Honolulu’s rail project has faced problems for years — including never-ending delays and its ever-ballooning multibillion-dollar price tag. But a new consequence seems to have emerged: The city recently saw its bond rating downgraded by one of the country’s major bond-rating agencies.
Speaking on Sunday with H. Hawaii Media radio host Johnny Miro, Grassroot Institute of Hawaii policy researcher Jonathan Helton explained that the rail project had almost $1 billion of debt as of last year.
However, the City Council has not been including that figure in its self-imposed “debt affordability limit,” which aims for no more than 20% of the city’s operating budget to be going toward interest payments on debt.
Helton said the city “was kind of artificially making that limit look lower than it was. But … the rating agencies were looking at [the rail] debt, too. And obviously, it’s gotten to a point where some of the rating agencies are saying, ‘You know, I think that there’s some extra risk here, and we’re going to have to downgrade your bonds.’”
Helton said the rail project should be a lesson for the city and all governments considering new large projects.
“In some cases, you have to make sure you have all of your money first before you build it,” he said. And then once you start it, he said, “Finish it as quickly as you can for as little money as you can and then stop.”
To hear the entire interview, click on the image below. A complete transcript follows.
4-23-23 Jonathan Helton with host Johnny Miro of H. Hawaii Media radio network
Johnny Miro: Happy Sunday morning to you, I’m Johnny Miro. It’s time for our public access programming here on our five Oahu radio stations on 101.1 FM, 101.5 FM, 97.1 FM, 96.7 FM and 107.5 FM.
All right, we’re going to be talking about the topic that’s been in the news lately: the start of the rail project. There’s projected start dates, and there’s a full in-effect date that’s been put out there by the Honolulu Authority for Rapid [Transportation].
And joining me to discuss this once again on this Sunday would be one of the great contributors to the Grassroot Institute. That would be policy researcher Jonathan Helton.
Good Sunday morning to you, Jonathan. Thanks for visiting us once again.
Jonathan Helton: Yeah, good morning as always. Happy to be on the show.
Miro: Yep. The Honolulu rail is back in the news as a lot of press conferences have been taking place lately. It’s supposed to start operating in July, at least partially, OK?
And there was an article in Civil Beat that said the director of the Honolulu Authority for Rapid [Transportation] was taken aback — taken by surprise — when she heard the mayor, Rick Blangiardi, say this publicly, that he wanted to start operations in July.
And she said she meant that she asked him to say Summer instead. So what do you think’s really going on? What’s going to happen, really?
Helton: You know, really there’s no telling. You know, first, you know, it was supposed to open 2020, and in 2021, then last year.
And then even, you know, even just a couple of months ago, they said, “Oh, it might open in June-ish,” right? And now it’s July.
So, you know, eventually, they’re going to get it right, and they’re going to set a date, and the rail will open. And so will it be July? I don’t know. I hope so. I think that, you know, I’m optimistic that this time they’re really going to be on schedule. But who knows, really?
Miro: Yeah, we’re talking the portion from Kapolei to Aloha Stadium. That portion right there, construction began in 2012, but it’s not slated to be complete until sometime in 2031. And it’s obviously already looking like it’s going to cost a little bit more than the original estimate, if not a lot more. The city will have to come up with a lot of money to build the rest of it.
Do we have any idea how much this ultimately might cost — right now projected at $10 billion or something — indeed, where the money’s supposed to be coming from?
Helton: Yes. Right now, the cost estimate’s somewhere between $10 and $13 billion. You know, it’s already — goodness — it’s already $7 billion over budget.
But where the money’s going to be coming from, you know, that’s really — that’s really an interesting question. So it’s got a couple of revenue sources.
So the first, I think everyone knows about, the GET surcharge, right? They adopted it back in 2005. They’re saying it’s going to expire in 2030 — we’ll see. We’ll see if that happens. If, you know, if lawmakers decide to keep it around to keep funding the rail when it does finally open.
But then you also have the TAT, which is the transient accommodation tax. It’s a tax on short-term rentals and hotels. So for this, the rail gets money from both the state and the city from this tax.
And then obviously there’s a little bit of federal money involved.
And finally — and I think a lot of people are concerned about this — there’s also debt.
So as of last year, the Honolulu Authority for Rapid [Transportation], HART, had almost $1 billion of debt.
And so, just to give some context of how this funding breaks down, I pulled up HART’s budget for this next year. So this is the proposed budget, and here’s what they’re looking at: So for both building — as a capital — and then operating, they’re asking for a budget of $680 million.
About $300 million of that would come from GET. The TAT, you know, is another hundred or so million dollars. Federal funding is another $250 million. And then there’s some other little accounts in there.
So, I mean, this is a lot of money we’re talking about. This is just for this year’s budget. And as you said, overall cost could be somewhere around $10 billion for the whole thing.
