Financial Risks Loom Over The Honolulu Rail Project

The Honolulu rail project is facing expensive lawsuits, some still-uncertain future construction costs and possibly a surprisingly hefty early change order in a huge new contract.

There has been little public discussion so far about the emerging financial challenges for the Honolulu Authority for Rapid Transportation, but some warning signs have been flagged in recent reports from a federal consultant who monitors the project for the Federal Transit Administration.

That consultant also noted a slowdown last fiscal year in the state tax collections that provide most of the funding for rail construction, although HART CEO Lori Kahikina said collections have recovered in recent months.

Kahikina declined a request for an interview about HART’s fiscal outlook, but said in a written statement that HART can complete the final segment of the rail line from East Kapolei to Kakaʻako within the current budget.

The rail authority “continuously monitors project funding levels to confirm alignment with its financial plan to complete construction,” she wrote.

Rail has already received three financial bailouts — in 2015, 2017 and 2021 — as the cost of the project ballooned from $5.2 billion in 2011 to more than $10 billion today. Construction is running more than a decade behind the original schedule.

In an effort to cut costs, the city eliminated two stations and shortened the rail line in 2022, ending the route in Kakaʻako instead of continuing on to Ala Moana Center as originally planned. HART projects the ridership for the shortened line will be 30% less than was projected for the full run to Ala Moana.

HART also indefinitely deferred construction of a 1,600-stall parking garage at Pearl Highlands to save an estimated $330 million, and last year the rail authority scrambled again to cut costs to free up money for a huge new contract to build 3 miles of elevated guideway and six rail stations through the city center.

Some of the latest uncertainty about rail’s finances today is focused on that last major construction contract because there are signs the cost of that contract may grow.

Costs Deferred Until Later

There was only one bidder for the city center contract — Los Angeles-based construction giant Tutor Perini Corp. — which submitted a proposal last year to do the job for nearly $1.66 billion.

That is the largest single rail contract to date, but records released by HART to Honolulu Civil Beat earlier this year show Tutor initially proposed a price tag of $1.977 billion to build the last 3 miles of elevated guideway and six rail stations.

HART bargained that price down to $1.659 billion, but a summary of those negotiations makes it clear that some costs under that contract have not been nailed down yet.

In particular, a document HART released to Civil Beat earlier this year shows HART and Tutor agreed to revisit the big-ticket issue of the cost of the six city center rail stations later. Those stations will be bid out to subcontractors after Tutor has completed the designs for each one.

Tutor’s original bid proposed a contract price of $90 million per station, according to HART’s most recent progress report on the project, which works out to a total of $540 million for the six stations.

But in the negotiations that followed, HART and Tutor agreed to reduce the contract price of the six rail stations to $300 million — or just $60 million per station — and to revisit the issue later.

The “Summary of Negotiations” document released by HART explains the city center contract with Tutor will be structured so that “when the final design submittal for a station is completed, the Design-Builder shall submit a proposal for a fixed priced of the Stations Construction Work applicable to that station (a ‘Station Price Proposal’).”

The document summarizing the negotiations continues: “Upon completion of final design submittals for all stations, the total amount of all of the Design-Builder’s Station Price proposals shall be summed (the ‘Revised Stations Price’) and HART shall issue” an order for an “adjustment” to the contract price.

In other words, the $300 million listed for the station costs in the Tutor contract is essentially a placeholder that both sides expect to revisit later.

Kahikina said in her written statement that the station prices in the contract were based on the station costs in the earlier two rail segments, “and Tutor in partnership agreed to price the station elements as the designs developed.”

“At the time of bid, Tutor was not able to receive accurate pricing from potential subcontractors,” Kahikina wrote. “HART will continue to participate in the design and pricing process to ensure a fair and reasonable price for the stations.”

Tutor is still in the earlier stages of the design work for the stations, and Hill International said in its most recent report to the FTA that each station is being studied for “efficiencies and cost savings ideas.”

A ‘Claims-Oriented’ Contractor

Another strategy HART used last year to help contain the sticker price of the Tutor contract was to have HART share some of the risk of inflation instead of requiring Tutor to build that risk into the company’s contract price.

For example, Kahikina explained last year that if the cost of concrete or steel dramatically increases, HART may be required to chip in to help cover that expense. That could present problems during construction over the next five years if tariffs or other factors cause increases in the cost of materials.

Kahikina said in her statement Wednesday that Tutor can request price adjustments due to “unforeseeable cost escalation for a predefined list of materials,” but to date no adjustments have been requested.

Meanwhile, there are some indications that any cost-cutting negotiations with Tutor may become a challenge for the Hawaiʻi rail executives.

HART Project Director Vance Tsuda told the HART board at a public meeting on July 18 that “Tutor has a reputation throughout the industry in terms of how they operate. You know, they’re very claims-oriented.”

