GAO-01-174R South Boston Piers Finance Plan

United States General Accounting Office

Washington, DC 20548

November 9, 2000

The Honorable Richard C. Shelby

Chairman

The Honorable Frank Lautenberg

Ranking Minority Member

Subcommittee on Transportation

Committee on Appropriations

United States Senate

The Honorable Frank R. Wolf

Chairman

The Honorable Martin Sabo

Ranking Minority Member

Subcommittee on Transportation and Related Agencies

Committee on Appropriations

House of Representatives

Subject: Mass Transit: Review of the South Boston Piers Transitway Finance Plan

The Massachusetts Bay Transportation Authority (MBTA) is constructing a 1.5-mile

underground transitway to connect its existing transit system with the South Boston

Piers area, which is undergoing significant economic development. The South

Boston Piers Transitway project is to be built in two phases. The first phase is a 1-

mile, three-station bus tunnel between South Station and Boston’s World Trade

Center. In November 1994, the Federal Transit Administration (FTA) entered into a

full funding grant agreement with MBTA,1 under which the federal government would

provide $331 million (80 percent) of the projected $413 million total cost for the

project’s first phase, which was to be completed in December 2000. To date, MBTA

has received almost $242 million of that amount. However, this phase has

experienced significant cost increases and schedule delays; currently, the project is 3

years behind schedule and its estimated total cost has risen to $601 million.

Concern over the project’s increased cost led to a provision in the conference report

accompanying the Department of Transportation and Related Agencies

Appropriations Act for fiscal year 2000 that made the funds for the project contingent

on MBTA’s completion of a finance plan. This plan was to set forth the full cost of

completing the project and MBTA’s strategy for paying this cost, among other things.

1

The Federal Transit Administration’s New Starts program provides funds for new transit systems and extensions

to existing systems. Full funding grant agreements set the terms and conditions for federal participation in these

projects.
2 GAO-01-174R South Boston Piers Finance Plan

The report also directed GAO and the Department of Transportation’s Inspector

General to conduct independent analyses of the plan and report to the House and

Senate Committees on Appropriations.2Accordingly, this report provides

information on (1) the financing of the project, (2) the remaining risks to the project’s

cost and schedule, and (3) MBTA’s ability to operate and finance its transit system.

On February 25, 2000, MBTA submitted a finance plan to FTA to document its ability

to fund the project while continuing to operate and maintain its existing

infrastructure. In June 2000, we postponed our ongoing review of the finance plan

because of concerns that delays and cost increases in the Boston Central

Artery/Tunnel (CA/T) project could affect MBTA’s costs under three contracts that it

and the Massachusetts Highway Department share for the design and construction of

segments of the South Boston Piers Transitway and the CA/T projects. On August 17,

2000, MBTA and the CA/T project completed a joint analysis of the finance plans for

the South Boston Transitway and CA/T and concluded that each plan’s projections

included only that project’s fair share of costs on the joint contracts. Therefore, we

resumed our analysis of MBTA’s finance plan.

Results in Brief

MBTA’s South Boston Piers Transitway finance plan demonstrates that the agency

has the financial capacity to pay the current estimated cost of $601 million to

complete the project. MBTA plans to rely on federal funds, specifically $331 million

in New Starts funds (55 percent) and $150 million in transit formula funds (25

percent), 3

to finance 80 percent of the project’s costs. The New Starts funds remain

at the same level as approved in the original full funding grant agreement. In

addition, $120 million in state and/or MBTA bond funds will be used to cover the

remaining 20 percent of total project costs. To cover additional cost increases that

might occur, MBTA has established a $50 million capital reserve bond fund.

We found, largely through the work of FTA’s project management oversight

contractor,4

that the transitway’s finance plan contains reasonable cost and schedule

projections. There are, however, two issues that could jeopardize the project’s

schedule and cost. First, the contractor believes that subsurface problems

encountered while stabilizing the earth under the Russia Wharf section of the project

could cause a schedule delay. Second, the estimated cost to purchase the project’s

buses has increased by $10 million because of market conditions and the vehicles’

design. MBTA is still considering a number of options to offset this increase. Despite

these two concerns, the contractor believes the project’s expected opening date of

December 2003 is realistic and MBTA’s $50 million capital reserve fund should be

able to cover any additional cost increases.

