Full text of state report on Big Dig cost overruns
TABLE OF CONTENTSExecutive Summary
1. Enhanced Communication Process
2. Progress and Outlook
3. Budget and Cost Control
Project Management Monthly Report
Cash Flow Issues and Cost Pressures
Summary of the $1.4 Billion
Independent Assessment of the $1.4 billion
Total Cash Requirements
Federal Funding Levels for Massachusetts
Non-Federal Funding Sources
Funding Plan for Additional Requirements: $1.4 billion
Turnpike Authority Contributions
Turnpike Authority Cash
MHS Bond Issue
Extension of Maximum MHS Bond Maturity to 50 Years
Annual Contract Assistance Agreement
Massport Cash Contribution
Additional Grant Anticipation Notes
Other Proposed Finance Plans
Commonwealth Debt Reduction Plan: Contingency Fund
Real Estate Air Rights and Other Right of Way Benefits
Total Funding Requirements
Federal Obligations and Cash Flow
Commitment and Expenditure of Additional $1.4 Billion
Total Cash Flow Projection
This plan presents an update to the integrated cost, schedule, and funding forecast for the remainder of the Central Artery/Tunnel Project that was filed with the Federal Highway Administration (FHWA) for the period through June 30, 1999. Consistent with standard quarterly reporting practices, the data cutoff for this update is January 2000, however, the Project is aware of no significant changes to this data as of March 15, 2000. This update reports generally on the financial requirements to complete the Project, with a specific focus on explaining the components of the additional Project cash needs of $1.4 billion ("$1.4 billion"), and identifying non-federal funding sources for the $1.4 billion. This updated plan includes discussions on Project budget development and cost controls, remaining work, to-go funding and cash flow requirements. A full presentation of the $1.4 billion is included in this plan, including background information on the underlying assessment and a funding plan that supports the increased cash requirements. This updated plan also proposes major changes in reporting format and frequency. The highlights of this updated plan include:
The Commonwealth’s Central Artery/Tunnel Project (the Project) is the largest, most complex and technologically challenging highway project in American history. By replacing Boston’s aging, deteriorating elevated Central Artery (I-93) with a modern underground expressway, and extending the Massachusetts Turnpike (I-90) to Logan Airport via the new Ted Williams Tunnel under Boston Harbor, the Project will dramatically improve the flow of traffic.
The existing Central Artery was built in the late 1950’s to handle 75,000 vehicles a day. It is currently jammed with over 190,000 vehicles a day. The new underground expressway is expected to carry 245,000 vehicles comfortably in 2010. The Ted Williams Tunnel (TWT) has doubled the lane capacity across the harbor from four to eight, and provided a direct route to the airport for drivers south and west of the city. The tunnel opened to commercial traffic in December 1995, and when opened to full traffic in 2001, will carry more than 90,000 vehicles a day.
The Project’s most recent milestone was the opening of the Initial Leverett Circle Connector roadway between I-93 and Leverett Circle on October 7, 1999, one week ahead of schedule. This new roadway system accommodates over 30,000 vehicles per day, providing significant additional capacity to this congested interchange.
In all, the Project is building or rebuilding 161 lane miles of urban highway, about half in tunnels, in a 7.5-mile corridor. Construction extends from the I-93 Massachusetts Avenue Interchange on the south to Charlestown’s Sullivan Square on the north, and from the Mass Turnpike/I-93 interchange near South Station on the west under Boston Harbor to Logan Airport and Route 1A in East Boston. The eight-to-ten-lane underground downtown highway will replace an overcrowded six-lane elevated structure, with the number of on- and off-ramps reduced from 27 to 14 to help eliminate weaving across lanes to enter and exit the highway.
A key challenge is keeping traffic moving during construction. The elevated highway must remain in service as the wider road is built directly underneath, which presents major engineering and construction challenges.
This enormous project through the heart of one of America’s oldest and most crowded major cities requires state-of-the-art engineering to allow construction to continue within a few feet of active subway tunnels, railroad tracks, office towers, historic buildings, and a full load of Boston’s notoriously heavy traffic.
In the long term, the Project will provide an intermodal transportation infrastructure with links to air, sea, rail, bus and subway that can support sustained economic growth well into the next century.
Additionally, the Project will provide numerous environmental benefits. Air quality improvements will result from more efficient traffic movement and improved disbursement of vehicle exhaust. More than 150 acres of new parks and open space are being created in Boston at Spectacle Island, the Charles River Basin, and in the 27 acres of open space created in downtown Boston when the existing Artery is removed. Additionally, landfills in Massachusetts are being closed as excavated material from the Project is used to cap existing landfills that have reached capacity.
The Project recognizes that communication of information to the many Project stakeholders must be enhanced. This enhanced communication is essential to the maintenance of the Project’s long standing partnership with FHWA. This goal will be accomplished using several means:
As of January 2000 the Project is 64 percent complete and construction volume is at its peak. Consistent with standard quarterly reporting practices, the data cutoff for this update is January 2000. On average, over $100 million dollars of new construction is being completed each month. This peak level will continue into 2001. Various ramp openings will continue through the remainder of the Project to enable smooth traffic transitions when the major roadway openings occur as follows:
Initial I-90 Mainline Opening 2001
I-93 Northbound Opening 2002
Initial I-93 Southbound Opening 2003
Project Substantial Completion 2004
The Project opened the Leverett Circle Connector roadway on October 7, 1999, ahead of the scheduled milestone date. This roadway links the Leverett Circle area in Boston to I-93 in Cambridge improving traffic flow on Storrow Drive and reducing the traffic on the I-93 bridge over the Charles River. Since the Leverett Circle Connector went into service, commuters in the Boston area are saving up to 30 minutes on their daily commute. It is estimated that over 30,000 vehicles travel the roadway each day.
In South Boston, progress continues on the construction of the "cut and cover" portions of the I-90 tunnel. Four of the six Immersed Tube Tunnels (ITT) were cast and are in varying stages of preparation for "float-out" and placement in the Fort Point Channel. Two tubes have already been placed in the channel. The remaining two tubes will be moored in the channel for placement later this year.
Progress on the jacked tunnels in the South Bay Interchange area is also well underway. The concrete tunnel box constructed in the north jacking pit west of the railroad tracks has been jacked into place, and the follow-on cut and cover construction in the jacking pit area is underway. Construction continues on the tunnel boxes in the south jacking pit.
Excavation and construction of the I-93 Northbound and Southbound tunnels continues in downtown Boston. At the southern limit of the Project, the Massachusetts Avenue bridge has been completed and opened to traffic. Additionally, tunnel finish work has commenced at the southern limits of the I-93 cut and cover tunnels.
In South Boston, a number of ramp openings will occur to support construction staging as the I-90 roadway approaches the Initial I-90 Opening milestone in December 2001. The casting basin in the Fort Point Channel area will be closed again and drained to allow the remaining two ITTs to be constructed. After the tubes are constructed, the basin will be flooded again so the tubes can be floated into the channel for placement. Once the float out has occurred, the basin will be drained and then transformed, using cut and cover construction, into the I-90 tunnel as it extends towards the Ted Williams Tunnel. West of the railroad tracks the remaining tunnel boxes will be completed and jacked under the tracks for future connection to the ITTs in the Fort Point Channel.
Along I-93 Northbound, the existing elevated highway will be completely underpinned, the surface roadways will be decked over, the excavation completed, and tunnel construction and roadway finish work will continue. Progress will continue on the I-93 cable-stayed bridge and viaducts north of the Charles River. Two lanes of the permanent I-93 Southbound viaduct south of Dewey Square will be completed and put into service.
On Spectacle Island, the 105 acre island will open and become part of the National Park System.
Detailed lists of recent accomplishments and upcoming activities by Project area appear in Exhibits 2-1 through 2-5 on the following pages.
Exhibit 2-1 – CA/T Project by Area
Exhibit 2-2 – South Boston Area Map
Exhibit 2-3 – Central Area Map
Exhibit 2-4 – East Boston Map
Exhibit 2-5 – North of Callahan Map
The Project has continually experienced cost pressures since its inception. Through 1999, the Project identified ways to manage those pressures through aggressive cost containment. Over the past twelve months the cost pressures on the Project became more acute, and the cost containment measures were met with limited success. In late 1999 the Project initiated a "bottom to top" review of evolving cost trends that were not responding to cost containment and other cash flow reduction initiatives. The Project reassessed the cost and schedule for all remaining work, focusing on known cost and schedule exposures, both upward and downward, as well as potential cost increases due to unknown issues. The resulting anticipated additional cash requirement of $1.4 billion, increases the cash requirement through state fiscal year 2005 from $11.7 billion to $13.1 billion.
