Adding Up The Real Cost Of Rail

Rick Hamada
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Wednesday - April 02, 2008

Whether or not you support or oppose the proposed Honolulu transit project, there is one question that must be answered. How are you going to pay for it? That’s it. This is what this whole issue boils down to. Where is the money going to come from to design, build and maintain the greatest public works project the city has ever seen?

It appears the cost of this project varies from $2.7 billion to estimates as high as $6 billion, depending on whom you talk to. I’ll let the accountants bring the fiduciary details to the conversation. According to recent reports, it is likely the widely publicized cost of $3.7 billion (which includes a $1 billion “buffer”) will increase. Regardless, the appropriate question remains. How are you going to pay for it?

What we are told is there is a big pot of federal money awaiting us. The collections from the GET surcharge will continue to be a primary source of revenue. The fare box will alleviate a bit of the operations expense once the train is up and running. At the very least, this is a tremendously optimistic position.

Here’s a reality check. As of this writing, there is no confirmation that Honolulu will receive a dollar of federal funding. The GET surcharge collection for 2007 was $152.3 million. The City and County has to kick back 10 percent of the surcharge to the state for “administrative costs.” Over a 10 year period (assuming there is no reduction in GET collections), the city will collect approximately $1.5 billion. The state will realize a profit of approximately $150 million.

Let’s factor in a one-time grant from the federal government of an unprecedented $500 million. That brings us to a 10-year financial statement of $1.85 billion to finance the rail transit project. The estimated cost of $3.7 billion less the $1.85 billion in financing leaves a balance of of $1.85 billion.

The City and County of Honolulu has two primary sources of revenue: General Excise Tax collections and real property tax collections. In order to fund the rail project, one of two things must happen. The state Legislature will have to consent to an increase in the General Excise Tax for Oahu, or the city will have to increase real property taxes. The city could float municipal bonds, but that money comes at a cost. Since those funds would have to be paid back with interest, that “revenue” would increase the overall cost of the project.

There are other financial considerations when contemplating the rail transit proposal. Honolulu’s debt service is approximately 20 percent. That means $2 of every $10 collected by the city goes directly to paying off accumulated debt. Operation expenses, especially employee pay raises and benefits, will continue to increase. Our city roads require repair and maintenance. A glance at the proposed city budget for FY2009 demonstrates a dramatic increase in spending.

Finally, the EPA demand of secondary wastewater upgrades still looms large with associated costs potentially exceeding $1 billion. The necessity of our sewer system repairs is legendary with equally legendary expense. Translation? The City and County of Honolulu has great financial demands without the anticipated expense of rail transit.

The question remains. How are we going to pay for rail?

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