2

The conference report accompanying the Department of Transportation and Related Agencies Appropriations Act

for fiscal year 2001 contains a similar provision with respect to the project’s 2001 funding.

3

Capital funds are also made available for urbanized areas on a formula rather than a project-specific basis.

4

A project management oversight contractor serves as an extension of FTA’s technical staff in assessing grantees’

project management and technical capacity and capability to successfully implement major capital projects.
3 GAO-01-174R South Boston Piers Finance Plan

Finally, we note that while MBTA has demonstrated that it has the financial capacity

to complete the project, it has not yet clearly demonstrated to FTA’s financial

management oversight contractor that funding the transitway project will not impair

its ability to operate and maintain its overall transit system.

Background

MBTA believes that the South Boston Piers Transitway project is the missing link in

the chain of development along the waterfront in the South Boston Piers area. City

and state officials expect that more than 13 million square feet of new development,

as well as the upgrading and conversion of existing development to more intense use,

will occur in the area within the next 15 years. Daily ridership for the transitway is

expected to range from 22,000 to 34,000 in 2010.

The first phase of the South Boston Piers Transitway project is now expected to cost

$601 million—a $188 million increase (46 percent) over the $413 million projected in

the 1994 full funding grant agreement. The project management oversight contractor,

FTA, and MBTA attribute most of the project’s cost increase to schedule delays and

the fact that the original cost estimate was based on an early project design.

Construction delays were due, in part, to technical interface problems on three joint

construction contracts with the CA/T project, complications with relocating utilities,

and site conditions. According to MBTA, the joint construction contracts were

between 25- and 72-percent complete on September 25, 2000. Currently, most major

contracts have been awarded, construction is under way, and the transitway is

expected to open for service in December 2003, 3 years later than originally

projected. MBTA does not anticipate any circumstances that would further alter

either the revised cost estimate or the completion date.

On July 1, 2000, funding for MBTA was modified by the state legislation described in

its agencywide finance plan. Previously, MBTA had received state subsidies that

covered all costs in excess of available revenue. Under the new funding structure,

commonly referred to as “forward funding,” MBTA receives a portion of the revenues

from the state retail sales tax as a dedicated source of funds. MBTA will continue to

fund its operating and capital needs from fare revenues, local assessments, and

federal assistance. However, under the “forward funding” structure, bonds issued by

MBTA after July 1, 2000, will no longer be guaranteed by the Commonwealth of

Massachusetts. The legislative intent is that MBTA become an independent

enterprise with its own sources of funds for operations and capital investment.

MBTA Has Sufficient Capacity to Finance Construction of the Transitway

MBTA’s South Boston Piers Transitway finance plan demonstrates that it has the

financial capacity to pay the estimated $601 million cost to complete the project.

Under the plan, MBTA will depend on federal funds to finance 80 percent of the

project. While the amount of funds from the New Starts program stays at the

$331 million (55 percent) approved in the original full funding grant agreement, the

project will also use $150 million (25 percent) in transit funds it expects to receive

from the Formula Grant Program to finance the project. FTA must amend the full

funding grant agreement to reflect MBTA’s planned use of formula funds. To finance

the remaining 20 percent of the project’s costs, MBTA plans to use $120 million in
4 GAO-01-174R South Boston Piers Finance Plan

state and/or MBTA bond funds. Figure 1 shows MBTA’s planned financing structure

for the transitway project.

Figure 1: Funding Sources for the South Boston Piers Transitway

55% • New Starts funds

25% ($331) •

Formula funds

($150)

•20%

State and/or MBTA

($120)

Federal

Nonfederal

Dollars in millions

Source: GAO’s presentation of data provided by MBTA.

