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Honolulu City Council leaders have hashed out a plan to cover the city’s $44 million share of rail costs next year, with a budget maneuver they say will spare Oahu from millions of dollars in service cuts and appease the transit project’s federal partners.

Trevor Ozawa, the council’s new budget chairman, proposes putting the city share, which represents about two years of rail administrative costs, in the capital budget.

Typically, that budget, which handles rail construction costs, is funded by rail’s two longtime sources of revenue: state and federal tax dollars.  But the city’s share would be backed by city operating dollars, Ozawa said Tuesday during a break in his committee’s special meeting.

Ultimately, Ozawa and other city leaders say they’re optimistic they won’t actually have to float the bonds to pay that $44 million share. That’s because HART, which directly oversees rail, has said it doesn’t need those dollars next year.

The whole effort to squeeze $44 million in the budget comes after the Federal Transit Administration required the city to cover those rail administrative costs – to put more “skin in the game” for the project.

“We think that the FTA is probably going to look at it favorably,” HART Chief Financial Officer Robert Yu told the budget committee of its approach Monday.

Rail spending has become a political hot potato as its costs have skyrocketed, with the state’s elected leaders looking to their counterparts at the city to bear some of the brunt of the added costs.

In March, Honolulu Mayor Kirk Caldwell proposed a similar approach as Ozawa’s. The mayor wanted to include the $44 million in the city’s capital budget and then avoid floating bonds since HART wouldn’t need the cash.

Caldwell’s budget and fiscal services director, Nelson Koyanagi, likened the move to taking out a line of credit but then not using it. It wasn’t clear at the time whether the FTA would accept the move.

Overall, the city must cover a total of $215 million in rail administrative costs until construction wraps under the requirements set by their state and federal partners. While HART doesn’t need its share for next year, it will likely need the money in subsequent years.

There’s a key detail to Ozawa’s plan to make it work when HART will actually need the cash. The rail agency overhauled its budgets this year, switching $17 million in administrative costs over to capital costs, Yu testified Monday. That $17 million represented more than 70 percent of the operating budget, he added.

The shift is a big departure from how HART budgeted its costs in prior years. Yu and other HART officials didn’t specify which costs were switched over.

Ozawa and other city officials say the switch will dramatically ease the burden of what the city has to cover in the years to come.

If those costs are labeled capital expenses, then rail’s state general excise tax and transient accommodations tax revenues can cover them instead of city tax dollars. It greatly reduces the city’s share of the load.

“This is a significant change of course,” said Natalie Iwasa, a community advocate who’s challenging Ozawa for his council seat this year. She was the item’s lone testifier on Monday. “It seems like a shell game to me … How is this going to work?”

Yu said the change is allowed under generally accepted accounting principles.

Previously, members of the council’s new 5-member majority bloc, including Chairman Ernie Martin, balked at Caldwell’s similar idea for using the city’s capital budget to pay for what they considered operational costs.

But Ozawa said using HART’s capital budget makes sense. The spending will be more transparent there, instead of getting lumped in with hundreds of millions of dollars in city projects, he said.

“We don’t want that to have to be floated — any amount of money. And therefore, each of us has a responsibility and added skin in the game to make sure that HART does not have to ever float those” (bonds), Ozawa said.

Caldwell has issued a statement saying he supports the plan as long as the FTA does. The budget strategy now goes to the full council to consider for final passage.

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