oversight

Transportation Infrastructure: Progress On and Challenges to Central Artery/Tunnel Project's Costs and Financing

Published by the Government Accountability Office on 1997-07-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to the Chairman, Subcommittee
                  on Transportation and Related Agencies,
                  Committee on Appropriations, House of
                  Representatives

July 1997
                  TRANSPORTATION
                  INFRASTRUCTURE
                  Progress on and
                  Challenges to Central
                  Artery/Tunnel Project’s
                  Costs and Financing




GAO/RCED-97-170
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community, and
                   Economic Development Division

                   B-275370

                   July 17, 1997

                   The Honorable Frank R. Wolf
                   Chairman, Subcommittee on Transportation
                     and Related Agencies
                   Committee on Appropriations
                   House of Representatives

                   Dear Mr. Chairman:

                   The Central Artery/Tunnel project in Boston, Massachusetts—one of the
                   largest, most complex, and most expensive highway construction projects
                   ever undertaken—is well under way, with contracts worth nearly $8 billion
                   either completed or awarded. Construction began in 1991, and the project
                   is expected to be substantially completed in December 2004. As of
                   February 1997, federal funds accounted for $4.7 billion (about 82 percent)
                   of the $5.7 billion obligated for the project, with the remainder coming
                   from state funds. The level of future federal funding for the project
                   depends upon the amount provided under the next federal highway
                   program authorization; the current authorization expires on September 30,
                   1997.

                   In response to your concerns about the need to monitor the costs of this
                   project and the uncertainties associated with its financing, we evaluated
                   (1) the estimated cost of the project and (2) Massachusetts’ plans for
                   financing it.


                   As of March 1997, Massachusetts had estimated that the total cost of the
Results in Brief   Central Artery/Tunnel project was $10.8 billion—$400 million more than
                   the $10.4 billion estimate contained in its September 1996 finance plan.
                   This increase occurred primarily because of growth in the project’s
                   estimated construction costs. Costs actually increased by more than
                   $400 million, but the state assumed in its $10.8 billion cost estimate that
                   the increases would be partly offset by savings, primarily from the
                   project’s owner-controlled insurance program. However, the state also
                   assumed that most of these insurance savings—$778 million—would not
                   be realized until 2017, long after construction is completed. As a result, the
                   project’s total funding needs through 2004, when the project is scheduled
                   to be completed, are $11.6 billion—$778 million more than the project’s
                   $10.8 billion cost estimate. Furthermore, uncertainties exist about whether




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the savings projected by the state in the insurance program will be
achieved.

The state’s $10.8 billion cost estimate also depends on achieving the
aggressive cost containment goals established for the project. While the
state has made some progress in its cost containment program, officials
acknowledge that it has ambitious goals that will be difficult to meet. If
current trends in the project’s construction costs continue, further cost
increases of some magnitude seem likely. As a result, the project’s cost
could increase between $100 million and $500 million.

Massachusetts has implemented a plan to finance its share of the project’s
cost, including a strategy to finance funding shortfalls. The state’s
December 1996 feasibility study identified a funding gap of $1.8 billion to
$2.3 billion between fiscal years 1998 and 2002, depending on the federal
funds provided. However, unless additional savings are implemented, this
shortfall could be about $450 million higher than expected because the
feasibility study does not include cost increases that occurred through
March 1997.1 Furthermore, funding shortfalls could be an additional
$100 million to $500 million more if the state does not meet its cost
containment goals for construction.

To finance the shortfalls, the state plans to borrow $1.7 billion through a
combination of revenue bonds issued by the Massachusetts Turnpike
Authority and grant anticipation notes—short-term notes issued by the
state to borrow against future federal funds—as authorized by legislation
passed in 1997. However, this plan may be insufficient to meet the
project’s financing needs because it substantially covers the funding
shortfalls only under the best case funding scenario modeled in the
feasibility study. In addition, while the financial markets will decide
whether the use of grant anticipation notes is feasible, uncertainties exist
about the use of these notes because the amount proposed by
Massachusetts is unprecedented and relies on borrowing against federal
funds that may not be authorized until after the next federal highway
authorization expires, sometime around 2003. If Massachusetts’ plan to
address shortfalls is not sufficient, the state may have to borrow additional
funds. This additional borrowing could make it difficult to stay within the
state’s limits on the issuance of new debt. The state imposed these limits
on itself to constrain the growth of state debt in order to improve its credit
ratings.

1
 As noted above, the amount of cost increases was greater than the $400 million increase in the state’s
estimate for the project’s total cost because increases have been partially offset with savings, and most
of the savings attributable to the project’s insurance program will not be realized until 2017.



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             The Central Artery/Tunnel project, an Interstate Highway System project
Background   in Boston, Massachusetts, will build or reconstruct about 7.5 miles of
             urban highways—about half of them underground. As shown in figure 1,
             the project will (1) extend Interstate 90 east, mostly in tunnels, through
             South Boston, under Boston Harbor (through the Ted Williams Tunnel),
             and to East Boston and Logan International Airport; (2) replace the
             Central Artery—an elevated portion of Interstate 93 through downtown
             Boston—with an underground roadway; and (3) replace the I-93 bridge
             over the Charles River.

             The project is currently managed by the Massachusetts Highway
             Department (MHD).2 Day-to-day design and construction activities are
             managed by a management consultant—a joint venture of Bechtel/Parsons
             Brinckerhoff—under contract with MHD. Federal funds are authorized
             under the Intermodal Surface Transportation Efficiency Act of 1991, which
             expires on September 30, 1997. The Federal Highway Administration
             (FHWA) approves and oversees the expenditure of the project’s federal
             funds. For example, FHWA reviews the project’s design plans and
             construction specifications and determines whether they meet applicable
             safety and quality standards and are eligible for federal funding.

             Massachusetts periodically prepares finance plans detailing the remaining
             estimated cost of the project and the sources of funds the state plans to
             use to finance this cost. Since March 1996, the state has also prepared
             monthly project management reports. These reports, which present the
             estimated cost of the project on the basis of current costs and savings, are
             used to identify trends, manage the project on a total-cost basis, and
             monitor the progress of cost containment goals. In 1995 the Secretary of
             Transportation announced that FHWA would require states to prepare
             finance plans for federally assisted highway projects with an estimated
             total cost of $1 billion or more, and FHWA has requested that Massachusetts
             prepare a plan annually or more frequently if events warrant. FHWA has no
             requirements for states to prepare total cost estimates for projects nor
             standards for how such estimates should be prepared.




             2
              The Massachusetts Turnpike Authority will assume ownership and management of the Central
             Artery/Tunnel project under a state law approved in Mar. 1997. The Authority and MHD are currently
             drafting an agreement delineating the roles, responsibilities, and terms of an eventual transfer.



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Figure 1: Map of the Central Artery/Tunnel Project




                                           Source: Massachusetts Highway Department.