Miro: Jonathan Helton, policy researcher from Grassroot Institute, and he recently wrote an article for the Honolulu Civil Beat about how the city’s rail spending has affected the city’s bond rating.
Can you explain to our listeners why that happened and how that all works?
Helton: So this is very interesting. Back in February, Moody’s Investors Service, which is one of the United States’ major bond-rating agencies, they put out a press release saying that they had downgraded Honolulu’s bonds.
Now, that’s the first time this has happened, I think, since 1999, and it’s been a long time since they’ve downgraded the bonds. And so we did some research and said, “OK, well, why did this happen? And should the city have seen this coming?”
So it happened, as Moody said itself — I’ll read [to] you from the press release — they said that “the debt burden has recently been rising due to bonds issued for the construction of the rapid transit system.” And they said that a lot of cities that are the same size as Honolulu have less debt.
And so they said, you know, “We think that, you know, once the rail gets completed, they’re not going to have any new debt for it. So, you know, maybe the bond rating will change once that happens. But for now,” they said, “there’s a lot of debt here, and we’re going to downgrade your bonds.”
So, as to why that happened, there’s some history there. So, first, the city, back in 2006, they — the City Council created the “debt affordability limit,” which basically said they wanted to have a goal of paying no more than 20% of the operating budget for interest payments on debt.
So that would kind of be an indicator to the city that if they ever spent more than 20% of the budget on paying interest, you know, something would be wrong, they need to reevaluate. So that was the limit.
But then once the rail came around, in 2012, the city made the decision to not count all of the debt for the rail toward that limit. So they were kind of artificially making that limit look lower than it was because they weren’t counting the debt.
Now, for the city’s purposes, that made, you know, that made their financial situation look better. But for the rating agencies who are looking at all of the city’s debt — not just, you know, not just the debt they reported for their debt affordability ability limit — the rating agencies were looking at HART’s debt, too.
And obviously, it’s gotten to a point where some of the rating agencies are saying, “You know, I think that there’s some extra risk here, and we’re going to have to downgrade your bonds.” So that’s, I guess, that’s kind of the short story of it.
Miro: Yeah, but a lot of great detail in that short story that a lot of people probably didn’t know about.
So, Jonathan, what could the lower bond rating mean for Honolulu taxpayers — and is it really going, you know, really going from A1 to A2 really so bad?
Helton: Maybe, maybe not. But Honolulu’s bonds are still rated fairly highly, and the other major bond rating agency, Fitch, hasn’t changed the rating for the city.
So we’re going to have to wait and see whether or not this lower rating will translate into higher interest payments on any new debt the city might be looking to take out.
Right now, HART is looking to take out some additional bonds that are going to be paying off the current bonds they have. So they’re not looking at taking any additional debt to what they have.
So whether or not this bond rating is really going to hurt taxpayers — is really going to hurt the city — you know, that remains to be seen.
But I think the bigger question is, you know: Why are we even in this position where the bond rating is taking a hit because the city has taken out so much debt? And I think that’s the question that, really, city leaders will need to think about in the coming years.
Miro: OK. Jonathan, I know the rail is supposed to start collecting, you know, fares when it opens this summer. What extent will rail fares help pay for rail operations or even the city’s rail-related debt we’ve been talking about?
Helton: Right now, that’s unclear. I know that the city, you know, they’re planning to open — they are planning to give some free rides on the rail, I think, to get people interested. You know, certainly, that’s not going to make them any money.
But I can tell you what HART says. And I guess this would be probably the rosy version. This would be the optimistic version. HART is saying that by the time the rail opens — all right, 2030, 2032, whenever — when it’s fully complete, it’s going to collect — the rail and TheBus together anyway — will collect $186 million in fares, right.
So that would only recoup 36% of the operating costs. So that’s HART’s projection. That’s, really, that’s the optimistic projection — is that by the time this is completely finished, bus and rail together will only, you know, recover 35, 36% of their cost.
So, you know, that’s not super great. And until rail is completely built, you know, fewer people are going to be riding it. So, you can expect, you know, you can expect the amount of money that they take in to be much lower than that.
Miro: You just mentioned riding the rail — is anybody really going to ride the rail? What are the city’s projections for how many people will be riding it, and will those riders just be folks switching from TheBus or even from their cars?
Helton: I’ll tell you what HART’s saying, and take it with a grain of salt. They’re saying by the time it’s fully open, maybe 86,000, or 84,000, people a day are going to be riding it.
And that’s, that’s for the stop at the Civic Center. Last year in some of their plans, they said, “OK, maybe we’ll shorten it even further.” So 84,000 people a day, optimistic case.
By contrast, I looked up the numbers for TheBus, and around this time last year, about 110,000 people rode TheBus every day.
But I did find one statistic that I think is telling. So between 2002 and 2022 — that 20-year period — the number of people riding TheBus each month dropped about 50%.