The total cost of the Project, expressed as cash needs through completion in 2004, is $13.1 billion. This number is based upon the long standing Project cash requirement of $11.7 billion, plus $1.4 billion. Given the inherent fluidity of certain Project costs going forward - e.g. final PCA outcomes, bids on unawarded contracts – it is impossible to predict with precision the Project’s final cash needs. The Project believes that the $1.4 billion constitutes a realistic and reliable estimate of additional cash needs. The estimate falls within a currently identified range of $1.277 billion to $1.669 billion. The Project’s assessment of additional cash needs has been validated as a realistic forecast by O’Brien-Kreitzberg (see Appendix F). The lower end of the range could be realized if, for example, construction contracts experience fewer than budgeted changes due to unforeseen site conditions. The upper end of the range could be realized if future contract bids exhibit less than the Project’s forecasted 13 percent variance to the office estimate due to market competition, future construction has impacts from differing site conditions greater than history or construction progress to-date would suggest, and contractors have greater success proving merit on claims than in the past. The total anticipated Project cost, expressed as a total net cost to complete taking into account all anticipated credits and offsets, could be less than the $13.1 billion of currently projected cash needs.
In early 1995 the Project established a $10.4 billion budget, designated as Revision 6 (Rev.6), with budget goals that relied in part on improvements over the Project’s historical experience. This aggressive, goal-oriented management approach achieved lower Project costs and accelerated schedule delivery.
The key cost and schedule containment goals established in Rev. 6 were in the areas of market-place competition, design evolution, to-go escalation, contingency (both budget and schedule), project management, and air rights credits.
At the time Rev. 6 was developed, contract bids were lower than the Project’s estimates by 13 percent. At that time, 22 contracts had been awarded for an approximate value of $1.3 billion. The Project estimated the price of each remaining contract and discounted each estimate by 13 percent to reflect the Project’s historical experience. To encourage market competition, the Project also initiated an international outreach effort by contacting major contractors throughout the world, providing to them details about the Project, and soliciting bids for the remaining work.
To control cost increases during design evolution, emphasize cost containment, and establish that the Project would not tolerate design enhancements unless they were truly critical to the operation of the system, Rev. 6 did not include any cost allowances for added design enhancements. Additionally, the Project initiated a design-to-cost budget program which required each design team to agree to a "not-to-exceed" construction cost for their design. This specified construction cost could only be adjusted for owner-initiated scope or pricing changes. This program has been successful in reducing cost growth during design. It was the first of its kind for a major public transportation project, and has since been considered by FHWA as a model for nationwide implementation.
The third major budget assumption in Rev. 6 was for to-go escalation. Rev. 6 assumed a to-go annual inflation rate of 3.35 percent. The assumption was changed in 1997 with FHWA concurrence to 2.35 percent annually, which has proven consistent with actual experience since 1997.
Potential Change Allowance
Each construction contract forecast includes a contingency, or Potential Change Allowance (PCA) for unknown or unforeseeable change orders. When Rev. 6 was developed, it included a PCA rate of 7 percent for unawarded contracts. This equated to an all-years rate of 10.6 percent. The Project and FHWA recognized that this rate was aggressive and represented a departure from historical trends. However, the Project concluded that targeting an aggressive to-go rate would ultimately result in a lower Project cost. Targeting a more relaxed rate would be easier to meet but (by definition) would impose less pressure on managers to contain costs.
Schedule milestones were developed based on aggressive progress without contingency. Project management continues to enforce an "aggressive, but achievable" schedule philosophy and requires establishment of schedule offsets when new issues impact the schedule. This philosophy has produced numerous schedule improvements and maintained the major Project milestones as evidenced by the opening of the Initial Leverett Circle slightly ahead of schedule.
In 1995, project management services were expected to be fully transferred to the Massachusetts Highway Department (MassHighway) or the Massachusetts Turnpike Authority (Turnpike Authority) from the management consultant (MC) by the end of 2002. The end of 2002 represented the time when construction activity would transition from a primarily "new construction" program to a demolition/surface restoration program. Prior to the end of 2002 the Project had planned a series of scope transfers leading to a complete transfer by the end of 2002. As explained in Section 3, these assumptions need to be adjusted based on today’s scope and services.
Air Rights Credits
Rev. 6 included $255 million in air rights credits. Due to the uncertainty of when these credits would be realized, in 1997 the Project was directed to delete the credit and the Project cost estimate was revised to $10.8 billion. The Project intends to reintroduce air rights credits to the Project cost estimate if the revenue can be realized before Project completion. Any air rights credits realized after 2005 will ultimately reduce the Project cost, but will not reduce current Project cash requirements.
The Rev. 6 estimate, produced in early 1995, has been the official budget and schedule of the Project. In the time since it was established, the Project has continuously managed to that baseline. Other than the $400 million adjustment in 1997, the Project has managed to a "zero-sum" budget with all cost increases offset by cost reductions or new revenues. This practice has been rigorously applied and followed since 1995. In early 1996, the Project established the Project Management Monthly (PMM) report, the Project’s budget management tool, to report on the cost, schedule and safety aspects of the Project as measured against the Rev.6 budget and schedule. The PMM is a routine report provided to FHWA, Project managers and staff for use in overseeing the Project.
The PMM identifies known and foreseeable cost issues. Once an issue becomes reasonably foreseeable and definable, it is quantified and added to the PMM as a "soft" exposure. This technique provides the Project early indicators of definable cost pressure for known issues and allows the Project the opportunity to avoid or mitigate the consequences of the issue or validate the certainty of the potential increase or decrease, and maintain the Project budget.
Once a "soft" exposure is definite, such as an actual bid opening variance to the budget, a "hard" variance and offsetting cost reduction are identified in the PMM. These offsets have been achieved primarily through the Project’s cost containment program and the highly successful safety/insurance program results.
Since April 1998, senior Project executives have periodically evaluated more speculative cost increases and decreases, based on trend assessments or other indirect information sources. If these speculative assumptions begin to materialize, or the trends and rough estimates become more certain, they are incorporated in the PMM as foreseeable costs.
Since 1996 the Project has filed an annual Finance Plan with FHWA and a semi-annual Finance Plan with the Massachusetts Legislature. The Finance Plan identifies the cash flow requirements of the existing budget and the available funding sources to support this cash need. The Finance Plan is based on the Project costs identified as of the Plan’s cutoff date. In the past, the Finance Plan, like the PMM, has not addressed potential cost exposures since these exposures were not firm and, if experienced, the Project and Commonwealth had a demonstrated record of identifying alternative funding sources or cost offsets. Additionally, any exposures that were realized were captured in the next scheduled update of the Finance Plan. If the Finance Plan is not accepted by FHWA, federal authorization of any new Advance Construction funds is suspended, essentially stopping the Project’s ability to award new contracts.
The Project has in place an Owner-Controlled Insurance Program (OCIP) that the Project anticipates will dramatically reduce the cost of insurance for the Project. The reserve funds required by this program will grow significantly if loss experience continues at current levels. The amount of reserves available under the OCIP are largely a function of excellent loss experience (i.e., a low level of insurance claims). The Project’s total cost estimates have assumed an insurance credit of $826 million upon completion of the OCIP in 2017. The timing and availability of the insurance credit in the total Project cost (see Section 5 for additional information) was put into question when the Department of Transportation Inspector General (DOT IG) raised issues concerning the level of funding in the OCIP Trust in 1999. The Project takes seriously the concerns raised by the DOT IG, and will take them into account in working with FHWA to establish the to-go level of funding and duration of the OCIP. FHWA requested that the Project provide an updated risk assessment and recommendations concerning the current and to-go funding levels in the Trust. Depending on the outcome of that review (currently on-going), the funding level and the duration of the Trust as currently structured may be changed.
The Project has a long and successful history of aggressively pursuing cost reduction and revenue increasing concepts in order to keep total Project costs within a manageable budget. These initiatives include items such as land and air rights development, leaseback opportunities, and fiber-optic corridors and the possibility of leveraging additional cash from anticipated insurance trust and air rights returns. The Project continually reviews the viability and timing of these opportunities to determine if they can be included as Project cash flow offsets.