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In December 1996, the state released a study (referred to as the feasibility
study) addressing options for financing the state’s share of the Central
Artery/Tunnel project. In March 1997, a state law conveyed ownership of
certain roadways and tunnels in downtown Boston, including those
comprising much of the Central Artery/Tunnel project, to the
Massachusetts Turnpike Authority and authorized the Authority to issue
revenue bonds to help finance the project’s construction and other costs.
To provide further financing for the project, Massachusetts’ May 1997
transportation bond bill authorized the state to issue short-term notes to
be repaid with future federal funding.

During the last 12 months, the project has progressed toward completion
at a faster rate than at any time in its history. In June 1997, MHD estimated
that about 90 percent of the project was designed and more than
26 percent was constructed. The Ted Williams Tunnel opened to
commercial traffic in 1995 and to passenger vehicles on a limited basis
during 1996. The tunnel’s permanent connections to the Massachusetts
Turnpike are under construction and will open to all traffic in 2001 (see
fig. 2).




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Figure 2: The Ted Williams Tunnel




                                    Source: MHD.




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As shown in figure 3, work on the tunnels that will replace the
above-ground Central Artery is under way, with 6 of the 10 principal
construction contracts awarded as of April 1997. The northbound and
southbound Central Artery tunnels are scheduled to open to traffic in 2002
and 2003, respectively. After 2002, the pace of construction should slow
considerably, as demolition of the elevated Central Artery, surface
restoration, and street improvements take place. The project is scheduled
to be substantially completed in December 2004.

As of March 1, 1997, $5.7 billion had been obligated for the Central
Artery/Tunnel project. Contracts for a larger amount—$7.7 billion—had
been completed or awarded as of March 31, 1997. To accomplish this level
of contract activity, Massachusetts has made extensive use of advance
construction, which allows it to begin many projects concurrently by
obligating federal funds over several years. For example, although $2.1
billion in contracts will be awarded in fiscal year 1997, only $180 million
will be obligated, consistent with FHWA’s regulations. The remainder will be
obligated over a 5-year period. Appendix I provides additional information
on federal and state obligations for the Central Artery/Tunnel project and
Massachusetts’ use of advance construction.




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Figure 3: Construction of the
Underground Central Artery




                                Source: MHD.




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                         As of March 1997, Massachusetts estimated that the total cost of the
State Estimates the      Central Artery/Tunnel project was $10.8 billion—$400 million more than
Total Cost at $10.8      the $10.4 billion estimate contained in the state’s most recent finance plan
Billion, but Funding     of September 1996. Increases occurred primarily in the project’s estimated
                         construction costs and were partly offset by savings. However, a
Needs Are Higher         substantial portion of the estimated savings are expected to come from the
                         project’s insurance program but will not be realized until long after
                         construction is completed. Because these savings will not be available as
                         the project incurs costs, the project will require total funding of
                         $11.6 billion through 2004, when it is scheduled to be completed.
                         Furthermore, uncertainties exist as to whether the insurance savings
                         projected by the state will be achieved.


Rising Costs Partially   Overall, Massachusetts estimates that the cost of the Central
Offset by Savings        Artery/Tunnel project has increased from about $10.4 billion to
                         $10.8 billion over the last 12 months. Although the estimated cost actually
                         increased by more than this amount, the state has found savings to
                         partially offset this growth.




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Figure 4: Central Artery/Tunnel Cost
Estimates, March 1996 to March 1997
                                       Dollars in millions
                                       11,000




                                       10,800




                                       10,600




                                       10,400




                                       10,200
                                             rch      ril      y     ne       ly        st      er      er      er     er     ary       ry     rch
                                                    Ap       Ma    Ju       Ju       gu       mb     tob      mb     mb     nu       rua
                                           Ma                                      Au      pte     Oc      v e     ce     Ja       eb        Ma
                                                                                        Se               No      De               F




                                       Notes: These figures have been adjusted to exclude credits for “air rights”—proceeds the state
                                       expects to receive from developing property acquired for the project’s construction that will
                                       become excess at the end of the project. At FHWA’s request, MHD’s September 1996 finance
                                       plan changed how air rights were treated in earlier plans from a credit to the cost of the project to
                                       a source of revenue. However, the state’s monthly project management reports through
                                       March 1997 continued to treat air rights as a credit to the project’s cost. Project officials stated
                                       that future finance plans would continue the practice of treating air rights as a revenue source
                                       rather than a cost credit, and in May 1997, the Central Artery/Tunnel project manager told us that
                                       the state planned to revise its monthly cost-reporting system to treat air rights in the same fashion.

                                       According to the September 1996 finance plan, the project’s $10.4 billion total cost estimate
                                       reflected project costs as of June 1996 and included recognition of future insurance savings
                                       totaling about $226 million. Those savings were taken in November 1996.

                                       Source: GAO’s analysis of MHD’s data.




                                       The largest increase in the project’s estimated cost was for
                                       construction—the largest cost component of the Central Artery/Tunnel
                                       project. Between March 1996 and March 1997, estimated construction
                                       costs increased by about $500 million, a 7.4-percent increase. While a
                                       number of factors contributed to the increased construction costs, about
                                       $278 million occurred because bids on construction contracts were higher
                                       than projected. Most of these increases occurred on two large-dollar
                                       contracts—totaling nearly $800 million—awarded in January and



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March 1997. On one contract for segments of the tunnels to replace the
above-ground Central Artery, state and FHWA officials stated that several
factors contributed to the increase, including the complexity of integrating
the new tunnel with the existing Boston Harbor tunnels while sustaining
traffic, and noise mitigation measures that were costlier than expected. On
another contract for tunneling for the I-90 underground connection to the
Ted Williams Tunnel at Fort Point Channel, state and FHWA officials said
that complex tunneling techniques never before used to this extent in the
United States contributed to higher-than-expected bids. State and FHWA
officials expressed confidence that the circumstances experienced on
these two contracts were unique and that remaining contracts would not
experience the same types of cost increases.

Two other categories of cost increases resulted in about $230 million in
additional construction costs. First, estimates of construction costs
prepared during the design phase were more than the amount budgeted.
Second, actual and estimated costs of changes to awarded construction
contracts exceeded the amount budgeted for such changes.

The project has also achieved savings to offset cost increases; the largest
savings have come in the project’s owner-controlled insurance program.
While contractors in a construction project traditionally purchase their
own insurance and add the cost of their premiums to the contract, the
Central Artery/Tunnel project purchased “wrap-up” insurance that
provides workers’ compensation insurance, general liability insurance, and
other coverage for all contractors and subcontractors working on the
project. Wrap-up insurance programs generally result in lower total
insurance costs for a number of reasons, including the elimination of
redundant insurance services and profit margins associated with the
purchase of insurance by each contractor and subcontractor.

Since December 1994, the estimated cost of the insurance program has
been reduced by over $700 million. These estimated savings result from,
among other things, a better-than-expected safety record and
lower-than-expected accident claims on the project. Most of the estimated
insurance savings are attributable to anticipated refunds which, along with
other insurance related funds, will earn interest until all claims are paid, at
which time these remaining funds will be returned to MHD. Project officials
estimate that MHD will receive these proceeds, including refunds and
related interest, in 2017—13 years after construction is completed.
According to project officials, standard industry practice is to assume that
claims are paid over a 13-year period after the project is completed.



