The cost of borrowing money to finance the Honolulu rail project is climbing despite the injection of nearly $1.2 billion in additional cash from last year’s controversial statewide hotel room tax increase, according to new financial data for the project.
State lawmakers last year predicted that increasing the hotel room tax for 13 years would reduce the cost of borrowing for rail because it would pump more money into the rail project starting this year. The idea was the extra cash would reduce the need to borrow during construction, which would translate into lower interest costs and fees.
But according to a new report from the Honolulu Authority for Rapid Transportation, borrowing costs for rail have actually increased by $42 million, to a total of $897 million. That figure was included in a recently released draft “recovery plan” for the rail project that was circulating among city and state lawmakers last week.
That might not seem like a huge increase given the overall $9 billion price tag for the rail project, but House Finance Chairwoman Sylvia Luke said she wants to discuss the issue with HART executives.
Luke said she met with HART’s chief financial officer early last month and was told the rail financing costs were still projected to be about $850 million, “so I don’t know what changed between then and now which increases the financing costs by $40 million.”
“The whole reason in giving them additional funds upfront was to reduce that financing costs and debt in the future, so we need for them to give us an explanation,” she said.
HART spokesman Bill Brennan said in a written statement Thursday that the “biggest driving force” behind the increased borrowing costs is HART now anticipates the federal government will spread its subsidy payments in support of the Honolulu rail project over a longer period.
The Federal Transit Administration committed to provide $1.55 billion in federal funding to help Honolulu build the rail line, but has withheld nearly $744 million of that money until HART develops an acceptable recovery plan for the troubled project.
Wrong prediction
HART predicted last year that the FTA would release $229 million of that federal funding in June 2018, and the rest of the money would be delivered to the city in two additional increments of more than $200 million next year and the following year.
But the FTA hasn’t released that money, and HART’s new draft recovery plan projects the FTA will release the federal rail subsidies in annual $100 million increments starting this year and ending with a $144 million payment in fiscal year 2025.
Brennan said that new schedule of federal payments is conservative “in lieu of knowing what the actuals will be.” But if the federal money won’t be delivered to Honolulu until later, HART will need to borrow more money to cover its near-term construction costs.
“Should FTA come back to us with larger draws, then this could be reflected in the final plan and would reduce the total borrowing amount,” Brennan said in his statement.
Over budget
The 20-mile Honolulu rail line is vastly over budget, and state lawmakers last year approved a $2.4 billion financial bailout for the rail project, marking the second time the state had to intervene to shore up rail’s finances.
Last year’s rail bailout angered many neighbor island residents because lawmakers decided to increase the statewide hotel room tax to 10.25 percent from 9.25 percent from 2018 to 2030 as one component of the bailout package. That tax increase is expected to provide an extra $1.2 billion for the rail project.
That hotel tax increase caused a stir politically in part because it applied to neighbor island hotels and vacation rentals, and was seen by neighbor island residents as a move to force them to subsidize what many believe is a mismanaged Honolulu rail project.
In part because of that perception, six neighbor island senators and seven neighbor island House members voted against the rail bailout bill last year, including Senate Transportation and Energy Committee Chairwoman Lorraine Inouye, Senate Majority Leader J. Kalani English and then-House Majority Leader Cindy Evans.
Luke and other lawmakers argued in favor of the hotel room tax increase because it would provide additional funding to the rail project more quickly than other options such as extending the excise tax surcharge on Oahu for additional years. That quick infusion of cash from the hotel tax was supposed to reduce borrowing costs.
Brennan said in his written statement that while borrowing costs have continued to climb for the rail project, there would have been an even greater increase in those financing costs if lawmakers had simply extended the excise tax surcharge for additional years.