It became apparent in the latter part of 1999, however, that although these concepts were viable and would reduce the all-years Project costs, much of the revenue associated with these concepts would not become available to the Project until after 2005. A variety of cost pressures became more acute and resistant to cost containment measures. For example, Potential Change Allowance exposures were trending beyond the rates assumed in Rev.6, most scope reduction opportunities had been taken, and the continuing complexity of the Project made it highly desirable to maintain Project management services through 2004. These conclusions put significant stress on the Project’s ability to maintain its $11.7 billion cash requirement.
Exhibit 4-1 below summarizes the $11.7 billion cash requirements identified in prior Finance Plans.
Totals may be off due to rounding
Exhibit 4-1: $11.7 Billion Cash Requirement
Exhibits 4-2 and 4-3 provide a breakdown of the $1.4 billion. Further explanations for each category of work follow.
Exhibit 4-2: Additional Cash Requirements by Category
Exhibit 4-3: Summary of Additional Cash Requirement by Type of Work
Construction - $915 Million
Schedule Maintenance Costs - $292 Million
Maintain the I-90/I-93 schedule milestones; schedule recovery resulting from unanticipated events (differing site conditions, obstructions, complex construction interfaces, etc.).
Changes on Awarded Contracts (PCA) - $302 Million
Unanticipated site conditions and obstructions; mitigation efforts (noise, environmental, etc.); revised construction techniques required to address site-specific conditions.
Unawarded Contracts - $321 Million
Additional material disposal, additional mitigation requirements, traffic maintenance, construction staging refinements, hazardous material handling issue, scope and pricing adjustments.
Force Accounts - $90 Million
Extended service contracts with the City of Boston for increased coordination required to address complex traffic maintenance; increased costs for Gillette’s plant relocation; additional AMTRAK services for work in the North and South Station areas due to extended construction schedules and the complexity of the work in the track areas; settlement with Massport for facility interfaces in East Boston; reassessment of electrical power expenses; miscellaneous extensions to service agreements and complex construction interfaces with abutting agencies.
Design - Construction Phase Services - $60 Million
Services include production of final design documents (plans, specifications and estimate) ($12 million) and support during construction including review of contractor submittals ($48 million).
Right of Way - $72 Million
Amounts owed to landowners based on settlements or court judgments above the amount offered by the Commonwealth; also identifies potential exposures on claims filed or expected to be filed by landowners.
Project Management through 2002 - $160 Million
B/PB Labor - $107 Million
Direct Expenses and Subconsultants - $53 Million
The exposure for Management Consultant services through 2002 is due to increased staffing levels necessary to manage the construction exposures identified above, extended services resulting from a shift of the centroid of the Project schedule, and ongoing services originally assumed to be performed by the Turnpike Authority or MassHighway.
Project Management 2003-2004 - $100 Million
The original budget assumes Turnpike Authority would take over all management services in 2003.
Additional Cash Requirement - $915 million
Schedule Maintenance: $292 million
Potential Change Allowance: $302 million
Unawarded Contracts: $321 million
The Construction portion of the additional cash requirements is broken down into three components: Schedule Maintenance (costs related to acceleration of construction activities in order to overcome delays and maintain Project milestones); PCA (costs associated with addressing unknown or differing site conditions and other contract changes); and Unawarded Contracts (accounts for variances between current contract estimates and 1995 budgeted amounts for contracts not yet awarded). The advanced state of design and construction has been decreasing the cost reduction opportunities on unawarded construction contracts and force accounts, and, as a result, severe scope reductions would be needed to mitigate any further budget increases. However, any major scope reductions would produce a technically inadequate transportation system, and the Project was, and is not, willing to sacrifice safety or system necessities for cost reduction. The Project, of course, continues to foster cost reduction and cost containment, but not at the expense of safety, quality, operability, or efficiency.
For awarded contracts, the estimates were developed following analysis and review by multiple levels of Project management. The individual field office staffs estimated their contracts "Cost to Complete" (that is, the estimate of that contract's value at completion). That estimate was based on several factors, including the value of changes and claims to date; the schedule status (i.e., how much delay had to be recovered); type and amount of remaining work; amount of remaining risk (i.e., how much was underground); status of design issues; and complexity of contractor interfaces. These estimates were reviewed and adjusted through additional senior level management review based on their experience and knowledge of the status of various negotiations. This process enables the project management to understand additional cash needs for each active contract (additional cash need equals the Cost to Complete minus the current budget, for each contract).
For unawarded contracts, the current estimate was based on the complete final plans developed by Project engineers. The current contract estimate was adjusted for anticipated market conditions prior to calculating the potential exposure. This adjustment [a 13 percent discount] was based on the Project's historical data plus a current assessment of unawarded contract scope and potential bidders' competitive positions. The current budget values were established in early 1995 as part of Rev. 6.
Schedule Maintenance Cash Need
These estimated costs are associated with maintaining the major I-90 and I-93 Project Milestones. The attached bar chart schedules in Appendix D depict the summary level recovery plans for Initial I-90 Opening (December 2001) and the I-93 Northbound Opening (July 2002). These schedules were the basis for the cost estimates in this category. The attachments also identify several Schedule Initiatives that were developed and estimated as part of this overall effort. These recovery plans continue to evolve as Project managers continuously adjust the plan to account for completed work and identify any additional unknowns.
As noted in the bar chart, the I-90 Milestone would have been exposed to a 10-month delay, due to encountering difficult, unexpected conditions in the Fort Point Channel area of the Project. As a result of several schedule initiatives, the Project expects to overcome previous delays and meet the Milestone date.
The I-93 Northbound milestone would have been exposed to a 12 month delay, primarily due to differing site conditions such as uncharted utilities, obstructions, and difficult groundwater conditions on a number of contracts. Various acceleration initiatives recovered 6 months off this delay. The remaining six months were recovered using a resequenced ramp opening.
Types of costs in the category of schedule maintenance include items such as acceleration of contractors (additional people plus additional premium overtime); resequencing of contractors (extra costs associated with performing the work in a different manner); providing extra or different equipment; installing different or additional work to make other work easier; providing temporary protection or shoring; and requiring shared access in a single work zone. The total estimated additional cash requirement for schedule maintenance is $292 million.
It is less costly to recover schedule than to extend schedule. This is due to the "fast track" nature of this project, as a delay to one contractor affects several other interfacing or following contractors. The Project has always put a high priority on meeting its schedule milestones. Both the Ted Williams Tunnel and the Initial Leverett Circle Connector roadways were opened ahead of schedule, significantly improving traffic between East Boston and downtown Boston and in the I-93/Leverett Circle interchange. Achieving schedule commitments minimizes public disruption, avoids even greater delay and escalation costs, and ultimately will deliver the benefits of the completed Project to the public and businesses as soon as practicable.
The Project has concluded, based on quantitative assessments, that as a general proposition it is more economical to pay acceleration costs to maintain schedule than to extend the schedule and pay the added contractor overhead and construction management costs. These significant cost exposures include items such as delay costs to contractors (extended time for overheads – labor/equipment); escalation costs for existing and unawarded contracts; and additional Project management costs for maintaining a presence longer. The estimated additional cash need if the Project had been delayed would have been $330 million.
In addition to avoiding the costs of delay, there are significant public benefits by achieving the Project milestones. "Road User Benefits" is a FHWA sanctioned industry standard for estimating the public benefit of opening a highway. This study describes (in dollars) the benefits to the travelling public derived upon completion of Project elements as quickly as possible. The approved study describes the benefits as worth approximately $1 million per day to achieve the I-90 and I-93 milestones. Based on the projected delays, recovering the delays translates to a Road User Benefit of about $200 million for I-90 and $146 million for I-93. The "Road User Benefit" study and FHWA’s acceptance letter of the study can be seen in Appendix E.
Potential Change Allowance
This category includes non-schedule related contract changes. These changes are primarily the result of unanticipated site conditions, general administrative changes, design development, and other categories.
PCA exposures have been increasing at a greater rate than offsetting cost containment initiatives are being identified. To-date experience is higher than forecast, and it has become clear that the to-go trend will not meet the aggressive rates set as part of the Rev.6 budget.
Unanticipated site conditions, due to the inherent unknowns of underground construction (especially in an old city with much reclaimed land) include items such as uncharted utilities; obstructions such as old piles and seawalls; unexpectedly difficult groundwater conditions; unexpectedly weak soil strengths; and discovery of hazardous materials.
General administrative changes include overruns of forecasted quantities; and include revised regulatory or mitigation requirements.
Design development changes occur since some systems designs necessarily lag behind the structural work. In order to maintain the schedule, the tunnel contracts began while the electrical and Integrated Project Control System designs were being completed. Final systems design details are then added to the tunnel contracts later. Also, schedule delays in one area may require a revised roadway design in another area to support necessary traffic staging.