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Project’s Total Funding            The state’s $10.8 billion estimate of the project’s total cost includes a
Needs Are $11.6 Billion            credit to the cost of the project of $778 million, which represents the
                                   receipt of insurance proceeds. However, these funds will not be available
                                   until 2017 and thus cannot be used to help pay for the cost of the project.
                                   As a result, the project’s total funding needs during the period of
                                   construction will be $778 million greater than the $10.8 billion total cost
                                   estimate, or about $11.6 billion. (See table 1.) FHWA stated that while the
                                   insurance proceeds would not be available for use in meeting the Central
                                   Artery/Tunnel project’s costs, they could be used for other federally
                                   eligible transportation projects in Massachusetts.

Table 1: Central Artery/Tunnel
Project’s Total Cost and Funding   Dollars in millions
Needs                                                                             Data as of
                                                                            September 1996       Data as of
                                   Obligations and cost                        finance plan     March 1997       Change
                                   Obligations through fiscal year 1996               $5,169        $5,081
                                                                                  (estimated)       (actual)        ($88)
                                   Estimated obligations fiscal year 1997
                                   through 2004                                        5,979         6,523           544
                                   Total estimated obligations through
                                   2004                                              $11,148       $11,604          $456
                                   Insurance proceeds in 2017                            722           778            56
                                   Total (net) project cost                          $10,426       $10,826          $400
                                   Source: MHD.




Insurance Savings May Not          Although Massachusetts’ cost estimate assumes that insurance proceeds
Be Realized                        will be received in 2017, the insurance program may not continue in its
                                   present form until that time. According to industry representatives and
                                   officials on other transportation projects with wrap-up insurance policies,
                                   most workers’ compensation claims are filed within 2 years after
                                   construction ends. Industry and project officials also said that within 18
                                   months to 5 years after construction ends, the liability for satisfying any
                                   further claims is frequently transferred to a reinsurer or another party who
                                   manages the claims until they are paid. The state estimates that workers’
                                   compensation and general liability claims payments after 2006 will total
                                   about $28 million; however, it also assumes that the insurance trust
                                   accounts will carry over $300 million until 2017 and accumulate interest
                                   during that period. In particular, the state credits to the cost of the project
                                   about $226 million, representing interest accumulated between 2006 and
                                   2017. However if the liability were sold to a reinsurer, these proceeds



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would be largely unavailable to the project, and the total estimated cost of
the project would rise from the state’s $10.8 billion estimate to about
$11.1 billion.

In commenting on a draft of this report, MHD stated that it has decided at
this time not to use a reinsurer and to retain the funds until 2017. However,
it noted that this decision would need to made in consultation with FHWA in
about 2004, nearer to the end of the project.

In addition, the state’s assumptions have other uncertainties. Estimated
savings from the project’s insurance program stem in part from estimates
of lower-than-expected accidents and claims. In 1992, the cost estimates of
the workers’ compensation component of the wrap-up insurance program
were established on the basis of a 75-percent “loss ratio;” that is, the value
of claims paid was expected to total 75 percent of premiums. However,
over the last 4 years, the actual loss ratio has been about 30 percent. As a
result, the project has reduced its assumptions about the insurance loss
ratio from 75 percent to 55 percent. Although experience has been
somewhat limited to date on wrap-up insurance for large construction
projects, project officials stated that large programs tend to end with loss
ratios of 45 percent to 55 percent.

While only future experience will demonstrate whether the state’s
accident and claims assumptions are correct, it should be noted that the
Central Artery/Tunnel project is only 26-percent complete, and the project
is beginning 6 years of underground tunneling in the congested downtown
area. This construction will be complex; it will, for example, require
maintaining highway traffic on the existing Central Artery’s elevated
structure directly above tunnel construction and maintaining rail and
subway operations below and near tunnel construction. In the coming
years, the number of contractor personnel and the level of construction
activity in the downtown area will greatly increase. If loss claims were to
increase, and if the loss ratio were 65 percent, rather than the 55 percent
assumed in the cost estimate, the project’s cost would increase by about
$56 million.

Project officials stated that the project has completed 18 months of the
6-year construction schedule and that accidents and claims have
decreased during that time. Officials expressed confidence that the state’s
assumptions will hold and believed that if that is the case, it may be
possible to reduce the estimated cost of the insurance program even more.




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                                        While MHD is aggressively pursuing its cost containment goals, the project
Construction Costs                      is not meeting these goals. Unless additional offsetting savings are found,
Could Increase                          it will be difficult to avoid increases in the cost of the project. We estimate
Further If Cost                         that these increases could add between about $100 million and
                                        $500 million to the cost of the project if current trends continue.
Containment Goals
Are Not Realized                        In 1995, MHD established an overall goal of holding the cost of changes to
                                        the project’s construction contracts to 10.7 percent or less of the
                                        contracts’ estimated bid prices. This overall goal was based on two
                                        assumptions: (1) holding cost growth on contracts awarded after
                                        November 1994 to an average of 7 percent of the awarded bid price and
                                        (2) holding cost growth on contracts awarded through November 1994 to
                                        about 25 percent of the awarded bid price—the average amount that was
                                        being experienced on those contracts at that time. Cost increases above
                                        MHD’s goals have occurred on contracts awarded both before and after
                                        November 1994. As of December 1, 1996, cost growth on awarded
                                        contracts totaled 17.4 percent of contract bid prices, rather than the
                                        project’s 10.7-percent goal, as shown in table 2.

Table 2: Percentage Increase in Costs
on Awarded Central Artery/Tunnel        Dollars in millions
Project Construction Contracts, as of                                                   Cumulative
December 1, 1996                                                                          awarded      Percent        Percent
                                                                           Number of      contract cost growth     actual cost
                                        Contracts                           contracts        price        goal         growth
                                        Contracts awarded through
                                        November 1994                             36        $1,108          25.0          28.4
                                        Contracts awarded after
                                        November 1994                             28         1,571           7.0            9.7
                                        All awarded contracts                     64        $2,678          10.7          17.4
                                        Source: GAO’s analysis of MHD’s data.



                                        As table 2 shows, the contracts awarded after November 1994 have
                                        experienced much lower growth in costs (9.7 percent) than the contracts
                                        awarded through November 1994 (28.4 percent). MHD and FHWA officials
                                        believe that the cost performance of contracts issued after November 1994
                                        is a more meaningful indicator of the effect of MHD’s cost containment
                                        efforts than the performance of contracts issued before that date because
                                        MHD did not have a cost containment program in effect until 1995. As of
                                        December 1, 1996, 49 construction contracts had not been awarded. If
                                        those contracts experience the same 9.7-percent cost growth as the




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                            contracts awarded after November 1994 (instead of the 7-percent goal),
                            the cost of the project would increase by about $100 million.

