Civil Beat Discovers $227 Million Error in State Consultant’s Work
Editor’s Note: After three months of work, a state consultant in early December released a report reviewing Honolulu’s financial plan for its proposed $5.5 billion rail project. Civil Beat is taking a closer look at the two analyses and will evaluate the key areas in which they differ: construction revenue, construction costs, operating revenue and operating costs.
When it comes to long-range financial projections, there’s only one thing we can be sure of: They’re all wrong. But finding out who’s closest requires a look at the methodology and assumptions each employed in coming to their conclusions.
We’ve already explored the city’s optimistic projections for tax revenue to pay for construction. This story, the second in our series, explores a $227 million discrepancy in projected construction costs.
Other stories — including Civil Beat’s conclusion on the financial future of rail in Honolulu — will follow. A discussion of the topic has already begun.
A new financial analysis of the rail project says construction will cost nearly a quarter of a billion dollars more than the city estimated.
But the discrepancy is an error.
It’s as if the consultant, , compared apples to oranges.
Had the comparison used the appropriate figures, the $1.7 billion difference between IMG’s estimate and the city’s estimate of the price tag of rail to Honolulu taxpayers would actually have been millions lower. And the alleged $227 million gap between the city’s and consultant’s construction cost projections wouldn’t exist.
Here’s what happened, Civil Beat discovered. IMG — which was hired by former Gov. Linda Lingle for $350,000 to conduct an of the rail project — attributed to the city an estimate for construction costs that did not include finance charges.
IMG’s estimate, on the other hand, adopted a federal recommendation for construction cost projections that did include finance charges. So when it compared its total with the city’s total, it found a difference of $227 million — a difference that doesn’t exist.
There is general consensus between the city’s most recent financial plan and the independent federal reviews that IMG relied on for its conclusions — if the right numbers are compared.
The city said in the of its financial plan that construction would cost $5.12 billion, excluding finance charges. The total construction cost including finance charges through 2019 — the last year of planned construction and the end of federal New Starts grant funding — is $5.348 billion, the city said.1
That number was updated from a . It appears to have incorporated the suggestions of one federal analysis2 and then subsequently to have been endorsed by another federal review.3
IMG relies exclusively on those federal analyses for its conclusion on construction costs. IMG used the correct number for its own estimates. But when it compared them to the city’s estimates, it didn’t use a comparable figure. If it had, it wouldn’t have found a difference between its own estimates and those of the city.
Steve Steckler, founder and chairman of IMG, provided helpful background information for this story but declined to speak publicly about the matter, saying that burden should fall to the state’s Department of Transportation. The department is without a director and the current governor didn’t commission the study and has said it’s not relevant.
Cost Overruns
Of course, no amount of consensus guarantees final construction costs will come in at exactly $5.3 billion. IMG pointed out that a number of heavy rail projects across the country have gone far over their planned construction budgets. While those case studies did shape the report’s tone, they did not directly factor into the $1.7 billion estimate for how much extra weight Honolulu taxpayers are going to be asked to carry.
“While it would be incorrect to state that all such projects have negative outcomes, their frequency suggests caution regarding all rail project cost estimates with caution, particularly those developed prior to final design,” the report says.
On average, projects IMG included because their costs were “substantially different from their plans” ended up with overruns of 22 to 29 percent, the report says.
The city has often pointed to a billion-dollar contingency built into the financial plans that will serve as extra padding for any unexpected cost overruns. tallies the unallocated and allocated contingency at $1.27 billion. The overruns that some projects experienced were above and beyond their built-in contingencies.
But the bottom line is that the possibility of cost overruns didn’t factor into IMG’s claim that the most likely scenario for rail costs would be that the city would fall $1.7 billion short. The consultant’s error in comparing federal and city estimates means that figure is high.