To cover any additional cost increases that might occur, MBTA established a

$50 million capital reserve bond fund. FTA requested the reserve to address the risks

associated with the remaining construction. The project management oversight

contractor has concluded that MBTA’s estimate of $601 million to complete the

project is reasonable and that MBTA is demonstrating a strong financial commitment

to complete the project with the addition of the $50 million capital reserve fund.

Moreover, a separate review of the South Boston Piers Transitway finance plan by

FTA’s financial management oversight contractor also concluded that MBTA has the

financial capacity to complete the project.5

Two Issues Could Affect the Transitway’s Cost and Schedule

Largely through the work of FTA’s project management oversight contractor, we

found that MBTA’s finance plan for the South Boston Piers Transitway project

contains reasonable cost projections. However, the project management oversight

contractor noted that two issues could delay the project and/or increase costs.

Nevertheless, MBTA’s $50 million capital reserve fund should be able to cover

additional cost increases.

5

FTA engages these contractors to determine whether a grantee has the financial capacity to effectively support a

major capital project.
5 GAO-01-174R South Boston Piers Finance Plan

According to FTA’s project management oversight contractor, construction at the

Russia Wharf area of the project could be delayed because of problems with

stabilizing the ground under historic buildings. This stabilization requires two

procedures—soil freezing (a technique to inhibit the flow of water and soil during

excavation and tunneling activities) and mining the soil by the New Austrian

Tunneling Method (a technique to provide structural support for a tunnel by spraying

layers of concrete on its interior surface during excavation). The contractor believes

that there is a high probability that subsurface problems could delay this critical work

and noted that if MBTA encounters a significant problem during these stabilization

procedures, the project’s completion could be delayed by more than 2 months.

According to MBTA, however, it is premature at this time to assume a schedule delay

in the project.

The contractor also found that complications in developing a bus to satisfy the

project’s requirements could affect the project’s cost. The type of vehicle MBTA

requires for the project is not an “off-the-shelf” bus and is not currently available in

the United States.6

MBTA is negotiating with a company to provide them, but the

$1.6 million cost per bus is substantially higher than the $1.1 million cost originally

included in the project’s budget. According to MBTA, the primary reasons for the

higher cost are the vehicle’s unique configuration and existing market conditions.

MBTA is negotiating with the company to lower the cost of the buses, but it estimates

that the project’s budget for them has a $10 million shortfall. To offset this shortfall,

MBTA is still considering a number of options, including potential savings in the

vehicle maintenance facility. MBTA is confident that a significant portion of the

shortfall can be eliminated. On August 17, 2000, MBTA’s Board of Directors approved

the vehicle contract, subject to, among other things, FTA’s release of the transitway

funds for fiscal year 1999. Although FTA subsequently released these funds to

MBTA, as of November 8, 2000, MBTA had not awarded the vehicle contract.

MBTA Has Not Clearly Demonstrated It Can Maintain Its Existing Transit

System

While MBTA has shown that it has the financial capacity to complete the South

Boston Piers Transitway project, it has yet to clearly demonstrate that funding this

project will not impair its ability to maintain its existing mass transit system.7

A

recent financial capacity report by FTA’s financial management oversight contractor

raised concerns about MBTA’s overall capital program. Continued oversight by FTA

is essential to help ensure that MBTA makes appropriate resources available to its

currently existing system, notwithstanding the transitway project.

In May 2000, MBTA published an agencywide finance plan that reflected the changing

needs of its transit system. These changing needs occurred because of, among other

things, “forward funding” provisions. FTA’s financial management oversight

6

MBTA has proposed a dual-mode, hybrid diesel-electric, 60-foot articulated (i.e., jointed) bus for the transitway

project.

7

Under the Transportation Equity Act for the 21st Century, in evaluating proposed projects for full funding grant

agreements, FTA requires sufficient local resources to operate the overall proposed transit system without

requiring a reduction in existing mass transportation services.
6 GAO-01-174R South Boston Piers Finance Plan

contractor performed a financial capacity assessment of the finance plan,8which

focused on the reasonableness of the plan’s underlying financial assumptions, and

developed models to test the sensitivity of those assumptions. In November 2000, the

contractor’s financial capacity assessment report concluded that MBTA continues to

maintain the financial capacity to complete the transitway project.