                            However, it may not be possible to limit the growth in contract costs to the
                            9.7 percent experienced on the 28 contracts awarded after November 1994
                            because those contracts have not been in effect for very long. As of
                            December 1, 1996, only 5 of the 28 contracts, valued at less than
                            $10 million, had been completed, while 11 contracts (accounting for about
                            70 percent of the $1.6 billion cost of the 28 contracts) were less than
                            25-percent complete. Nevertheless, almost one-half of the 28 contracts had
                            already exceeded the 7-percent cost containment goal. For example, one
                            contract that MHD awarded in 1995 to construct the underground Central
                            Artery is 22-percent complete and will not be finished until 2000. However,
                            MHD estimates that this contract had already exceeded its bid price by
                            13 percent as of December 1, 1996.

                            While we cannot predict the total cost increase on all construction
                            contracts, we believe that it will be difficult to meet the goals set in 1995
                            and to avoid increases in the cost of the project. For example, assuming
                            that awarded construction contracts experience no further cost growth
                            after December 1, 1996, costs for the remaining 49 unawarded contracts
                            could increase by only 5.7 percent if the cost containment goal of 10.7
                            percent is to be met. If, however, the unawarded contracts experience the
                            same 17.4-percent growth experienced by the awarded contracts, as
                            shown in table 2, the total cost of the project would rise by about
                            $500 million.

                            State officials agreed that the project has ambitious cost containment
                            goals that will be difficult to meet. However, they stated that the existing
                            goals are essential to provide designers and contractors with an incentive
                            to control contract changes and restrict cost growth. They believe that any
                            relaxation of the goals would deprive state managers of the leverage
                            needed to control costs and that ultimately such a relaxation would
                            become a self-fulfilling prophecy, resulting in even further cost increases.


MHD Is Taking Steps to      Since our May 1996 report,3 MHD has analyzed the reasons for cost
Reduce Costs, but Options   increases and developed strategies to reduce the cost of construction
for More Savings May Be     contracts. For example, MHD now requires firms bidding on Central
                            Artery/Tunnel construction contracts to include a bid of the cost and time
Limited
                            3
                             Transportation Infrastructure: Central Artery/Tunnel Project Faces Continued Financial Uncertainties
                            (GAO/RCED-96-131, May 10, 1996).



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associated with removing unanticipated underground obstructions. MHD
officials stated that this estimate allows them to obtain a competitive price
at the outset of a contract for unknown factors rather than face negotiated
change orders and delays after a contract is awarded. The project’s
construction managers stated that, although it is still too early to assess
measurable results, some of these initiatives could reduce the cost and
number of contract changes, primarily by avoiding delays in these
contracts.

MHD has also made progress in reducing estimated construction costs
during the design process. During the design of a highway, bridge, or
tunnel, preliminary design concepts are refined into detailed plans and
specifications, and preliminary construction cost estimates can increase.
MHD stated in 1995 that preliminary cost estimates, on average, increased
18 percent. To control cost increases, MHD initiated a “design-to-cost”
program in 1995. Under this program, contractors design their segments of
the project within an agreed baseline budget for construction costs. The
design contractor must periodically submit progress estimates as well as a
final design. If the estimate in any of the submittals exceeds the agreed
baseline budget (assuming that MHD has not requested changes to the
agreed baseline budget), the contractor is required to redesign the
project—at the contractor’s own expense—so that the estimated
construction cost falls within the baseline budget.

The design-to-cost initiative is intended to result in no growth in the
estimated cost of construction during the design phase. An MHD analysis
shows that, as of April 1997, estimated construction costs under this
program have increased in total by about 4 percent, compared with the
historical 18-percent rate.4 As of April 1997, MHD required design
contractors to find cost reductions on four contracts to reduce estimated
cost increases by $60 million. The Deputy Project Manager for Design
stated that contractors’ plans have resulted in reductions of about
$44 million of this $60 million and that he is confident that the remainder
will be recouped as well.

While MHD has made some progress in containing costs, options for further
savings may be limited. For example, as of March 1997, only four principal
construction contracts—two for the Route 1A interchange at Logan
International Airport and two for the underground Central Artery—were

4
 Experience with the design-to-cost program has been limited to date because, as of Nov. 1996, only 10
contracts had progressed through the final design point in the design-to-cost program. Eight of these
10 contracts had their original baseline budgets established late in the design process. Generally, cost
growth would be more likely to occur earlier in the design process.



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                           early in the design stage, where greater opportunities exist for significant
                           scope reductions or changes. MHD is redesigning the scope of one of the
                           Route 1A interchange contracts to reduce its costs by about $56 million.

                           With limited opportunity to reduce the project’s scope, the state is looking
                           for other ways to cut costs. For example, MHD has proposed that the
                           amount currently budgeted for inflation in unawarded contracts be
                           reduced from 3.35 percent to 2.35 percent, on the basis of recent inflation
                           rates in the Boston area. This lower inflation rate would reduce estimated
                           project costs by about $140 million. FHWA officials are reviewing this
                           proposal. MHD is also reducing the estimated cost of the project by moving
                           certain costs out of the project’s budget. For example, in 1996, MHD
                           reassigned about $20 million in costs from the Central Artery/Tunnel
                           project to the statewide road and bridge program. These costs were
                           associated with project contracts for temporary structures at the Charles
                           River and the replacement of an existing bridge connecting to the project’s
                           Interstate 90/93 interchange. Project officials stated that these costs were
                           more appropriately reflected as statewide transportation expenditures
                           because they would have been incurred whether or not the Central
                           Artery/Tunnel project was built. Officials said that they are considering
                           assigning some other project costs to the statewide program.


                           While the level of future federal funding is uncertain until the federal
State’s Plan for           highway program is reauthorized, Massachusetts’ plan for financing the
Financing Project May      state’s share of the Central Artery/Tunnel project identified funding
Be Insufficient            shortfalls. To address these shortfalls, the state has implemented a plan to
                           borrow $1.7 billion through Massachusetts Turnpike Authority revenue
                           bonds backed by toll increases and short-term grant anticipation notes to
                           be repaid with future federal funds. However, this plan may not be
                           sufficient because (1) shortfalls may be greater than modeled in the state’s
                           plan and (2) while the financial markets will decide whether the use of
                           grant anticipation notes is feasible, uncertainties exist about the use of
                           these notes because the amount proposed by Massachusetts is
                           unprecedented and relies on borrowing against federal funds that may not
                           be authorized until the next federal highway authorization expires,
                           sometime around 2003.


Funding Shortfalls Exist   The state’s December 1996 feasibility study identified a project funding
Under All Scenarios        shortfall of $1.8 billion to $2.3 billion from fiscal years 1998 through 2002.
                           The study referred to this as the “interim” shortfall because the project’s



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needs outstrip sources of funds during the accelerated construction years.
According to the study, from fiscal years 2003 to 2005, construction needs
subside and a funding surplus of $1.6 billion reduces the project’s “total”
funding shortfall to about $200 million to $700 million.

The shortfall ranges are due to uncertainty about future federal funding.
While the feasibility study modeled two potential federal funding
scenarios, shortfalls could be greater or smaller under other possible
federal funding scenarios. For example, under several of the
reauthorization proposals introduced in the Congress during 1997, the
project’s funding shortfalls in fiscal years 1998 through 2002 would range
from $1.6 billion to $2.5 billion. Details of the various funding scenarios
are discussed in appendix II.