The total estimated cash requirement for PCA is $302 million.
As noted above, the costs in this category include the additional cash requirements to the estimated bid prices. Exhibit 4-4 details the remaining contracts to be awarded and additional cash need for each contract.
Totals may be off due to rounding
Additional Cash Requirement - $90 Million
Project construction affects numerous utilities, government agencies and abutters necessitating the relocation of innumerable sewer and water lines, electrical conduits, and private and public facilities, services and work sites. As a result, "force account" agreements have been entered into with these parties to address these impacts and relocation requirements. Under these agreements, the affected parties perform certain services such as design, construction, inspection and coordination services with their own forces and are reimbursed by the Project for actual costs.
The revised numbers are based on scope review meetings with each utility company and agency. The estimates considered the status of construction, the work remaining to complete the job as well as any new design information.
The following is a breakdown of the $90 million additional cash need.
Cash Requirement - $17 Million
Additional services for construction support in the North and South Station areas. Principal items include extended construction schedules in track areas, changes at North Station to accommodate eight-track operation, additional support for deep soil mixing, grouting, and soil freezing in the South Station area, and additional flagging requirements.
Cash Requirement - $19 Million
The consolidation of temporary and interim power cost for several construction contracts, including the roadway testing and start-up, is estimated at $10 million. This work was previously included in various construction contracts but is being removed since it will be more efficient to handle it through a consolidated approach. The additional $9 million is an allowance for related infrastructure and contingencies.
City of Boston
Cash Requirement - $8 Million
The agreement with the City of Boston for traffic planning and other services has been extended to June 2003. Previously, the agreement was only funded through December 2000.
Cash Requirement - $7 Million
The tunnel alignment in South Boston required the relocation of certain Gillette facilities. The figure represents the latest cost projection for the final stage of the relocation.
MBTA BECO Retaining Wall and Unrealized Savings
Cash Requirement - $19 Million
Unrealized savings of $8 million from the MBTA Force Account reduction agreement - MBTA initially committed to a cost reduction/cost participation of $10 million, but to date has identified only $1.6 million in reductions. Additionally, as part of the BECO substation relocation right-of-way agreement, the Project is responsible for building retaining walls at the site at an estimated cost of $11 million. The design of this work was not finalized until late 1998.
Cash Requirement - $16 Million
The settlement with Massport requires the Project to design and construct the agreed upon Alignment Option (Concept 4) betterments, including right-of-way acquisition, management, insurance and other costs. It is important to note that this settlement allowed the project to realize $40 million in savings.
Cash Requirement - $4 million
Miscellaneous extensions of MBTA, BWSC, TRIGEN, Commonwealth Electric, Bell Atlantic and other force accounts.
The land acquisition requirements for the Project are handled by MassHighway. Land and rights in land are generally acquired by eminent domain pursuant to MassHighway's authorizing legislation set forth in Mass. Gen. L. c. 81, and in accordance with the eminent domain procedures set forth in Mass. Gen. L. c. 79. Land and rights in land to be acquired on either a permanent or temporary basis are shown on Right of Way Plans prepared for each design contract section.
Once the land and rights in land are identified, for all but the smallest parcels, two independent appraisals are conducted by appraisers selected from MassHighway's approved list of real estate appraisers. Following completion of those two appraisal reports, they are reviewed by a review appraiser who is either a MassHighway employee or is selected from MassHighway's approved list of review appraisers. The review appraiser's responsibility is to review both reports, to correct any errors, and to prepare a report indicating which appraisal is more indicative of the fair market value of the land or rights in land to be acquired as of the date of the report. Following receipt of the review appraiser's recommendation, all proposed acquisitions in excess of $175,000 are also subject to receipt of approval from the Real Estate Review Board, and then by the MassHighway Board of Commissioners.
During the 30 day period following the Board of Commissioner’s approval of an Order of Taking, the landowner is contacted by MassHighway and informed of the amount MassHighway has established as the fair market value on the date of taking. The landowner has the choice of accepting the payment in full settlement or as a (partial) payment "pro-tanto". Any landowner accepting MassHighway's offer as a payment "pro-tanto" reserves the right, within 3 years of the date of taking, to petition the appropriate Massachusetts Superior Court for an additional assessment of damages via a jury trial. MassHighway is required to pay interest at the statutory rate on any additional award that may be established either by negotiated settlement or jury verdict.
The Project identified each of the pending Right of Way claims and those takings that are anticipated to result in a claim beyond the "pro tanto" payment. The Project reviewed available information and documentation about each taking (for example, appraisals or information from litigation discovery), and consulted with the Assistant Attorney General assigned to handle each litigated claim. As cases continue to move through the discovery process, more information, particularly information about plaintiffs' demands, becomes known. The estimates, therefore, are subject to revision as more information becomes available.
Based on these figures, the Project estimated the total to-go potential exposure at $72 million.
Additional Cash Requirement - $60 Million
With design 99 percent complete, the Project’s engineering function has shifted focus to Construction Phase Services (CPS), or engineering services in support of Project construction. CPS includes review of the contractor’s technical submittals, response to technical Requests for Information, review and approval of the contractor’s shop drawings, design calculations, material samples and product catalog descriptions, review of Value Engineering Proposals (proposed design and construction alternatives intended to reduce Project costs), review of contractor claims, and introduction of design alternatives and construction work-a-rounds as field conditions require and for cost and schedule containment.
To assess CPS requirements, the Project reviewed the status of each construction contract, expected design changes during construction, the number of contractor submittals expected and any known non-standard services such as a major contractor Value Engineering initiative. With some minor exceptions, this assessment resulted in CPS budget requirements for each engineer of 1.5 percent to 2.0 percent of the construction contract value plus allowances for additional items such as design changes and field inspection by the final engineer.
This assessment resulted in identifying an additional $48 million required for Construction Phase Services. The 1.5 to 2.0 percent value is consistent with industry standards. This process has been reviewed and validated by an independent third party, O’Brien-Kreitzberg (see Appendix F).
To-go final design costs were also assessed and an additional $12 million cash need, primarily related to design efforts for mitigation and hazardous material assessment and remediation services, is required to complete final design.
Additional Cash Requirement - $260 Million
Project management responsibilities include conceptual and preliminary design services, design management services for final design, project controls, quality control, and construction management.
Rev. 6 assumed that project management services would be completely transferred from the MC to the Turnpike Authority or MassHighway by the end of 2002. Prior to 2002, there was a planned transition period when specific services would be transferred to the Turnpike Authority or MassHighway to meet the complete 2002 transition objective. The contract renewal process with the management consultant (MC) in mid-1999 assessed in detail the to-go project management needs and philosophy based on current project scope and schedule and the economies gained by the current integrated organization. The assessment clearly indicates that the remaining project management workload is significant and will require a workforce skill set and level of construction management expertise not currently available at these needed levels within the Turnpike Authority or MassHighway. Furthermore, because some services had not been transferred as early as planned and peak construction was both delayed and extended, requiring additional staff positions, it became evident that the 2002 objective would need to be advanced to mid-2001 to remain budget neutral. Concluding that it may not be in the best interests of the Turnpike Authority or MassHighway to assume full project management as early as needed, the cost of contracting the MC through 2004 was included in the to-go cost assessment. However, it should be noted that no final decision has yet been made on this issue. Any further transfer of project management services to the Turnpike Authority would save the taxpayer approximately 25 percent of the attendant labor cost.
The MC contract has been executed through a series of work programs. These work programs have ranged from one to three-plus years in duration. Pricing is dependent on the then known required scope of service. Quantification basis is validated by MassHighway, the Turnpike Authority and FHWA.
The first step in the process is to develop a detailed scope of service document based on the current schedule and needs of the project. Then each required position is identified and the duration of the position is determined. This information is captured on staffing templates. This need is then validated by the Turnpike Authority and FHWA. The Project then quantifies supporting direct expenses by detailed line item. This also is reviewed and approved by the Turnpike Authority and FHWA.
After several revisions to the staffing templates and direct expense forecasts, the pricing of the project management services is finalized and formally approved by FHWA, MassHighway, and the Turnpike Authority.
Project Management through 2002
Additional Cash Requirement - $160 million
Bechtel/Parsons Brinkerhoff Labor $97 million
Bechtel/Parsons Brinkerhoff Fee $10 million
Direct Expenses and Subconsultants $53 million
As the Project progressed many of the scope reductions were not achieved as continuation of these services were still required to adequately support the Project. However, the Project continually monitored its staffing requirements and decreased the staffing levels when actual conditions allowed, sometimes prior to scheduled staff reductions.