This report, however, raised several concerns about MBTA’s overall capital program.

According to the contractor, for example, MBTA has not clearly identified the source

of $130 million in funds for commuter rail replacement and rehabilitation

requirements for its overall system. In addition, MBTA’s fleet management plans for

its entire system have not been updated to reflect its current fleet replacement and

maintenance plans. Finally, MBTA reduced the amount of capital funds programmed

for the overall maintenance of its core facilities. According to the contractor, MBTA’s

financial risks and challenges are caused by many developments, including “forward

funding” and other commitments associated with the CA/T project. MBTA told the

contractor that the uncertainties created by “forward funding” and the dynamic

nature of its operating environment necessitate capital and finance plans that are

flexible and poised to react to changes in the environment. MBTA also told the

contractor that unfunded projects would be continually reassessed in the context of

funding availability. The contractor recommended that FTA continue to monitor

MBTA’s capital program to ensure that sufficient resources are made available to

fund an updated fleet management plan and maintain the agency’s core facilities.

Agency Comments

We provided MBTA and FTA with a draft of this report for review and comment. FTA

provided a copy to its financial management oversight contractor. While generally

agreeing with our report, the contractor provided clarifications about its assessment

of MBTA’s agencywide finance plan. The contractor commented that funding the

South Boston Piers Transitway project is not the primary challenge for MBTA and

that it has the financial capacity to complete this project. However, the contractor

noted that MBTA’s fiscal risks and challenges are caused by a multitude of

developments, primarily the new “forward funding” initiative and complications

created by MBTA’s commitments with the CA/T. The contractor also said that the

challenges it cited in its financial capacity review addressed an MBTA capital plan

that includes projects that will probably change because of future developments. The

contractor added that MBTA has never operated in the environment created by the

new “forward funding” legislation and that this environment makes it difficult for

MBTA to document a plan that clearly demonstrates financial capacity without some

level of risk. According to the contractor, this is why FTA’s close monitoring of the

project is critical.

In commenting on our draft report, MBTA stated that reinvestment in its transit

system will continue to be a high priority. Over the next 5 years, for example, MBTA

expects to spend, on average, $350 million per year on core infrastructure, which is

8

A financial management oversight contractor performs these reviews to assess a grantee’s financial capability to

meet the full funding grant agreement obligations on major capital projects and to help ensure that existing transit

service would not be interrupted owing to the grantee’s lack of financial capacity.
7 GAO-01-174R South Boston Piers Finance Plan

about two-thirds of its total capital program. MBTA also provided us with technical

comments, which we incorporated as appropriate.

Scope and Methodology

To perform our analysis for this report, we reviewed MBTA’s South Boston Piers

Transitway and agencywide finance plans, the financial management contractor’s

financial capacity assessment report, several project management oversight

contractor reports, and relevant supporting documentation. We interviewed

appropriate MBTA officials and the financial management oversight contractor to

discuss the cost and financing assumptions underlying the plan. To obtain

information about the project’s cost and status, we met with MBTA’s senior

management and FTA’s project management oversight contractor. We also met with

FTA headquarters and regional officials to obtain specific information on this project.

We performed out work from April through November 2000 in accordance with

generally accepted government auditing standards.

We are sending copies of this report to the Honorable Rodney E. Slater, Secretary of

Transportation; the Honorable Nuria Fernandez, Acting Administrator, Federal

Transit Administration; The Honorable Jacob J. Lew, Director, Office of Management

and Budget; Robert H. Prince, General Manager, Massachusetts Bay Transportation

Authority; and other interested parties.

Key contributors to this report were Jack Bagnulo, Helen Desaulniers, Kirk Kiester,

and Ron Stouffer. If you have questions about this report, please call me at (202) 512-

2834.

Phyllis F. Scheinberg

Director

Physical Infrastructure

(348258)
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