In addition to federal funding, the feasibility study identified the state
sources of funding that were expected as of December 1, 1996. These
sources included (1) about $1 billion in state funds to match federal funds
and to pay for the portions of the project funded exclusively by the state;
(2) a $200 million contribution from the Massachusetts Port Authority; and
(3) $400 million in state bonds, which was authorized in 1995, and which
will be assumed by the Massachusetts Turnpike Authority. The feasibility
study’s assumptions are shown in table 3.




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                                         B-275370




Table 3: Feasibility Study Analysis of
Central Artery/Tunnel Project Funding,   Dollars in millions
as of December 1, 1996 (Fiscal Years                                                    Fiscal years
1997 Through 2005)                                                                          1997-02        Fiscal years    Fiscal years
                                         Obligations and sources                            “interim           2003-05       1997-2005
                                         of financing                                      shortfall”        “surplus” “total shortfall”
                                         Obligations                                            $5,696             $283              $5,979
                                         Sources of financing
                                         Federal
                                         - High-funding scenario                                 2,435               675               3,110
                                         - Low-funding scenario                                  1,916               675               2,591
                                         State bonds                                               800               240               1,040
                                         Mass. Port Authority                                      200                  0                   200
                                         Mass. Turnpike Authority                                  100                  0                   100
                                         State bonds to be assumed by
                                         Mass. Turnpike Authority                                  400                  0                   400
                                         Total sources of financing
                                         - High-funding scenario                                 3,935               915               4,850
                                         - Low-funding scenario                                  3,416               915               4,331
                                         Proceeds
                                         Air rights proceeds                                         0               255                    255
                                         Insurance proceeds                                          0               722                    722
                                         Total proceeds                                              0             $977                    $977
                                         Surplus/(shortfall)
                                         - High-funding scenario                               ($1,761)          $1,609                ($152)
                                         - Low-funding scenario                                ($2,280)          $1,609                ($671)
                                         Note: This table excludes a $50 million contribution from the Massachusetts Bay Transportation
                                         Authority, which was included in the feasibility study’s high-funding scenario but is not being
                                         pursued by the project at this time.

                                         Source: GAO’s analysis of the feasibility study.




Funding Shortfalls Could                 The funding shortfalls could be higher than expected because the shortfall
Be Greater Than                          estimate in the feasibility study reflects the obligation estimate used in the
Anticipated                              September 1996 finance plan. Since that time, construction and other cost
                                         increases have raised the project’s funding requirements by about
                                         $450 million through March 1997. While some of those increases were
                                         offset by insurance savings in the total cost estimate, most insurance
                                         savings will not be realized until 2017, long after the project is completed.
                                         Thus, the cost increases that occur during construction will still need to be
                                         funded. Furthermore, shortfalls may be $100 million to $500 million
                                         greater if the state’s cost containment goals for construction are not met.




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                                     B-275370




                                     State officials acknowledged that these goals are ambitious and that it will
                                     be difficult to meet them.

                                     The state could reduce the shortfall through additional savings. However,
                                     the $1.6 billion surplus between fiscal years 2003 and 2005, which the
                                     feasibility study used to calculate the total shortfall through 2005, will be
                                     smaller than reported. According to the September 1996 finance plan, the
                                     surplus funds accrued between fiscal years 2003 and 2005 will be moved to
                                     the peak construction period through short-term financing. However, as
                                     shown in table 2, nearly $1 billion of this surplus is revenues from the
                                     development of air rights—proceeds the state expects to receive from
                                     developing property acquired for the project’s construction that will
                                     become excess at the end of the project—and savings from the project’s
                                     insurance program. As mentioned earlier, the state assumes that the
                                     insurance savings will not be realized until 2017. In addition, air rights
                                     revenues will be largely unavailable to the project until after 2005. This is
                                     because about half the property expected to be available will not be ready
                                     for development until late 2004.

                                     In commenting on a draft of this report, the state confirmed that insurance
                                     and air rights proceeds would not be used to help finance the project’s
                                     debt and stated that future finance plans would clarify that proceeds are
                                     expected to be received after 2005. FHWA stated that while these proceeds
                                     will not be available to meet the Central Artery/Tunnel project’s funding
                                     needs, they could be used for other transportation-related purposes in
                                     Massachusetts.


Plan for Addressing                  State legislation enacted in 1997 authorized $1.7 billion in state borrowing
Shortfalls Is in Place, but It       to address the funding shortfalls identified in the December 1996
May Not Be Sufficient                feasibility study. Specifically, under legislation enacted in March and May
                                     of 1997, the following will occur:

                                 •   The Massachusetts Turnpike Authority will contribute $700 million by
                                     December 31, 1998, through revenue bonds backed by toll increases. On
                                     July 1, 1997, the Authority Board voted to increase one-way tolls on the
                                     Sumner, Callahan, and Ted Williams Tunnels—effective July 10,
                                     1997—including increased tolls on passenger vehicles from $1 to $2. An




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    B-275370




    additional $1 increase is planned in 2002 on these facilities as well as
    increases on the Massachusetts Turnpike’s Boston Extension.5
•   The state will issue up to $1 billion in short-term grant anticipation notes,
    to be repaid with future federal highway funds.

    The authorized funding will substantially meet the funding shortfall
    identified by the feasibility study under the “high” federal funding
    scenario. However, additional state funding will be needed if federal
    funding is lower than the high funding scenario. Furthermore, the state’s
    funding will not cover the $450 million in additional funding needs through
    March 1997 discussed previously or the additional funding that may be
    needed if MHD does not meet its goals to contain construction costs.

    The financial markets will ultimately decide whether the use of grant
    anticipation notes is feasible. There is limited precedent for the use of
    such notes, especially in amounts of this magnitude. While grant
    anticipation notes have been used in other states, they have been issued
    for a substantially lower amount.6

    In addition, using grant anticipation notes to borrow $1 billion will require
    Massachusetts to borrow against federal funds that may not be authorized
    until after the next federal highway authorization expires, sometime
    around 2003. The feasibility study assumed that all federal funds for the
    project from fiscal years 1998 through 2002 would be needed to pay for the
    project and that funding would not exceed costs until 2003. The study
    further assumed that, during the surplus fiscal years from 2003 through
    2005, the project would have $283 million in funding requirements and
    receive about $675 million in federal funds. (See table 3.) Therefore, in
    order to borrow $1 billion or more in grant anticipation notes,
    Massachusetts would have to repay the notes using federal funds beyond
    the likely 5- to 6-year duration of the next highway authorization bill and
    beyond the scheduled end of the project.



    5
     According to the Turnpike Authority’s chief financial officer, the enacted and planned toll increases
    will be sufficient for the Authority to make the required $700 million contribution and assume the
    $400 million in state bonds authorized in 1995 (see table 2). The state has also proposed an additional
    $300 million contribution from the Turnpike Authority at the end of the project, if necessary.
    According to the chief financial officer, if this contribution is needed, the Turnpike Authority may have
    to raise tolls again.
    6
     For example, Pennsylvania issued $450 million in short-term notes over a 5-year period, from 1986 to
    1991. The notes—from 3 to 6 years in duration—were issued as general obligation notes and backed by
    the full faith and credit of the state. Pennsylvania used its Interstate Construction Program funds to
    pay the notes and state legislation gave these principal payments first priority in the state’s use of
    those funds.



