acquired by the city before HART was created were transferred to the agency’s control. Those assets were reported to be the value of construction underway and equipment.

HART CEO Dan Grabauskas speaks to HART Board Members during meeting held at Kapolei Hale. 18 dec 2014. photo Cory  Lum.

HART CEO Dan Grabauskas speaks to HART Board Members during meeting held at Kapolei Hale. 18 dec 2014. photo Cory
Lum.

One thing HART can’t do by itself is borrow money. Only the City Council can approve the borrowing of money through bond sales. City Council members are currently considering whether predicted cost overruns will require borrowing, although HART financial plans and projections have anticipated a need for borrowing additional funds upfront to be repaid from future surcharge revenues.

As far back as 2010, it appeared the Hannemann administration was considering borrowing nearly $1 billion for the project. The city’s 2010 financial report contained what city officials now say was a “placeholder” entry of $917.3 million in case a bond issue ever materialized.

While the public has been aware of some rail spending, there’s no evidence taxpayers fully realized the magnitude of expenditures, or realized that the city itself had committed to rail contracts valued at $1.2 billion before HART even existed. Some of those contracts had been signed just days before HART opened its doors.

Closed Doors and Locked Cabinets

Much of HART’s growing credibility problem with lawmakers can be attributed in part to the secrecy surrounding contract negotiations and the agency’s penchant for strictly controlling the flow of information.

With almost four dozen contracts now in play, it’s possible to see how much the prime contractors are being paid. But most of these contracts contain confidentiality clauses, making it virtually impossible for the public to learn how much money the army of subcontractors is collecting, or what they’re doing for the money.

HART officials themselves insist they don’t even know exactly how much subcontractors are being paid or for what. They say that information is proprietary and that it’s up to the prime contractors to share if they choose. That’s an argument that procurement experts say is baloney.

Records provided by HART so far show the contractors would rather keep those details to themselves.

In a Jan. 16 letter to the Honolulu City Council Budget Committee, Grabauskas provided a list of local prime contractors and subcontractors that received a share of rail-related work along with some of the contract amounts.

The documents show local prime contractors — including R.M. Towill Corp., Lawson & Associates and Nan Inc. — signed more than $45.2 million worth of contracts to do everything from consult on real estate acquisition to cultural monitoring. That’s just over 1 percent of the nearly $3.5 billion worth of contracts signed to date.

HART listed 187 different local subcontracts — some of which were awarded to the same companies that received prime contracts — but only provided dollar amounts for 107 subcontracts, which totaled about $77.6 million. The total amount paid to the prime contractors who hired those 107 subcontractors is more than $314.8 million, meaning local subcontractors as defined by HART will earn a quarter of the work.

The only reason the financial information was made public, according to HART spokesman Scott Ishikawa, is because the City Council had asked for it and the prime contractors were willing to provide it.

In a Jan. 28 email, he reiterated HART’s stance, saying the agency is not required to track or document the payments made to subcontractors.

Grabauskas said it would be “unusual” for HART to monitor how much the subcontractors are being paid since that is the purview of the prime contractors who hired them.

He said he’s “never seen that anywhere in my career on a federal aid project,” and believes the same would hold true for state agencies, such as the Hawaii Department of Transportation.

“Where a prime contractor buys their paper clips or their hammers is not something we really concern ourselves with,” Grabauskas said. “That’s something we leave to the contractor. They need to deliver a quality product on a schedule we define for the price that we agreed upon, and they have the flexibility and latitude to go to whatever companies will supply labor or materials.”

The only subcontractor payments HART tracks, he said, are related to Disadvantaged Business Enterprises, which are small firms majority-owned by minorities, women or other individuals deemed by the federal government to be at a social or economic disadvantage. Projects receiving federal transportation dollars are required to set aside a percentage of funds for these companies.

Questionable public relations tactics forced HART to release details on certain subcontracts in 2012, but only after intense pressure from Honolulu City Council members, who were worried taxpayer dollars were being squandered. Grabauskas responded by cutting more than $2 million in subcontracts, and trimming the project’s public relations staff.

Lack of Financial Details Is a Problem

University of Hawaii law professor Danielle Conway says the lack of transparency and spotty record keeping at HART is troubling. She’s an expert in government contract law as well as Hawaii’s procurement code.

Once a contract is signed, she said, confidentiality clauses related to payments made to prime and subcontractors would most likely be moot and that HART should not claim the records are proprietary or confidential.