The level of Project management support has changed since Rev. 6. Since that time detailed support activities such as required shift work, number of work days, refined contract schedule duration, etc. have been developed and Project management has had to modify its support strategy to match the contractors and Project schedule.
Project Management 2003-2004
Additional Cash Requirement - $100 million
Bechtel/Parsons Brinkerhoff Labor $60 million
Bechtel/Parsons Brinkerhoff Fee $ 6 million
Direct Expenses and Subconsultants $34 million
Rev. 6 established a budget for project management services that assumed the MC’s responsibilities would be transferred to MassHighway or the Turnpike Authority by the end of 2002, after which the related expenses would be expenses of MassHighway or the Turnpike Authority, and not Project costs.
In November 1999 the Turnpike Authority contracted PricewaterhouseCoopers (PwC) to independently assess the project management staffing requirements. PwC’s assessment of staffing needs confirmed the results of the joint assessment performed by Project and FHWA personnel in July 1999 (see Appendix G).
The Project has hired and is currently working with O'Brien-Kreitzberg, a construction management firm previously unassociated with the Project, to independently review and validate the design and construction additional cash requirements. The results of their study are included in Appendix F. The Project intends on contracting with O’Brien-Kreitzberg to regularly review cost and schedule assessments. In addition, the Executive Office of Administration and Finance will be contracting with an independent consultant to review Project costs and perform ongoing review as necessary.
Exhibit 4-5 below summarizes the anticipated total Project cash requirements by type of work after adding the $1.4 billion to the previously identified cash need of $11.7 billion.
Totals may be off due to rounding
Exhibit 4-5: Summary of Total Cash Requirements
Exhibits 5-1 and 5-2 summarize the obligation and expenditure status of the previously identified $11.7 billion funding.
Totals may be off due to rounding
Exhibit 5-1: Summary of $11.7 billion Obligations by Funding Source ($ millions)
Totals may be off due to rounding
Exhibit 5-2: Summary of $11.7 billion Expenditures by Funding Source ($ millions)
The Commonwealth's expected annual federal highway funding from TEA-21 is approximately $520 million per year. Actual funds each year depend on the Highway Trust Fund (HTF) revenues and annual appropriations levels. Exhibit 5-3 includes the actual obligation authority and estimated annual apportionments to Massachusetts. For FFY2001-2003 the full estimated appropriation levels are included in this Finance Plan, however, any expected or potential redistribution and future Revenue-Adjusted Budget Authority (RABA) values are not included (consistent with Commonwealth’s April 1999 State Transportation Improvement Plan (STIP) submission).
The federal funding levels assumed in this Finance Plan update are based on actual obligation authority for FFY00, estimated TEA-21 apportionments for FFY2001-2003, plus an additional $71 million in obligation authority to the Project from the FFY99 Omnibus Appropriations Act. This Finance Plan update assumes the current 71/29 percent funding allocation between the Project and the Statewide Road and Bridge Program will continue through FFY2002, after which, the allocation will be 50/50 percent until the Project’s Grant Anticipation Notes (GANs) are repaid. During FFY2001-2002, the Project’s 71 percent share of federal funding will include a 71 percent share of the Designated High Priority Project funds. The Project will not receive any RABA funds allocated to the Commonwealth during FFY2000.
Source: FHWA, September 1998; STIP, April 1999, Actual FFY00 OA.
Exhibit 5-3: Obligation Authority and Estimated Annual TEA-21 Apportionments ($ millions)
Advance Construction with Partial Conversion
The National Highway Act of 1995 (NHS) permits states to use the Advance Construction (AC) financing mechanism for projects included in their STIP. Project financing is heavily dependent on optimizing available federal funds through the use of Advance Construction with Partial Conversion. This Finance Plan update, using AC with Partial Conversion, assumes that over 90 percent of federal funds are obligated and spent in the same fiscal year. Under traditional obligation practices, this percentage would be closer to 20 – 25 percent, since, for example, the full value of a four year construction contract would be obligated at the start of construction. The AC balance is the sum of the existing authorized advance construction amounts for the Project less the annual obligations (conversions) required to pay the federal share of invoices through that year. The Project’s AC Balance was approximately $2.8 billion at the end of FFY99. Over the next several years the Project intends to request AC authorization on all federally eligible work, including the work included in the $1.4 billion. Exhibit 5-4 illustrates the Project’s projected AC balances by year.
Exhibit 5-4: Projected Project AC Balances as of January 2000
Previous Finance Plans as well as the Metropolitan Highway System Feasibility Study issued in December 1996 identified several non-federal funding sources for the Project, including state general obligation bonds, Grant Anticipation Notes, third party funds from Massport and the Turnpike Authority, and Bond Anticipation Notes to access Massport payments in advance. This Finance Plan update identifies sufficient additional non-federal funding sources to meet the $1.4 billion (see discussion later in this Section and Appendices A and B).
Transportation Bond Bill
In February 1999 the Governor filed the 1999 Transportation Bond Bill with the Legislature. The Bond Bill as filed will provide spending authorization of $6,006.8 million through SFY2002 for the various transportation initiatives within the Commonwealth, including the Project. The Project’s portion of the Bond Bill allows access to federal and state funding, as well as full spending (encumbering) authorization for the Grant Anticipation Notes provided under the Commonwealth’s GANs enabling legislation, passed in May 1998, thus implementing another phase of a comprehensive funding plan for the Commonwealth’s transportation improvement program. The bill provides the necessary language to maximize federal funding for the Project.
In August 1999 the Legislature and Governor approved a portion of the original Bond Bill, Chapter 53 of the Acts of 1999, "An Act Providing for an Accelerated Transportation Development and Improvement Program for the Commonwealth". The Act provides additional spending authorization of $450 million in GANs for the Project plus an authorization for an additional $16.25 million in state matching funds. The Act supports the Commonwealth’s overall transportation program by providing this spending authorization for the GANS program, by authorizing the Route 3 North Improvement Project, and authorizing $150 million for Chapter 90 projects. The Legislature also approved a capital supplemental budget that included $354 million for transportation infrastructure improvements for the Statewide Road and Bridge Program.
In November 1999, the House passed the remainder of the Governor’s original 1999 Transportation Bond Bill (House No. 4877). The Senate recently passed a portion of the Governor’s Transportation Bond Bill (Senate No. 2103), authorizing only $200 million in spending for the Project. The balance of the Bond Bill request is on hold pending approval of a funding plan for the $1.4 billion. Both bills have been referred to a conference committee. Timely enactment of the full Bond Bill is critical to support the schedule and financial requirements of the Project.
General Obligation Bonds
Between January 2000 (mid-SFY2000) and SFY2005, the Commonwealth will issue $667 million of general obligation bonds to finance the Project. Total outstanding debt through 2005 for the Project is less than this amount since a significant portion of the bonds issued since 1985 will have already been repaid by annual principal payments financed by the general revenues of the Commonwealth through the Commonwealth’s operating budget.
The Commonwealth has a long practice of borrowing funds, via state general and special obligation bonds, to pay for capital expenditures such as the Project. Proceeds from these bonds cover the state share of federal-aid projects and pay for non-federally funded projects. General obligation bonds are the principal non-federal source of financing for most of the Commonwealth’s capital infrastructure investment, including transportation, higher education, public housing, prisons, courthouses, and recreational and other facilities.
Between 1991 and 1998 the Commonwealth issued approximately $900 million per year of bonds to finance its capital program. In 1998 this amount was increased to approximately $1 billion per year to provide the Commonwealth greater financing flexibility and allow continued investment in other important capital construction activities during the peak cash flow years of the Project. Citing the Commonwealth’s overall fiscal health and management, Moody’s Investor Services upgraded the state’s credit rating from Aa3 to Aa2 in January 2000. In addition, Standard and Poor’s changed the state’s outlook from stable to positive, and Fitch IBCA, Inc. re-affirmed its stable outlook on the Commonwealth’s credit. Both Standard and Poor’s and Fitch IBCA, Inc. assign the Commonwealth’s general obligation bond rating AA-.
Grant Anticipation Notes (GANs)
In 1996 the Commonwealth filed a Finance Plan with FHWA that identified a transportation program funding variance between cash requirements and available funding sources during the Project’s peak construction years. The projected funding sources were insufficient to maintain both an adequate statewide program and support the Project during peak construction. The Project and the Commonwealth conducted several studies to address and minimize this funding deficiency.