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              According to officials at three bond rating agencies, uncertainties
              associated with the availability and timing of future federal funds means
              that the financial markets will almost certainly demand some form of state
              backup in the event that federal funds are not available to repay the notes.
              This demand may entail some difficulties for the state. Massachusetts
              already has one of the highest debt burdens in the nation and has put both
              statutory and administrative measures in place, such as limits on the
              issuance of new debt, to constrain the growth of state debt in order to
              improve its credit ratings. These limits restrict the state’s flexibility in
              issuing additional debt, and Massachusetts has emphasized the need to
              stay within those limits as part of any solution to financing the Central
              Artery/Tunnel project. For example, the Massachusetts Deputy Secretary
              for Administration and Finance told us that the state is attempting to
              structure an issuance of grant anticipation notes that would not require it
              to guarantee the notes with the full faith and credit of the state. State
              legislation also exempts the notes from the state’s statutory debt ceiling.

              According to state officials, there is no contingency plan for financing the
              project should the combination of revenue bonds and grant anticipation
              notes prove insufficient. However, the feasibility study described several
              potential sources of state funds, including additional state
              borrowing—subject to the debt ceiling—or further toll increases. The
              study also described other sources, such as gasoline taxes, taxes
              generated from increased property values, and the diversion of state funds
              from other projects, but explained that these options do not appear
              feasible or practical.


              The Central Artery/Tunnel project faces numerous and complex
Conclusions   challenges in constructing tunnels through a densely populated downtown
              urban area, within a few feet of buildings and subway tunnels, while
              keeping automobile and rail traffic flowing. In addition to these technical
              obstacles, Massachusetts faces the challenges of controlling costs and
              paying for the project.

              Massachusetts is to be commended for establishing aggressive
              management goals and for making progress in controlling the cost of the
              Central Artery/Tunnel project. By managing the project on a total-cost
              basis, monitoring progress against that goal, developing action plans to
              control costs and schedules, and holding contractors accountable for cost
              increases, the state has shown that it is serious about cost containment.




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                     B-275370




                     Despite the state’s efforts, the project’s estimated costs have been rising,
                     and opportunities to produce more savings may be limited. To maintain
                     total project costs at about $11 billion, the state would not only have to
                     meet but exceed its aggressive cost containment goals. State officials
                     acknowledged that these are ambitious goals that will be difficult to meet.
                     If current trends continue, further cost increases of some magnitude seem
                     likely. We support the project’s adhering to its cost containment goals as a
                     means of holding down costs. But these goals form the basis for the state’s
                     cost estimate and its finance plan. Decoupling the existing goals from the
                     project’s cost estimate and revising that estimate to more closely reflect
                     the project’s actual experience with its cost containment program would
                     provide a more realistic basis for securing needed financing.

                     While future federal funding remains an uncertainty, Massachusetts has
                     made progress in the last 12 months by restructuring its public institutions
                     to bring the resources of the state to bear on financing the project.
                     However, a number of challenges remain to be overcome before a plan
                     that is sufficient to meet the financing needs of the Central Artery/Tunnel
                     project is in place. While Massachusetts could borrow additional funds to
                     meet funding shortfalls, it will be constrained by its statutory and
                     administrative debt limits. These constraints on the state, the magnitude of
                     the shortfalls, and the likelihood of additional costs of some magnitude are
                     likely to require Massachusetts to reassess its financing plans, particularly
                     once federal funding for the next 5 to 6 years is established through
                     reauthorization of the federal highway program.


                     To provide a more realistic estimate of the cost and financing of the
Recommendations      Central Artery/Tunnel project, we recommend that the Secretary of
                     Transportation direct the Administrator, Federal Highway Administration,
                     when FHWA requests the Commonwealth of Massachusetts to prepare a
                     new Central Artery/Tunnel project finance plan, to include in that plan
                     (1) a revised estimate of the project’s costs and funding needs that more
                     closely reflects the state’s actual experience with its cost containment
                     program and (2) a contingency plan for financing the project if costs
                     increase further or if the sources of financing are not sufficient.


                     We provided copies of a draft of this report to the Department of
Agency Comments      Transportation and the Massachusetts Executive Office of Transportation
and Our Evaluation   and Construction. We met with FHWA officials, including the Associate
                     Administrator for Program Development, and with state officials, including



                     Page 23                             GAO/RCED-97-170 Central Artery/Tunnel Project
B-275370




the Chief Financial Officer of the Massachusetts Turnpike Authority and
officials from MHD’s Central Artery/Tunnel Project Office.

While FHWA and the state generally agreed with the information contained
in this report, they disagreed with the estimate in our draft report that the
project would cost $11.1 billion and our recommendation to revise the
estimate of the project’s cost to more closely reflect the state’s actual
experience with its cost containment program. Specifically, FHWA and the
state contended that (1) while FHWA has no standards for states to follow
in preparing estimates for total project costs, they believed that all costs
incurred and proceeds generated by the project should be considered in
calculating “total cost” regardless of when they occur, even years after the
project is complete and (2) most of the state’s estimates of insurance
savings affect only the total cost estimate and do not reduce the project’s
total funding needs. We revised the report to present the state’s total cost
estimate of $10.8 billion and to delineate the differences between the total
cost estimate and the project’s total funding needs of $11.6 billion. We
continue to believe, however, that uncertainties remain over whether the
insurance savings projected by the state for 2017 will be realized.

FHWA and the state also disagreed with our recommendation to revise the
project’s cost estimate to more closely reflect the state’s actual experience
with its cost containment program. While recognizing the difficulty of
meeting the goals, they stated that decoupling the goals from the estimate
as we recommend would send the wrong message to the project’s
contractors and deprive state managers of the leverage needed to control
costs. While we commend Massachusetts for adhering to its aggressive
cost containment goals, we also believe that the state’s cost estimate—an
estimate that forms the basis for financing the project when significant
shortfalls are projected—should recognize reasonably expected costs
based on current available information about the state’s experience with
its cost containment program. We have therefore retained our
recommendation.

Both FHWA and Massachusetts offered technical comments to clarify and
amplify the information presented in the draft report. We have
incorporated those comments throughout the report as appropriate. In
addition, MHD provided a letter presenting additional views on the progress
of its cost and schedule containment initiatives (see app. IV).




Page 24                             GAO/RCED-97-170 Central Artery/Tunnel Project
B-275370




The scope and methodology used in preparing this report are presented in
appendix III. We performed our work from November 1996 through
June 1997 in accordance with generally accepted government auditing
standards, but we did not independently verify the data obtained from
MHD’s database.


As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days after the
date of this letter. At that time, we will send copies to the cognizant
congressional committees; the Secretary of Transportation; the
Administrator, Federal Highway Administration; and other interested
parties. We will also make copies available to others on request.

Please call me at (202) 512-2834 if you or your staff have any questions.
Major contributors to this report are listed in appendix V.

