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In the final days of 2011, the Federal Transit Administration granted a key approval for the Honolulu rail project.

It permitted the Honolulu Authority for Rapid Transportation to start “final design” of rail, and allowed it to do everything short of heavy construction. But that approval came with the warning that HART still has work to do if it wants $1.55 billion of federal funds to build the 20-mile-long system.

The made clear the agency needs more assurances before it green lights the funding. But the agency has declined to go beyond the language in the letter.

These two paragraphs outlined the concerns to HART:

Specifically, the financial plan states that additional revenues may be obtained from an extension of the General Excise Tax or implementation of value capture mechanisms. However, these revenue sources require actions by the State of Hawaii and/or the City that have not been taken and which are beyond HART’s ability to control. Prior to the Project’s consideration for an FFGA, HART should demonstrate the availability of additional revenue sources that could be tapped should unexpected events such as cost increases or funding shortfalls occur.

Additionally, HART made assumptions in three areas that require further justification or amendment: (1) the containment of bus and HandiVan operating expenses; (2) the increasing share of the City’s annual budget required to fund the transit system; and (3) the diversion of Section 5307 funds from preventive maintenance to the Project. Prior to the Project’s consideration for an FFGA, HART should either provide further documentation justifying the reasonableness of these assumptions or consider revising these assumptions to more closely follow historical patterns.

Civil Beat has delved into some of these issues before. Let’s review what we know so far about what stands between HART and federal funding.

General Excise Tax

In 2005, the Hawaii Legislature passed what became , allowing Honolulu to create a one-half percent general excise tax surcharge to pay for mass transit and the other counties to do the same for buses. None of the others implemented the tax. Honolulu began collecting the rail-specific tax in 2007, and to date the city has pulled in more than $750 million.

The surcharge sunsets Dec. 31, 2022, and the city has projected that it will generate about $3.5 billion over the course of its 15-year life, enough to pay for two-thirds of rail construction.

In Civil Beat’s December 2010 analysis of the project’s financial plan, we determined that the city’s projections for tax revenues were optimistic. Since then, HART has had only good news about GET collections.

In its most recent draft financial plan, the city says extending the surcharge for two years — until Dec. 31, 2024 — would generate approximately $740 million. But the FTA is uncomfortable with that contingency plan, because it would require further action by the Legislature.

It’s unlikely that HART will look to have the sunset changed or removed in time to impact the FTA’s consideration of the full funding grant agreement. Mayor Peter Carlisle and HART Finance Committee Chair Don Horner, in Washington this week to meet with the FTA, said the city is considering only those steps it can implement independently.

Value Capture Mechanisms

The project, when complete, will increase property values along the rail line. HART could capitalize on those increased values, and generate additional money to build rail, in a variety of ways outlined in .

To take advantage of “tax increment financing,” the Honolulu City Council would need to define a district near the rail line and establish a plan. After that, any tax revenue gains inside the boundaries of that special district can be used to issue rail bonds.

A second mechanism, known as “special assessments,” would allow the city to levy additional property taxes against properties within a defined zone near the rail line. The Council would need to create the boundaries of such an area and define the formula over a predetermined number of years — so the revenue wouldn’t be indefinite.

A third mechanism, called “development impact fees,” would be one-time fees paid by developers near the rail line when they secure their building permits. The fees are usually designed to collect a certain amount of money per unit or per square foot of retail space and would be based on how much value the rail project provides to the developers.

The plan says that issuing 30-year bonds on the revenue generated from value capture within a half-mile radius of planned stations would generate between $65 million and $95 million — small numbers compared to the project’s $5.2 billion construction price tag.

One other alternative could generate far more money. Public-private partnerships, the financial plan says, would call for a developer to pay the city directly for costs that generate economic activity. Those could bring in up to $500 million.

Bus and HandiVan Costs

The April 2011 draft financial plan projected lower rail operating costs but a higher overall city subsidy for the transportation system.

The $650 million increase — from $4.73 billion to $5.39 billion — over 20 years was largely due to an increase in the projected cost to operate TheHandi-Van system that provides door-to-door transportation for handicapped and disabled residents.

HART has repeatedly said that the sizable subsidies for TheBus and TheHandi-Van would exist with or without rail, and that rail’s superior efficiency is one of the main benefits of the project. But the three mass transportation programs are related, and the Council’s transportation chair bristled at the suggestion that HART would wash its hands of responsibility for the big picture.

In our Fact Check of rail opponents’ claim that the city needs $100 million per year to keep the trains running, we determined that their estimate was high because they lumped bus costs with rail costs.

Opponents shot back that Civil Beat was wrong because the two need to be considered together since they share a fare system.

The fact that the FTA is raising bus and Handi-Van costs as a concern for rail’s financial outlook would seem to indicate that it believes they need to be considered together, too.

Share of the City’s Annual Budget

Fares will pay for a portion of the rail system, but not all of it. And TheBus and TheHandi-Van will require even heavier subsidies from taxpayers in coming years.

The city’s share for the transportation system will grow to nine figures, making it a considerable piece of the city’s overall budget. The FTA has raised concerns about the city’s willingness and ability to cover those growing costs.

The concerns will be amplified as Honolulu expends billions of dollars on other infrastructure improvements for its aging sewer and water systems.

Honolulu will try to show that it can keep the transportation subsidy under control so it doesn’t put any further burdens on the city’s budget.

Diversion of Preventive Maintenance Funds

The project’s most recent financial plan said HART intends to use $244 million in federal funds during rail construction, about 5 percent of the total cost. Those funds are what’s known as Section 5307 formula funds and are not to be confused with the $1.55 billion in New Starts funding HART is seeking.

The Section 5307 money could otherwise be used for a slew of things, one of which is “preventive maintenance.” That will take a back seat to construction for the next eight years, and that makes the FTA uneasy.

“As a general rule for the Financial Plan, Section 5307 funds are first applied to ongoing capital needs, with any surplus being transferred to preventive maintenance,” HART says in its plan.

Starting in Fiscal Year 2020, the 5307 funds will revert to their normal use, including preventive maintenance.

Dark blue represents Section 5307 funds used to build rail. Preventive maintenance is shown in gray.

Carlisle and Horner told Civil Beat that a response to the FTA would be prepared within weeks. Despite the concerns in the letter, FTA Administrator Peter Rogoff said he expects Honolulu to get the job done.

The project may hinge on whether he’s correct.