Tsuda said rail executives from other cities approached HART officials at a conference earlier this year to offer some “lessons learned, or what worked for them in terms of managing Tutor, those kind of things.”

Vance said the executives from other cities, including Los Angeles, wanted “to share how you can manage or potentially manage Tutor, and kind of keep them in line. Hopefully.”

HART Board Chair Colleen Hanabusa gave a dry laugh at that remark and opined: “That does not portend well.”

In fact, a Hill International report to the FTA dated July 11 suggested Tutor is already seeking a sizable $48 million change order before major construction has even started. The Hill report indicated that change order had increased the value of Tutor’s contract from the original $1.659 billion to $1.707 billion.

But Kahikina said in her written statement “HART has not issued any change orders and it has not received any change order requests from Tutor.”

Kevin Whitton, vice president of Pang Communications, provided a written statement Thursday explaining the listing for the $48 million change order was a “transcription error,” and was deleted from a subsequent Hill International report filed with the FTA on Aug. 11.

Joe Kent, executive vice president of Grassroot Institute of Hawaiʻi, said he does not believe the community at large is paying much attention to rail at the moment, and that worries him. Grassroot Institute has been a critic of the Honolulu rail project for years.

“I think that the opportunity to stop the rail has long passed and and now everyone’s just hoping for the best, but that’s usually when the worst comes on any boondoggle project,” he said.

“It’s the end of the project where contractors can hold taxpayers over a barrel almost indefinitely, and the policy makers really need to keep a close watch.”

Lingering Litigation

HART has also been trying to settle two major lawsuits over the rail project, including one filed by rail contractor Hitachi Rail Honolulu JV last December that originally demanded $324 million in compensation for years of rail project delays.

Hitachi is responsible for installing, operating and maintaining the control and power systems and other functions for the 18.9-mile Skyline rail line, and deadlines were set for each task that was required.

The lawsuit alleges Hitachi could not do the necessary work until other contractors built the elevated guideway, stations and track, which fell far behind schedule. The rail line was originally supposed to be open to the public by 2020, but the latest estimates are that construction won’t be completed until 2030.

Hitachi’s predecessor, Ansaldo Honolulu JV, settled similar late claims with the city in 2019 for $160 million, which covered more than 2,000 days of delays in earlier phases of the rail project.

Hitachi later bought out Ansaldo, and lawyers for Hitachi said in the new lawsuit last year the city still has not paid out “a significant amount” of the $160 million it owed under the previous settlement.

Hill International, the consultant for FTA, said in its June report the Hitachi claim now is “in excess of $120 million,” but HART Director of Project Controls Corey Ellis told board members in June the financial risk posed by the Hitachi claim is already accounted for in HART’s project budget.

Hill International has been reporting a tentative agreement to settle the lawsuit “appears to be stalled,” and Tsuda told members of the board on June 20 that Hitachi still needs to provide justification for a portion of its claim before the case could settle.

A Circuit Court judge in August dismissed the Hitachi lawsuit after lawyers for HART and the city alleged Hitachi failed to follow a claims resolution process that is required in Hitachi’s contract. But Hitachi has told the court it plans to resume the litigation, according to HART’s Monthly Progress Report.

The rail authority is also in settlement negotiations over a separate lawsuit filed by Howard Hughes Inc. over land HART is trying to acquire for the project.

The Dallas-based developer Howard Hughes wanted compensation totaling more than $200 million for 2 acres of land between Cooke and Kamakee streets, land that HART wants to acquire for future extensions of the rail line beyond the current rail terminus near South and Halekauwila streets in Kakaʻako.

The HART board voted to authorize a settlement in that dispute in March, but that case is still pending in Circuit Court. A settlement conference for that lawsuit is scheduled for next month.

Federal Funding And Tax Revenues

Looming in the background of all of those issues are concerns about federal budget cuts imposed on rail projects by the Trump administration, and some alarming larger economic trends.

The Federal Transit Administration committed $1.55 billion to the Honolulu rail project in 2012, and HART has already received all but about $369 million of that money.

But the Trump administration last month announced it was imposing deep cuts to California’s high-speed rail project, and Republican U.S. Sen. Joni Ernst of Iowa singled out the Honolulu project for sharp criticism this summer in a report she issued on so-called rail “boondoggles.”

That report was the subject of media coverage in the New York Post and other outlets, and HART board member Lisa Baker asked at a board meeting last month if HART’s remaining federal funding is secure.

Kahikina replied that “FTA assures us that we are good.” She said in her written statement this week that HART expects to draw down the last of the federal funding for the Honolulu project in the fall of 2027.

As for HART’s main source of cash flow — which is made up of revenue from the state excise tax surcharge for rail and hotel room taxes — Hill International noted in its most recent reports that those revenues have been running slightly behind HART’s projections.

Kahikina told the board last month the tax collections have bounced back somewhat, and more recent data shows revenue is running slightly above HART’s projections.