Sincerely yours,




John H. Anderson, Jr.
Director, Transportation Issues




Page 25                              GAO/RCED-97-170 Central Artery/Tunnel Project
Contents



Letter                                                                                              1


Appendix I                                                                                         28

Obligations and the
Use of Advance
Construction on the
Central Artery/Tunnel
Project
Appendix II                                                                                        30

Future Federal
Funding Scenarios for
the Central
Artery/Tunnel Project
Appendix III                                                                                       32

Scope and
Methodology
Appendix IV                                                                                        34

Letter From the
Massachusetts
Highway Department
Appendix V                                                                                         36

Major Contributors to
This Report
Tables                  Table 1: Central Artery/Tunnel Project’s Total Cost and Funding            12
                          Needs
                        Table 2: Percentage Increase in Costs on Awarded Central                   14
                          Artery/Tunnel Project Construction Contracts, as of December 1,
                          1996




                        Page 26                          GAO/RCED-97-170 Central Artery/Tunnel Project
          Contents




          Table 3: Feasibility Study Analysis of Central Artery/Tunnel                19
            Project Funding, as of December 1, 1996
          Table I.1: Federal and State Obligations for the Central                    28
            Artery/Tunnel Project
          Table I.2: Central Artery/Tunnel Project Advance Construction               29
            Plan
          Table II.1: Comparison of Various Federal Funding Scenarios for             31
            Massachusetts and the Effect on Funding for the Central
            Artery/Tunnel Project

Figures   Figure 1: Map of the Central Artery/Tunnel Project                           4
          Figure 2: The Ted Williams Tunnel                                            6
          Figure 3: Construction of the Underground Central Artery                     8
          Figure 4: Central Artery/Tunnel Cost Estimates, March 1996 to               10
            March 1997




          Abbreviations

          GAO        General Accounting Office
          FHWA       Federal Highway Administration
          ISTEA      Intermodal Surface Transportation Efficiency Act
          MHD        Massachusetts Highway Department


          Page 27                           GAO/RCED-97-170 Central Artery/Tunnel Project
Appendix I

Obligations and the Use of Advance
Construction on the Central Artery/Tunnel
Project
                               As of March 1, 1997, $5.7 billion had been obligated for the Central
                               Artery/Tunnel project. About $4.7 billion, or 82.5 percent, of those funds
                               came from federal sources, while $1 billion, or 17.5 percent, came from
                               state sources, as shown in table I.1.

Table I.1: Federal and State
Obligations for the Central    Dollars in millions
Artery/Tunnel Project          Source of funds                                                                Obligations
                               Federal funds
                               Interstate Construction Program                                                     $3,940
                               National Highway System Program                                                        254
                               Bridge Program                                                                         181
                               Surface Transportation Program                                                         283
                               Other programs                                                                          60
                               Total federal funds                                                                 $4,718
                               Total state funds                                                                   $1,003
                               Total obligations                                                                   $5,720
                               Note: Numbers may not add due to rounding.

                               Source: Central Artery/Tunnel Project Office, MHD.




Advance Construction           As of April 1, 1997, about $8 billion in contracts for the Central
                               Artery/Tunnel project had either been awarded or had been completed. To
                               accomplish this rate of contract activity, Massachusetts made extensive
                               use of advance construction, particularly during fiscal year 1997. Advance
                               construction allows a state to begin many more projects concurrently than
                               under a traditionally financed highway project. With advance construction,
                               under FHWA’s July 1995 regulations, a state may begin a project and
                               obligate federal funds in phases over the several years required to build
                               the project.

                               Massachusetts plans to award 28 contracts totaling $4.2 billion in this
                               manner. As of April 1, 1997, about $3 billion of this $4.2 billion had been
                               awarded. As table I.2 shows, the bulk of this contracting activity occurred
                               in fiscal year 1997. In fact, during a 6-month period between October 1996
                               and March 1997, nearly $1.7 billion in contracts were awarded.




                               Page 28                                       GAO/RCED-97-170 Central Artery/Tunnel Project
                                           Appendix I
                                           Obligations and the Use of Advance
                                           Construction on the Central Artery/Tunnel
                                           Project




Table I.2: Central Artery/Tunnel Project Advance Construction Plan (as of September 1996 Finance Plan)
Dollars in millions
    Advance construction contracts
              awarded
                                  Total                                      Obligations by fiscal year
Fiscal year          Number       value        1995-96       1997         1998          1999      2000      2001      2002      2003      2004
1995                       3       $451          $152        $299
1996                       5         740           69         104         $221          $209      $101       $28         $5        $3
1997                      10      2,136                       180          496           676       587       187         10
1998                       6         511                                     24           96       159       110         59        44       $19
1999                       1          93                                                    3         8        21        30        26          5
2000                       2         185                                                              3        20        71        81        10
2001                       1         115                                                                       42        60        13
Total                     28     $4,231          $221        $583         $741          $984      $858      $408      $234      $166        $34
                                           Note: Numbers may not add due to rounding.

                                           Source: GAO’s analysis of MHD’s data.



                                           According to MHD, this advance construction strategy will save $1 billion in
                                           the total cost of the project and 5 years in construction time. In May 1996,
                                           we reported that while Massachusetts was relying on future funding to pay
                                           the bills, substantial funding shortfalls existed in those years and
                                           Massachusetts did not have a plan for financing the project.7 Since that
                                           time the Federal Highway Administration has required the state to provide
                                           either full funding or to provide state legislative contract authorizations
                                           for the full value of all awarded contracts. Massachusetts has since
                                           authorized state legislative contract authorizations for the full value of all
                                           awarded contracts, although it plans to rely on federal funds,
                                           Massachusetts Turnpike Authority bonds, and other sources as the
                                           ultimate source of financing.




                                           7
                                            Transportation Infrastructure: Central Artery/Tunnel Project Faces Continued Financial Uncertainties
                                           (GAO/RCED-96-131, May 10, 1996)



                                           Page 29                                        GAO/RCED-97-170 Central Artery/Tunnel Project
Appendix II

Future Federal Funding Scenarios for the
Central Artery/Tunnel Project

                  Future federal funding for Massachusetts will not be resolved until the
                  Congress reauthorizes the Intermodal Surface Transportation Efficiency
                  Act (ISTEA) of 1991. However, we modeled six funding scenarios on the
                  basis of several current reauthorization proposals and assumptions in the
                  state’s December 1996 feasibility study to estimate the apportionments
                  that Massachusetts could receive under the reauthorized federal aid
                  highway program.8 Estimated annual apportionments under all scenarios
                  are lower than Massachusetts’ average annual apportionments of
                  $831 million under ISTEA. These scenarios are the following:

