DRAFT Update of the Financial Plan for Full Funding Grant Agreement

From HART, December 1, 2016

The Honolulu Rail Transit Project (the Project) is a 20.1-mile proposed rail transit system in Honolulu extending from East Kapolei in the west to Ala Moana Center in the east via the Honolulu International Airport. The Project is intended to provide a high-capacity, high-speed transit service in the highly congested east-west corridor; and to improve mobility, transit reliability, and service equity for over 68% of O‘ahu’s residents and over 83% of its workforce who live and work in the areas within and connecting to this corridor, and for its many visitors. Revenue service from East Kapolei to Ala Moana Center is expected to start in December 2025.

Planning, design, construction, operations, and maintenance of the Project are currently the responsibility of the Honolulu Authority for Rapid Transportation (HART), which functions as a semi-autonomous unit of the City and County of Honolulu’s (City) government. However, due to the recent passage of Charter Amendment Number 4 in the 2016 Elections, the voters of the City authorized the consolidation of the operations and maintenance functions and responsibilities for all modes of public transit. Therefore, rail transit operations and maintenance will be combined with that of fixed route bus (TheBus) and paratransit (TheHandi-Van) services under management by the Department of Transportation Services’ (DTS) Public Transit Division (PTD).

The Project will be fully integrated with TheBus operations, which will be reconfigured to add feeder bus service to provide increased frequency and more transfer opportunities between bus and rail. The new rail and enhanced TheBus service will provide additional travel options, increase service frequencies, expand the hours of operation, minimize wait times, reduce total travel times, improve service reliability, and enhance comfort and convenience for passengers, resulting in over 20 million hours of user benefits annually.

This updated Financial Plan is being submitted to fulfill HART’s commitment made in the September 30, 2016 Interim Plan, as part of the request for extension of the submittal of a full Recovery Plan. The plan provides a summary of the capital costs and funding sources associated with both the Project and the City’s ongoing capital needs for its existing public transportation system. It then describes the City’s plan to fund the operations and maintenance (O&M) costs associated with the Project, TheBus, and TheHandiVan services.

SUMMARY OF THE PROJECT FINANCIAL PLAN

The current draft capital plan is based on the following key assumptions: 

• Projected total Project cost of $8.2 billion, based on current construction cost estimates. 
  
• General Excise and Use Tax (GET) surcharge revenue estimated using a 4.3% assumed annual growth rate, as directed previously by the HART Board of Directors, beginning the quarter ended June 2017 through December 31, 2027 so as not to presume any extension of the GET surcharge at this point in time. 
  
• Federal Transit Administration (FTA) grant reimbursement drawdowns of eligible project costs totaling $1.6 billion by July 2020 based on current project plan and schedule or Revenue Service Date (RSD) of fiscal year (FY) 2026.
  

Project Capital Cost Estimate: The updated capital cost of the Project without finance charges is $8.2 billion in year-of-expenditure (YOE) dollars. Financing costs, including interest and bond issuance charges, will be dependent on an extension of the GET surcharge as well as the terms upon which the extension is based. The duration and amount of bond financing will weigh significantly on the final total budget necessary for the project.

The capital cost estimate provided in this updated Financial Plan draft reflects advanced final engineering, cost estimation methodologies, and actual contract bid prices for all but two of the major construction contracts. The revised cost estimate includes approximately 20% of contingency funds for existing and new contracts to cover risks.

Local Funding: The dedicated local funding source for the implementation of the Project is an established one-half percent (0.5%) county surcharge on the State of Hawai‘i’s GET surcharge. The GET surcharge commenced on January 1, 2007. On July 14, 2015, the Governor signed legislation that allows the City to extend the GET surcharge from December 31, 2022 to December 31, 2027. Following the passage of legislation by the City Council, the Mayor signed into law Ordinance 16-1 on February 1, 2016 to extend the GET City surcharge. Based on the most recent cost estimates and revenue projections, the GET surcharge would need to be further extended beyond the current 2027 sunset date.

The GET surcharge revenue is to be used exclusively for the Project. The plan reflects actual receipts through FY2017, and assumes that GET surcharge revenues will grow at a combined annual rate of 4.3%, as previously directed by a Permitted Interaction Group (PIG) of the HART Board of Directors. Total revenues incorporated in the updated Financial Plan from the GET surcharge are expected to total approximately $4.8 billion between FY2010 and FY2028. Based on collections through the quarter ending September 2016, HART has received $1.4 billion from the start date of the Financial Plan in October 2009.