So overall, fewer people are taking mass transit in Hawaii — and, you know, there’s all sorts of reasons for that. But, you know, I think that the suggestion that suddenly when the rail is built everyone’s going to be riding it, you know, I think that’s probably wishful thinking.
Miro: What I’m thinking is there’ll be a “new toy” effect, and then people will figure it out from there with this.
Miro: Is there talk about a fare yet, what it would be?
Helton: I haven’t, so I haven’t seen anything about the fare may be. It may be the same as TheBus, which right now would be $3. Unless, you know, if you’ve got your HOLO card, which I think they’re planning to allow people to use the HOLO card. Although I don’t know if the cost will change, since now you have TheBus and the rail. So we’ll just have to, I guess, wait and see.
Miro: All right. Jonathan Helton, policy researcher from Grassroot Institute. A lot of great research over there, so you’ll want to stop by grassrootinstitute.org.
Jonathan, how likely is it that the rail is going to have an impact on traffic — which was the whole idea for building it in the first place?
Helton: I don’t think it’s going to have a major impact just because it’s not going to be as long as they originally thought.
And so — which, you know, that’s probably good, that’s going to save money — but it won’t have the impact on traffic.
And then, you know, you have to think about telework. With so many people teleworking, less people are commuting downtown. There’s less need for, you know, for public transit in general, apparently, or at least that’s what the numbers say — fewer people are using it. So I don’t know that the impact on traffic is really going to be all that big at this point.
Miro: Yeah, that’s a good point. So going forward, is there anything that the city can do to minimize the cost of the rail?
Helton: That’s the million-dollar question — or I guess the $10 billion question — and I wish I had something. You know, the city tried a public-private partnership; that didn’t really work well with the rail.
I guess really the No. 1 thing I would say is don’t make it worse — which at this point, you know, I guess that’s the No. 1 thing we can hope for.
And then, as far as building the rest of it, I don’t know if there needs to be some additional quality assurance because for the current portion that they’ve already built, I know that they’ve been having to go back and fill some cracks in, and that’s been what’s delaying them, for I think the past year or so.
And so for — as they continue to build it — you know, really they need to make sure that they’re building it so it’s not going to, you know, it’s not going to have, it’s not going to need repairs in just a couple of years. And so, you know, that might help lower costs.
But really, finish it as quickly as you can for as little money as you can and then stop, I guess would be the overall thing.
Miro: Yeah, ’cause the maintenance — that’s what a lot of people are asking questions about, the maintenance.
What about other strategies, you know, to reduce the city’s overall debt?
Helton: Yeah, so circling around back to that — the city’s overall debt, you know, HART has about a billion dollars of debt. Last year, the city was close to $7 billion in debt. So, it’s pretty significant.
So a couple things that they can do. No. 1, they can try to prepay the debt, so pay it down in advance, and that can reduce your interest payment in the future. So, you know, that does result in some future savings.
For infrastructure, they can try to use some, you know, pay-as-you-go approach. So instead of taking out debt to build infrastructure, if they can just pay for it, try to pay for it every year, that reduces your interest payment, again, because you don’t have to take out the debt.
And, you know, overall, big thing: The city needs to take the rail as a lesson. And looking at, you know, any other big projects that might be in consideration.
Now I know with the proposed Aloha Stadium —I know that’s a state issue — but the state needs to take a lesson from the rail. They need to make sure if we build the stadium, that they don’t build it in a manner that racks up a lot of debt for the city again, looking to build it as quickly and as inexpensively as possible. And I’m, you know, I know the plans for the stadium are all up in the air. We, you know, we’ll see what happens there.
But for both city and state, I think that’s the lesson. If you’re, you know, you need to be wary of building these big projects. And if you do build them, you know, you need to have a really good plan in place.
Miro: All right. Finally, Jonathan, on this Sunday, is there anything else that you’d like to add to this?
Helton: I guess that’s really the main point is, you know, from the quote from the movie, “If you build it, they will come.” Well, in some cases, you have to make sure you have all of your money first before you build it.
And for any big project, that might need to be your No. 1 goal is trying to make a good plan, trying to make sure that you can actually afford it, and then building it. So I guess that’s what I leave you with.
Miro: All right, how can they find your work and the rest of your team’s great work, Jonathan?
Helton: Absolutely. Go to Grassroot Institute — and that’s grassroot with no “s” — institute.org. We’ve got all sorts of great work.
I, just this week, I — we — published a policy brief on property taxes and how those could be lowered. I know that’s been a big issue. We’ve got a lot of other great research that should be coming out in the next couple months.
Miro: Happy you folks are busy. Seeing a lot of it utilized in media around town these days.
So thanks for once again chiming in and joining us for the discussion. Have a great Sunday, and we’ll talk to you again soon, Jonathan.
Helton: Yes, you too. I appreciate it. And have a good day.