              •   The ISTEA Integrity Restoration Act (H.R. 674) , or STEP 21, assumes that
                  each state will receive at least 95 percent of the revenues it contributes to
                  the Highway Trust Fund. Since Massachusetts has traditionally received
                  more in federal highway aid than it pays in federal highway taxes, this
                  proposal reduces federal funding to an average of $393 million per year.
              •   The Surface Transportation Authorization and Regulatory Streamlining
                  Act (S. 532), or STARS 2000, assumes that Massachusetts’ average annual
                  apportionments will be reduced to $432 million.
              •   The “low” funding scenario in the feasibility study reduces Massachusetts’
                  apportionments immediately to $450 million per year.
              •   The “high” funding scenario in the feasibility study assumes that
                  Massachusetts’ apportionments will be reduced incrementally from
                  $600 million per year from fiscal years 1998 to 2001 to $450 million per
                  year thereafter.
              •   The administration’s proposal for the National Economic Crossroads
                  Transportation Efficiency Act of 1997 (S. 468), or NEXTEA, retains the ISTEA
                  framework and assumes that Massachusetts will receive an average of
                  $580 million per year, ranging from $650 million in 1998 to about
                  $560 million in 2000 and beyond.
              •   The ISTEA Reauthorization Act of 1997 (S. 586), or ISTEA Works, also retains
                  the basic structure of ISTEA and assumes that average annual
                  apportionments for Massachusetts would equal $656 million.9

                  Table II.1 shows the effect of each scenario on the financing for the
                  Central Artery/Tunnel project. In modeling the scenarios for fiscal years
                  1997 to 2005, we used the assumptions contained in the feasibility study,
                  including obligation and state funding amounts, air rights proceeds, and
                  savings from the insurance program as shown in table 2. All scenarios

                  8
                   We selected reauthorization proposals for which FHWA estimates of average annual state
                  apportionments were available.
                  9
                   FHWA also provided state-by-state estimates for H.R. 1609. Under this bill, Massachusetts’ average
                  annual apportionments would be the same as those under S. 586, or $656 million per year.



                  Page 30                                         GAO/RCED-97-170 Central Artery/Tunnel Project
                                        Appendix II
                                        Future Federal Funding Scenarios for the
                                        Central Artery/Tunnel Project




                                        assume that the state is authorized to obligate the entire amount of its
                                        apportionment each year. In practice, states’ obligational authority has
                                        historically been less than the amount of the apportionment.

Table II.1: Comparison of Various
Federal Funding Scenarios for                                            Average annual                     Interim        Total
Massachusetts and the Effect on                                          Massachusetts                     surplus       surplus
Funding for the Central Artery/Tunnel   Scenario                         apportionment                   (shortfall)   (shortfall)
Project                                 STEP 21                          $393                              ($2,460)        ($936)
                                        STARS 2000                       $432                              ($2,338)        ($756)
                                        Feasibility study “low”          $450                              ($2,280)        ($671)
                                        Feasibility study “high”         fiscal year 1998-01 $600
                                                                         after fiscal year 2001 $450       ($1,761)        ($152)
                                        NEXTEA                           $580                              ($1,860)          ($60)
                                        ISTEA Reauthorization Act        $656                              ($1,637)         $281
                                        Source: GAO’s analysis of FHWA and state data.




                                        Page 31                                     GAO/RCED-97-170 Central Artery/Tunnel Project
Appendix III

Scope and Methodology


               To determine the estimated costs of the Central Artery/Tunnel project, we
               analyzed the monthly management reports issued by MHD from March 1996
               to March 1997 and selected cost data on construction contracts as of
               December 1, 1996. We met with MHD and management consultant officials
               to discuss the monthly reports and to determine the basis for MHD’s cost
               containment goals for the design and construction phases and MHD’s
               methodology for measuring progress against those goals. We also
               discussed our methodology for measuring MHD’s progress against its cost
               containment goals with project officials, who generally agreed with our
               methodology. We discussed cost containment strategies and progress with
               officials at MHD’s Central Artery/Tunnel project office and obtained and
               analyzed related documentation.

               In assessing MHD’s success in achieving its cost containment goals, we
               included scope changes in our calculation of growth in construction costs
               because these costs represent actual increases or decreases to total
               construction costs that if removed would not be accounted for in our
               analysis of growth in construction costs. We excluded the total value of
               scope transfers from our calculation of changes to awarded construction
               contract values. However, we captured this value as a separate line item
               under unawarded contracts in order to account for this source of cost
               increases within the total costs of the construction contracts.10

               To determine savings from the wrap-up insurance program, we reviewed
               insurance cost estimates from the inception of the program through
               March 1997 and discussed the program and its estimated savings with
               FHWA, MHD, and project officials, as well as the project’s insurance broker
               Sheppard, Riley, Coughlin. We also discussed various aspects of wrap-up
               insurance programs with industry officials at Liberty Mutual, Sedgwick
               James, Inc., the Workers’ Compensation Rating and Inspection Bureau of
               Massachusetts, and officials at other transportation projects with similar
               insurance programs, including the Los Angeles County Metropolitan
               Transportation Authority, the Metropolitan Atlanta Rapid Transit
               Authority, the Washington Metropolitan Area Transit Authority, and the
               New Jersey Turnpike Authority.

               To determine the Commonwealth of Massachusetts’ plans for financing
               the project, we analyzed the September 1996 finance plan and the
               December 1996 feasibility study. We reviewed supporting
               documentation—including additional funding scenarios for which

               10
                 According to project officials, the majority of scope transfers into awarded construction contracts
               initially came from unawarded construction contracts.



               Page 32                                          GAO/RCED-97-170 Central Artery/Tunnel Project
Appendix III
Scope and Methodology




state-by-state estimates were available—and discussed financing issues
with officials at FHWA’s headquarters in Washington, D.C., and at FHWA’s
Massachusetts Division Office in Boston, Massachusetts; the state’s
Executive Office of Administration and Finance; MHD’s Central
Artery/Tunnel project office; the Massachusetts Port Authority; and the
Massachusetts Turnpike Authority; and with rating agency officials at
Moody’s Investors Service, Standard & Poor’s, and Fitch Investors Service,
Inc., in New York. We also reviewed Massachusetts’ statewide
transportation plan and discussed it with officials at FHWA and at the state’s
Executive Office of Transportation and Construction in Boston. In
addition, we obtained and reviewed state legislation and discussed it with
officials at the state legislature, the Massachusetts Turnpike Authority, and
the Massachusetts Port Authority.

We performed our work from November 1996 through June 1997 in
accordance with generally accepted government auditing standards.
However, we did not independently verify the reliability of MHD’s data in its
Oracle database, which we used to analyze MHD’s progress in achieving its
cost containment goals.




Page 33                             GAO/RCED-97-170 Central Artery/Tunnel Project
Appendix IV

Letter From the Massachusetts Highway
Department




              Page 34      GAO/RCED-97-170 Central Artery/Tunnel Project
Appendix IV
Letter From the Massachusetts Highway
Department




Page 35                                 GAO/RCED-97-170 Central Artery/Tunnel Project
Appendix V

Major Contributors to This Report


                       Stephen M. Brown
Resources,             Steve Cohen
Community, and         Gary L. Jones
Economic               Phyllis F. Scheinberg
                       Sara Vermillion
Development Division
Washington, D.C.
                       Linda Choy
Boston,                Teresa Dee
Massachusetts          Lena Natola




(342926)               Page 36                 GAO/RCED-97-170 Central Artery/Tunnel Project
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