Federal Funding: The Full Funding Grant Agreement (FFGA) was signed on December 19, 2012. Under this agreement the City was awarded a total of $1.6 billion in FTA New Starts funding, with annual amounts of up to $250 million per year. Through October 2016, HART has drawn down $622 million. FTA Section 5307 Urbanized Area Formula funds ($210 million) have been removed from the Financial Plan and will be utilized for current City transportation needs.

Project Financing: Given the higher total estimated project cost, additional funding is needed to complete the project. Should additional funding materialize, the updated Financial Plan submitted as part of the final project Recovery Plan will continue to use a mortgage-type amortization schedule with level debt service repayment for each General Obligation (GO) bond issuance

SYSTEMWIDE CAPITAL PLAN

Ongoing Capital Needs: HART, with the approval of the FTA, has reconfigured the vehicles from two car trains to four-car trains. For purposes of this update, it is assumed that the replacement cost and schedule remains unchanged. The ongoing capital plan includes costs to replace, rehabilitate, and maintain capital assets in a state of good repair as well as necessary expansion of the existing system to accommodate forecasted FY2030 demand levels. The City is committed to maintaining the existing transit system in a state of good repair.

Funding Sources: FTA Section 5307 Urbanized Area Formula program, and other federal grants will continue to provide assistance for ongoing capital expenditures for the existing transit system. Section 5307 funds will be available for systemwide capital needs as well as for preventive maintenance for TheBus.

SYSTEMWIDE OPERATING PLAN

As with the original Financial Plan, the updated Financial Plan reflects the current transit policies applied to the future integrated transit system. The current City policy of setting fare rates to recover between 27-33% of operating costs, as well as the current fare rate categories, remains constant in the updated Financial Plan. By holding these factors constant, this updated Operating Plan projection will serve as a base comparison for changes to fare policies, fare differentials, and service levels.

O&M Costs: Updated rail costs in current year dollars are as projected in the original Financial Plan. However, projected estimates in certain cost categories vary considerably from the original projections. When converting the current year rail costs to YOE cost figures using the escalation factors in the original Financial Plan, rail costs forecast slightly under the original Financial Plan. The rail operating costs project between $8 million to $15 million per year higher when using more conservative escalation factors, as provided in Table 3-4.

Bus costs have been as anticipated in the original Financial Plan. The historical annual increase in bus costs per revenue service hour in the original Operating Plan was 3.9%. The actual cost per revenue hour over the last 10 years is 3.1%, reflecting the recent lower fuel prices. The updated Financial Plan estimates bus costs per revenue service hours to increase at approximately the same level as the original Financial Plan’s historical cost. Handi-Van has experienced the cost increases as projected in the original Operating Plan.

Table ES-1, Operating Costs in First Full Year, YOE $ millions

Operating Revenues: Approximately 258,000 daily linked trips were estimated in the first full year of the bus and rail combined system in 2020. The forecast grew to 280,000 linked trips per day in 2030 for the bus and rail combined system. The updated forecast estimates approximately 279,000 linked trips in the first full year and 313,000 in the tenth year.

With respect to actual boarding to date, actual boarding and original Financial Plan forecast began to diverge in FY2013. There are a number of factors that may have contributed to this situation, but service hour reductions and the decreasing price of fuel beginning in May 2014 are likely contributors. The updated ridership forecast commences at the current ridership results from FY2016.

Fare rate increases are comparable to Consumer Price Index All Urban Consumers (CPI-U) increases utilizing the original Financial Plan factors. Similar to the cost scenarios, this report also details the impact of lower ridership figures and its impact on fare rates and subsidy levels.

Table ES-1 above reflects a variance in the fare revenue between the original FY2026 ($143 million) total and the updated fare revenue in FY2026 ($126 million). This variance is attributable to the revenue service date starting in December 2025, midway through the fiscal year as opposed to a full year fare revenue in the original Financial Plan.

Subsidy: The original Financial Plan projected the transit system subsidy to grow to $307 million in the first full year of combined operations (FY2020) and $370 million in the seventh year of operations (FY2026). Fare Commission recommendations, other revenue sources (such as concessions, advertising, and potential leasing space for fiber cable), and further cost benefit analysis will lower subsidy levels. However, several sources of funds will be needed to support transit system operations, including fare revenues and continued Federal funds for preventive maintenance activities, increased City revenues related to transit-oriented development, and continued transfers from the City’s General and Highway funds.

PDF: Full Report