The Project evaluated all remaining scope and removed those features judged non-essential in order to help lower the cash requirement and reduce the funding variance. The Project also resequenced construction to the extent possible to reduce the funding variance during the peak years.
The Project also identified significant cost impacts that would result from major Project delays and schedule extensions. Concurrently, the Administration examined the possibility of downsizing the statewide program to increase available funds for the Project during its peak years and avoid large Project delay related costs. The Administration and Legislature concluded that the statewide program was also a priority, and that both the statewide and Project program requirements would be supported.
With all foreseeable federal and general obligation bond funding committed to the Project and the statewide program, new financing mechanisms had to be identified to alleviate the funding shortfall without increasing the overall general obligation debt of the Commonwealth and adversely affecting the Commonwealth’s bond ratings. The Administration, working closely with the Legislature, developed a comprehensive funding strategy to support the transportation program priorities and the above mentioned financing goals. The GANs program, a cornerstone of this strategy, is an innovative financing program that leverages future federal highway funds to provide current cash for Project costs without a general obligation pledge from the Commonwealth. GANs funding reduces the funding variance, creates no adverse cost or schedule impacts, and can be secured without impacting the Commonwealth’s credit ratings.
As part of this collective financial strategy, the Legislature, in May 1997, authorized issuance of up to $900 million in GANs backed by the Commonwealth. In May 1998, further legislation increased the current GANs program to issue up to a total of $1.5 billion and restructuring the program to be an asset-backed security. In August 1999, a portion of the 1999 Transportation Bond Bill was passed, which included spending authorization of $450 million of the remaining $600 million in GANs ($1.5 billion total less $900 million spending authorization to date). The issuance and spending authority of the remaining originally authorized $150 million in GANs is contingent upon passage of the remainder of the 1999/2000 Transportation Bond Bill.
The GANs program is structured as an asset-backed program and is not backed by the full faith and credit of the Commonwealth. The Commonwealth’s GANs program is unique as compared to other states’ GANs programs in its asset-backed structure. The program incorporates a number of security features that enhance the marketability of the Notes. The GANs program provides for the debt service to be funded one year in advance of the debt service payment dates. For each new series of debt instruments, the initial period debt will either be funded at closing or certified to be funded by the end of the then-current fiscal year. In addition, the semi-annual debt service requirements are structured to ensure ample debt service coverage under a conservative, low federal funding scenario. Projected federal highway reimbursements provide a coverage of 2.5 times the maximum covenanted semi-annual debt service. Further, subject to provisions of the GANs Trust Agreement, the amount of federal reimbursements on deposit in the GANs Trust Fund to be applied to the payment of debt service (principal and interest) on the Notes is equal to the greater of $216 million or 50 percent of future Massachusetts federal highway apportionments.
The intent of the Commonwealth is for interest payments due on GANs to be appropriated annually. The Executive Office of Administration and Finance (EOAF) will request and file for an amount in the Governor’s annual budget, the necessary appropriation to provide timely deposits to the GANs Trust Fund to meet the scheduled debt service requirements. This appropriation will cover the annual interest costs, required deposits to rebate funds, and any other fees and expenses associated with the Notes. Based on the security provided by the GANs Trust Agreement and the historical stability of the federal-aid highway program, the GANs program was rated favorably by Moody’s Investors Service, Fitch IBCA Inc., and Duff & Phelps. These rating agencies assigned the GANs Aa3, AA, and AAA ratings, respectively.
The Commonwealth issued its first series of GANs, consisting of $580 million in Notes, in June 1998 at a total interest cost of 4.84 percent. The second series of $320 million in Notes was issued in November 1998 at a total interest cost of 4.69 percent. In total, the Commonwealth has issued approximately $900 million of GANs to date and expects to issue another $450 million in April 2000.
Remaining GANs Authorization Required
As noted earlier, the $1.5 billion GANs program is an integral part of the Project’s Finance Plan and of the Project’s federal funding requirements included in the Commonwealth’s STIP. This program continues to be a major component of the Administration’s and Legislature’s strategy to bridge the federal funding shortfall during the peak construction years (SFY99-SFY2001). The recent passage of part of the GANs authorization portion of the 1999 Transportation Bond Bill has brought the Project’s GANs spending authorization up to $1.35 billion ($900 million plus $450 million). Another $150 million would fully fund the $1.5 billion program and meet the intent of the legislation that was conceived over the past several years. The Commonwealth expects to issue the remaining $150 million GANs by June 30, 2001.
The remaining $150 million GANs authorization is required to meet construction expenditures on the I-93 Central Artery North St. to Chardon St. (C15A1), I-93 Central Artery Chardon St. to Charles River (C15A2), I-93 Central Artery Northbound and Southbound (C17A1), Ventilation Building #3 (C17A3), and I-93 North of the Charles River (C19B1) contracts. Without a fully funded GANs program, an additional alternate funding source will need to be identified to support the Project’s schedule and cash flow. Without the remaining GANs or an alternate funding source, the above listed contracts would require schedule extensions to allow the pace of construction to slow down to the pace of federal funding. This will delay these and other interfacing and related follow-on contracts, and will ultimately delay the I-93 Opening milestones. Analyses performed over the past several years have confirmed the cost of slowing down construction (increased contractor labor and overhead costs from schedule extensions) to match the pace of federal funding availability is greater than the cost of the GANs program. This additional construction cost would significantly increase the total cost of the Project as well as the cost of the Commonwealth’s overall transportation program.
Massachusetts Port Authority
The Massachusetts Port Authority (Massport) is statutorily obliged pursuant to the Metropolitan Highway System (MHS) legislation (Chapter 3 of the Acts of 1997 - M.G.L. Chapter 81A) to purchase not less than $200 million of assets built as part of the Project. The Project will substantially improve the vehicular access to Logan Airport as well as properties owned by Massport in South Boston. However, for the purposes of compliance with federal regulations and obligations associated with previous debt financing, substantial financial payments must be associated with assets owned by Massport, and in many cases must be assets that exclusively benefit airport activities.
Chapter 3 of the Acts of 1997 directed EOAF, the State Auditor, the Division of Capital Asset Management, the Turnpike Authority, and Massport "to undertake a joint assessment study to identify any additional segments and the value of such segments which may be acquired by Massport in connection with an additional payment to the Commonwealth . . . not to exceed one hundred million dollars." The joint assessment study concluded that it was appropriate for Massport to acquire certain segments of the Project located near Logan Airport that exclusively serve or provide enhanced access to the airport, and to pay $300 million in the exchange. Such payments are to be made pursuant to the terms of the roadway asset transfer agreement between the Turnpike Authority, MassHighway, EOAF and Massport.
In August 1998, Massport executed an amended MOU with the Commonwealth that provides a schedule for payment of the $300 million Massport contribution. Massport will pay the originally legislated $200 million in installments between fiscal years 1998 and 2003 in exchange for MHS roadway assets of commensurate value. The last $100 million of roadway purchases has been scheduled for fiscal years 2004 and 2005. At that time, Massport will sell debt to finance the last $100 million in roadway purchases as its debt capacity will be bolstered by the revenues from the completed Logan Modernization Program.
Bond Anticipation Notes (BANs)
To meet the cash flow needs of the Project as outlined in this and previous Finance Plans, and in accordance with the agreed upon schedule for Massport contributions, the Commonwealth has agreed to provide interim financing in the form of BANs. Massport originally agreed to provide a total of $300 million ($222 million to go) to acquire MHS roadway assets – a total of $124 million in cash with $81 million to go to be provided as outlined in Exhibit 6-8, and the remaining $176 million on a schedule as agreed upon with EOAF commencing in 2003. In recognition of the cash flow needs of the Project between 1999 and 2001, the Executive Office of Transportation and Construction (EOTC), EOAF, and the Turnpike Authority entered into a Memorandum of Understanding (MOU) in February 1999 with respect to the $176 million BANs to be issued by the Commonwealth in anticipation of future payments from Massport.
Financial Status of Massachusetts Turnpike Authority
The Turnpike Authority has contributed $1,255 million to date (of a total $1,355 million) towards the financing of the Project. Additional Turnpike Authority contributions will be made both under the Governor’s plan and in an ongoing manner consistent with the spirit and intent of the Metropolitan Highway System legislation. The first $100 million was contributed in 1996 as mandated by Chapter 273 of the Acts of 1995 towards the acquisition of the Ted Williams Tunnel. The Turnpike Authority contributed $700 million in 1998 to the Capital Expenditure Reserve Fund of the Commonwealth to satisfy the Turnpike Authority’s financial obligations mandated under Chapter 11 of the Acts of 1997.