“If the city is paying a check with taxpayer dollars then that response makes no sense,” Conway said, referring to HART’s contention it can’t or doesn’t need to track money to subs. “The amount that a prime contractor is paying a subcontractor should be part of the contract file that should be available for review and inspection.”

Although public money is involved, provisions in many of the major HART construction contracts reinforce secrecy beyond the details of subcontracts – concealing information that would provide the public with an understanding of why contract bids come in over estimates and providing no accountability when it comes to HART officials approving requests for additional payments.

Financial information upon which these requests are based is shrouded in redacted documents or stashed away in locked boxes only a few people can see, justified by claims of being proprietary or “trade secrets” and raising the issue of just how transparent project contracting and finances really are.

The construction contracts contain standard confidentiality language requiring contractors to be “circumspect” with the news media, and that they obtain HART’s permission before talking to reporters.

Grabauskas says this is normal contract language, and not something to be alarmed about.

“When there’s a media inquiry about a HART project, the only people who can speak for HART is HART,” he said. “A contractor or subcontractor should not be in the position to speak for the project. If they want to speak about their company they’re free to talk about their company.”

Senator Jill Tokuda, Chair of Committee on Ways and Means and right, Representative Sylvia Luke, Chair Committee on Finance during informational briefings from the Office of the Governor, Office of the Lt. Governor and Department of Budget and Finance held at the Capitol auditorium.  6 jan 2015. photograph Cory Lum/Civil Beat

Senator Jill Tokuda, Chair of Committee on Ways and Means and right, Representative Sylvia Luke, Chair Committee on Finance during informational briefings from the Office of the Governor, Office of the Lt. Governor and Department of Budget and Finance held at the Capitol auditorium. 6 jan 2015. photograph Cory Lum/Civil Beat

But the contracts also include sections requiring the “escrow” of all information regarding contractor pricing to be held by a third party or “in a locked fireproof cabinet” to be used in conjunction with contract amendments or change order and other financial negotiations during the course of the project.

Grabauskas says the confidentiality is to ensure contractors don’t learn HART’s strategy for negotiating change orders. With that information those companies would then have an unfair advantage.

“That’s protected even after we make the decision because we may employ the same strategy for the next change order,” Grabauskas said. “The public interest is served by our ability to be the strongest advocate for your tax dollar when we negotiate with a construction company.”

But these provisions effectively shield HART and the contractors from public scrutiny by controlling the flow of information and preventing effective oversight. In the cozy world of transportation infrastructure contracting it is impossible to assess whether HART officials really did get the best deal when negotiating contractor claims for additional money.

At a time when HART estimates construction delays and other expenses could cost as much as $190 million, if the numbers upon which the contractors are basing their claims are locked away there is no effective public accountability.

The first Parsons Brinckerhoff contract for general engineering services signed in 2007 is an example of how large infrastructure project costs can increase without taxpayers even knowing.

Over a four-year period the original $85 million contract was amended seven times, almost doubling in value to $164.3 million. The final increase of $8.1 million was approved the day before HART began operations.

Another example is the $482.9 million contract with Kiewit Infrastructure West Company (formerly Kiewit Pacific) to design and build a 6.8-mile section of the project from the East Kapolei station to Pearl Highlands. With costs of delay and other change orders, that contract had increased by last October to $601.3 million.

Conway says the confidentiality clauses — and particularly the escrow provision — limit public accountability and oversight. But the problem extends to the state’s procurement code, she said, especially as it relates to large infrastructure projects, such as rail.

Conway questions whether HART and the city are following national best practices when it comes to contracting. For instance, she said Hawaii’s procurement code does not include model language that’s used across the country for public infrastructure projects. The American Bar Association developed new guidelines for these projects in 2007, yet Hawaii has never incorporated them into local rules.

“Should they do it? Absolutely,” she said. “Why? Because millions of our dollars are being spent without transparency.”

The Black Hole of Subcontracting

Much of the money paid to prime contractors on the project, such as Kiewit and Parsons Brinckerhoff, ends up in the pockets of subcontractors. But the exact amounts are almost impossible to determine.

While HART’s records show local subcontractors made at least $77 million on rail so far, what that money has been used for remains a mystery. The lack of information detail also makes it hard to measure whether rail is proving to be the economic driver it was promised to be.

Honolulu’s own City Auditor was unable to pierce the veil of secrecy cloaking subcontractor and other payments, meeting resistance from both the city’s Department of Transportation Services and tight-lipped contractors who refused to provide information.