The Feasibility Study prepared pursuant to Chapter 102 of the Acts of 1995, as amended by Chapter 273 of the Acts of 1995, suggested that the Turnpike Authority might have the capacity to contribute an additional $300 million in later years. The Turnpike Authority is not required by current law to pay any additional amount to the Commonwealth with respect to the Project. However, the Turnpike Authority entered into an MOU with EOAF and EOTC in February 1999 which amended and restated an earlier MOU, providing for additional contributions to the Project during SFY1999 and SFY2000.
The payments were contingent upon the Turnpike Authority’s ability to issue additional bonds resulting in net proceeds at least sufficient to make such payments on such dates and execution of a Contract for Financial Assistance with the Commonwealth. The Turnpike Authority executed a Contract for Financial Assistance with EOAF on behalf of the Commonwealth in February 1999 and subsequently, in March 1999, issued $808,975,000 in Metropolitan Highway System Revenue Bonds, 1999 Series A (Subordinated) (the "1999 Bonds") under the terms of its 1997 MHS Trust Agreement. The 1999 Bonds were issued to pay the Commonwealth all of the amounts stipulated in the MOU on the schedule described therein to pay Project costs.
The Turnpike Authority transferred $355 million on April 15, 1999 to the Capital Expenditure Reserve Fund and also funded $4 million into an escrow account on behalf of MassHighway (representing the Commonwealth) and the Project as part of a settlement agreement between MassHighway and an abutter. The balance of the $100 million due in SFY1999 ($96 million) was transferred to the Commonwealth’s Capital Expenditure Reserve Fund on June 30, 1999.
An additional Turnpike Authority contribution of $100 million (stipulated under the MOU executed in February 1999) due by June 30, 2000 is still contingent upon (i) continued adherence by MassHighway to the terms and conditions of the Project Management Agreement dated July 1, 1997 between MassHighway and the Turnpike Authority, as amended from time to time; (ii) continued adherence by MassHighway to the terms and conditions of the Third Harbor Tunnel Transfer Agreement dated December 31, 1995, as amended from time to time, and of all other agreements between the Commonwealth, or any of its agencies and authorities, and the Turnpike Authority concerning transfer of all or a portion of the Project or any contracts relating to the Project (collectively "Transfer Agreements"); and (iii) subject to the continued performance by the Commonwealth on all of its obligations and commitments relating to financing the Project as set forth in the October 1998 Finance Plan, as modified by the terms of the MOU, including to provide financing through the issuance of such debt instruments, if any, as may be required because of the difference between the schedule for the Turnpike Authority’s payments for the Project in the October 1998 Finance Plan and the schedule for the Turnpike Authority’s payments set forth in the amended MOU, and any other agreement among the parties hereto entered into in the future.
The investment community’s confidence in the Turnpike Authority’s management and commitment to efficiency in operations was reflected in the credit ratings assigned to its outstanding bonds by Moody’s Investor’s Service and Fitch IBCA, Inc. Moody’s currently rates the MHS 1997 Series A and C Bonds A2 (Senior), the MHS 1997 Series B Bonds A3 (Subordinated), and the MHS 1999 Series A Bonds A3 (Subordinated).
In connection with the issuance of the 1999 Bonds, Fitch upgraded the Turnpike Authority’s 1997 MHS Series A and C Bonds (Senior) from A- to A, affirmed an A- for the 1997 MHS Series B Bonds (Subordinated), and assigned an A- to the 1999 MHS Series A Bonds (Subordinated) reflecting the federal and state support for the Project, the stabilization of project costs, and the strength of the revenue generating assets of the Turnpike Authority.
The Governor has proposed legislation to address the additional Project funding requirements. Exhibits 5-5 through 5-7 below summarize the Governor’s proposal. The Governor and the Legislature are committed to enacting a final funding plan for the $1.4 billion and recognize the fact that to avoid adverse impacts to the Project’s cost and schedule, action must be taken in a timely manner. The Project anticipates that enactment of the final funding plan will occur no later than the end of the current legislative session (July 31, 2000). The legislation filed by the Governor with the Legislature on February 18, 2000 (House No. 5024) is contained in Appendix A to this report.
Exhibit 5-5: Summary of Governor’s Funding Plan to Support Additional Requirements
Note: Governor’s funding plan also proposes establishing a contingency fund. Reducing future debt service costs lowers the Commonwealth’s operating costs, improves the credit quality of Commonwealth debt, and increases borrowing capacity providing access to the capital markets, if needed, to meet additional Commonwealth or Project commitments (see page 43).
Exhibit 5-6: Summary of Governor’s Funding Plan ($ millions)
Exhibit 5-7: Implementation Schedule for Governor’s Plan
The Turnpike Authority’s continued focus on maximizing its revenue opportunities and controlling operating and capital costs has served to reinforce the investment community’s confidence in the Turnpike Authority’s ability to meet its obligations to its Bondholders while undertaking significant responsibility in managing completion of the Project. The Turnpike Authority has committed to using its available resources to meet a portion of the $1.4 billion.
Amount: $200 million
When the Turnpike Authority implemented the debt restructuring contemplated by Chapter 81A of the Massachusetts General Laws, enacted in 1997, it established substantial reserve funds to meet unforeseen capital needs. The Turnpike Authority has available for prudent use $200 million of these reserves to meet additional Project cash requirements without adversely affecting Turnpike Authority credit or operations.
Amount: $150 million
The Turnpike Authority expects to raise a substantial portion of the funds required to meet additional Project cash requirements from the issuance of additional MHS Bonds. MHS Bonds are supported by tolls on the Boston Extension, Sumner/Callahan Tunnels and the Ted Williams Tunnel, and by other revenues of the MHS, but are not supported by tolls paid on the Western Turnpike (west of Route 128). It was the Turnpike Authority’s belief in 1997 and again in 1999 that the toll levels presented to investors were the minimums required to support the $2.3 billion of MHS Bonds the Turnpike Authority issued in those years to finance their contribution to the Project. As a result of spending controls and development of additional non-toll revenues, the Turnpike Authority now has additional debt capacity and could realize as much as $150 million of additional MHS Bond proceeds without raising tolls beyond the levels stipulated in the Turnpike Authority’s Official Statement dated March 11, 1999.
Amount: $100 million
The MHS has an expected useful life that well exceeds 50 years and can generate revenue over this entire life. However, Massachusetts law limits the maturity of the Turnpike Authority's bonds to 40 years. The Project estimates that extending the allowable maturity of MHS Bonds by 10 years would allow the Turnpike Authority to raise $100 million of additional bond proceeds with the same toll schedule as was assumed in the Turnpike Authority’s Official Statement dated March 11, 1999.
Amount: $600 million
The Governor has proposed retaining annual license renewal fees, which will provide approximately $45 million annually to the Highway Fund. An annual payment from the Highway Fund for 30 years would allow the Turnpike Authority to provide $600 million of financing for the Project. To the extent the Turnpike Authority achieves its objectives with respect to non-toll revenues, a portion of the new MHS Bonds could be retired and these annual payments could be reduced accordingly, or the Highway Fund could be reimbursed directly..
Amount: $150 million
The Governor has proposed withdrawing $150 million from the OCIP Trust as early as November 2002 to meet the Project’s commitment and cash flow requirements. The Project has calculated that $150 million can be withdrawn from the OCIP Trust in November 2002, assuming the Project’s current good loss experience continues. The Project is reviewing various options of restructuring the OCIP to meet the Project’s cash needs, while at the same time appropriately insuring against the Project’s risk exposures. These options are presented in Appendix C. The final structuring of the OCIP will be subject to further review with, and concurrence by, FHWA and the DOT IG.
Amount: $50 million
The Governor has proposed a contribution from Massport totaling $50 million without any toll increase on the Tobin Memorial Bridge above the already planned $2.00 in 2002. In return Massport would acquire additional roadway assets from the Project.
Amount: $150 Million
The Commonwealth issued approximately $900 million of its federal Grant Anticipation Notes (GANs) in 1998 and expects to issue another $450 million of GANs in April 2000, and the final $150 million of the original $1.5 billion by June 2001. The Governor’s plan to fund the $1.4 billion includes an additional $150 million in GANs, bringing the total to $1.65 billion. Under current market conditions, the Commonwealth could issue approximately $150 million more in GANs without extending their maturity beyond the original GANs and without increasing annual GANs debt service above the $216 million originally established for this program in the GANs Trust Agreement.