In 2009 then-City Auditor Leslie Tanaka audited three rail-related contracts awarded by the city in 2005 and 2007 – two to Parsons Brinckerhoff Quade & Douglas (later renamed PB Americas and now Parsons Brinckerhoff) and the third to InfraConsult, finding in all cases that subcontractor invoices “contained little or no information regarding the work performed” for the period covered by the invoice.

According to Tanaka’s 85-page report, almost from the beginning the Department of Transportation Services appeared to be running interference for contractors, claiming subcontractors could not be held accountable to the city because they did “not have direct contractual relationships” with the municipal government, despite the fact they were paid with public money.

The auditor also reported that the DTS even objected to mention of the fact that one firm, PB Americas, was awarded two of the three contracts with the third going to InfraConsult, a California-based firm run by former PB America employees.

And the auditor noted that there was a perception of favoritism surrounding the bidding process, saying two engineering firms interviewed suggested previous contract awards to PB Americas “placed the company in a favored position” for receiving future contracts.

Another audit in 2013 by City Auditor Edwin Young, who was directed by the City Council to examine expenditures related to public relations and public outreach activities performed by subcontractors, had difficulty determining who was being paid for what.

This hidden information has the potential for being particularly troublesome in situations where a subcontractor performs services for multiple prime contractors or is a direct contractor on one part of a project and a subcontractor on another.

Although prime contracts normally disclose the identity of a subcontractor and the minimum value of the contract, this information is not contained in many contracts HART has awarded.

Young told Civil Beat that many problems from 2009 surfaced in 2012. He said HART has since started requiring PR consultants to provide more detailed invoices, but was unsure whether that practice has been applied to other parts of the project, including construction.

He says he just wants to make sure the city gets what it pays for. But even now HART admits it does not track subcontractor invoices in its computerized contract management system, according to the Jan. 28 email from HART’s Ishikawa to Civil Beat.

“When I came on board our concern was that they couldn’t track and validate the payments that were being made to the contractors, both the primes and the subs,” Young said. “Our concern was that they did not have sufficient documentation to support that the payments were justified.”

Unease at the Legislature

The lack of transparency and specificity could hurt the project as city and HART officials try to convince lawmakers they need more money to shore up the growing shortfall.

On Monday, Caldwell pitched the tax increase to members of the House and Senate finance committees. Legislators peppered the mayor for nearly two hours, pressing him for an answer he didn’t have: How much will this cost?

But nearly 40 percent of the project’s contracts have yet to be bid. Many of those contracts are not expected to be awarded until later this year or in early 2016. The original estimate for those contracts is $1.3 billion, according to HART.

Rail construction is well underway, but without extra money officials fear the project could be halted.

Rail construction is well underway, but without extra money officials fear the project could be halted.

But the city has a bigger strategy for rail. Several extensions are planned, including to the University of Hawaii at Manoa, Waikiki and West Kapolei. Early estimates in 2011 dollar figures set the price tag for those spurs at $3.9 billion. Caldwell and others hope the GET extension will help pay for these extensions.

Hawaii Sen. Jill Tokuda is chair of the Ways and Means Committee that controls much of the state’s budget. She is expected to lead GET discussions at the Legislature.

A number of lawmakers, along with first-term Gov. David Ige, have said they want to see the rail project succeed. But Tokuda told Civil Beat that it’s difficult to burden taxpayers — particularly Hawaii’s low-income population — with a GET increase.

Some legislators want HART and the city to focus on cost containment to help make up the shortfall before increasing taxes. Others say they need more evidence that the money has been spent wisely and that future financial plans are fiscally sound and based on the most accurate projections.

“It’s one of the scariest, hardest votes most lawmakers will take early on and throughout their career,” Tokuda said. “I would be shocked if there was no unease. Even if it was for the most motherhood, apple-pie kind of reason to do an increase or extension, it is never easy.”

“You would demand us to ask questions as to the how, what and why of the increase,” Tokuda said. “That is why you put us here.”

HART letter showing the local contractors working on the rail project.

HARTsubcontractorletter
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Lance Luke has been in the construction industry for over 35 years. He is a former general contractor and worked as a construction and project manager for real estate development companies. Currently he owns an independent construction management company and is a sought out speaker and trainer for his expertise in the field. His expertise lends to a wealth of understanding of the current HART rails project.

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