Various Legislative Leaders and Constitutional Officers of the Commonwealth have proposed alternatives to the Governor's plan. These alternatives have generally included various elements contained in the Governor's proposal including:
Specifically, as outlined in the Boston Globe on March 14, 2000, the Senate’s proposed plan includes a $200 million to $350 million cash (and bonds) contribution from the Turnpike Authority, $50 million contribution from Massport, and the SFY2000 state budget surplus (which could be as high as $700 million) to be set aside in an interest bearing account in lieu of new bonds. The House has proposed an initial interim funding plan to cover the amounts needed for construction underway only through 2001. Their plan calls for the Turnpike Authority to contribute $200 million in cash reserves and for the Commonwealth to issue $600 million in state bonds, which would be repaid by revenues from the driver’s license fees that were scheduled to be phased out.
The Governor has proposed using the existing balances in the Capital Projects Reserve Fund (approximately $150 million) accumulated from past surpluses (no legislative approval required) plus the expected SFY2000 budget surplus to pay down the Commonwealth’s currently outstanding highest interest rate bonds (see Appendix B). Dedicating the SFY 2000 budget surplus, estimated between $200 and $500 million, requires legislative approval.
Assuming the SFY2000 surplus reaches $500 million, the Commonwealth can save up to $800 million in debt service payments (principal and interest) over the next 24 years. Ninety percent of these savings would be realized in the next 10 years. Reducing future debt service costs lowers the Commonwealth’s operating costs, improves the credit quality of Commonwealth debt, and increases borrowing capacity providing access to the capital markets, if needed, to meet additional Commonwealth commitments.
A number of other revenue producing opportunities from land development and air rights will result from the Project. The Turnpike Authority has been maximizing the value of its real estate and right of way assets since 1996 to minimize the need for higher tolls, and will continue to realize substantial non-toll revenues from this effort.
A preliminary assessment of the potential value of the series of real estate parcels in the Central Artery Corridor is being developed. Most of these parcels will be created by the Project and made available upon completion of construction (2005). The Governor’s proposed plan would direct any revenues realized from the development of the Turnpike Authority’s real estate and right of way efforts to the Commonwealth for the resources it devotes to the Project.
The assessment will maintain the longstanding 75/25 percent ratio of open space parcels to development parcels in the Central Artery Corridor. Existing City of Boston zoning (Article 49) was used in the analysis including the floor-area-ratio (FAR) and use specifications for each of the development parcels. The FAR and land use factors also guided the ultimate design and construction of the tunnel walls including the load bearing capacity of these walls.
Future real estate values, even for the near to medium term, depend on a wide range of variables, most critically the overall economic vitality of the region. Even if this factor were predictable, other variables such as interest rate fluctuation, demand and absorption, and potential competitive projects affect potential value. At this time, the Project’s best estimate is that the potential real estate values for opportunities resulting from the Project (assuming disposition in 2005) range from $140 million to $300 million.
To-go expenditures total $4,768 million, however to-go obligations total $3,446 million. Exhibits 5-8 and 5-9 present obligation and expenditure status as of January 2000 for each funding source based on current sources and the Governor’s proposed plan. Consistent with standard quarterly reporting practices, the data cutoff for this update is January 2000, however, the Project is aware of no significant changes to this data as of March 15, 2000.
Totals may be off due to rounding
Exhibit 5-8: Summary of Total Obligations by Funding Source ($ millions)
Totals may be off due to rounding
Exhibit 5-9: Summary of Total Expenditures by Funding Source ($ millions)
6. Commitment and Cash Flow Projections
Construction is currently at peak production and will continue this level of activity through SFY2001. Expenditures are expected to be over $1.6 billion in SFY2000 and near $1.8 billion in SFY2001. Expenditures decline significantly in SFY2002 reflecting the completion of many major construction contracts currently underway. The cash flow projection that underlies this Finance Plan was developed with January 2000 cost and schedule information. Consistent with standard quarterly reporting practices, the data cutoff for this update is January 2000.
The following sections present the to-go commitment and cash flow requirements over time and the funding sources that will support these requirements. The exhibits illustrate that federal funds, with the state match (State Bonds/Notes) will be required until Project completion and are at their maximum use in SFY2001, and that state funds including third party contributions are required to fully finance the peak expenditure period and beyond.
The Commitment Projection, based on the forecast commitment of funds required when contract awards and modifications, is shown below in Exhibits 6-1 and 6-2. The projection highlights the timing and magnitude of the funding needs in total and as an additional requirement to the previously identified $11.7 billion funding. All remaining portions of the $11.7 billion funding will be committed by the end of 2000. By early 2001 approximately $802 million in new funding must be authorized to meet Project commitments.
Exhibit 6-1 – To-Go Commitment Projection ($ millions)
Exhibit 6-2 – Commitments by State Fiscal Year, January 2000 to Completion ($ millions)
The Cash Flow Projection, based on the planned expenditure of funds as work is performed, is shown below in Exhibits 6-3 and 6-4. The projection highlights the timing and magnitude of the funding needs as an additional requirement to the previously identified $11.7 billion funding. By early 2001 approximately $555 million in new funding must be available for Project expenditures.
Exhibit 6-4 – To-Go Cash Needs by State Fiscal Year, January 2000 to Completion ($ millions)
In Exhibit 6-5 to-go federal obligations are $333 million lower than to-go federal reimbursement of invoiced expenditures. Most design contracts, right-of-way actions, and a few large construction contracts were fully obligated prior to the current period, yet work and the associated payments will continue for several years. Exhibit 6-5 also shows that only $84 million in new federal obligations are required after TEA-21 expires in FFY2003 (excluding GANs conversions). This is less than 5 percent of the total to-go new federal obligations through project completion.
Exhibit 6-5: To-go Federal Obligations and Federal Cash Flow
(excludes GANs conversions)
Exhibits 6-6 and 6-7 identify the timing of the commitment and expenditure of the funding sources identified to support the $1.4 billion. In the event that any required legislation for implementation of the plan is delayed, the commitment and expenditure of the affected funding sources will be reprogrammed accordingly.
Exhibit 6-6: Commitment of Funding Sources for $1.4 billion ($ millions)
* Requires Legislation
Based on cost and schedule forecasts as of January 2000
Totals may be off due to rounding
Exhibit 6-8: Total Cash Flow Projection, January 2000 to Completion ($thousands)
Since 1991, the Commonwealth of Massachusetts has identified improvements in transportation infrastructure as a top priority. The Weld-Cellucci and Cellucci-Swift administrations have and continue to demonstrate their commitment to balanced statewide infrastructure investment consistent with federal regulations. Spending, independent of the Central Artery/Tunnel Project, has steadily increased over the past decade to the point where the Commonwealth now dedicates over $600 million a year to road and bridge projects.
The Commonwealth’s program is geared to address safety, traffic, and environmental issues as well as promote economic development. The investments in this program have resulted in safer, better-maintained bridges and highways throughout the state. For the last four years Massachusetts has had the lowest fatality crash rate in the nation. The capital outlay as demonstrated in Exhibit 7-1 has resulted in the following achievements since 1999:
Exhibit 7-1: Statewide Road and Bridge/Local Aid Investment ($ millions)
(exclusive of CA/T Project)
In February 1999, the Cellucci-Swift administration announced a finance plan for the continued improvement of the state’s transportation infrastructure. The plan, the majority of which was supported by the Legislature, dedicates a significant portion of the SFY 1999 surplus to transportation improvements.
Major Legislative Achievements
This plan was designed to allow transportation to continue investing in the state’s infrastructure at record levels.
Design-build construction and alternative financing legislation for Route 3 North reconstruction was another major legislative achievement for the Cellucci-Swift administration in 1999. Major project benefits to this 21-mile highly congested highway are as follows:
Costs for this project are estimated at $250-$300 million. These figures are in addition to the $610 million annual commitment.
The Administration is committed to a balanced Statewide Road and Bridge Program and has pledged to maintain, at a minimum, an investment of $400 million in the infrastructure of the Commonwealth, exclusive of the Central Artery/Tunnel Project, as a condition to the acceptance of the Finance Plan. The Administration has demonstrated this commitment to maintain or exceed an average spending level of $610 million over six years (SFY1999-SFY2004) in the statewide and local aid programs, considerably more than the $400 million federal requirement. The Administration has utilized state funds to offset the reduction in federal highway funds under TEA-21 and to assure all the stakeholders that transportation spending, exclusive of the Project, will be maintained or exceed the commitments made to FHWA for a balanced statewide program.
Appendix B: Commonwealth Debt Reduction Plan
Appendix G: PricewaterhouseCoopers Project Management Staffing Assessment