Reston Spring

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Reston Spring

Tuesday, November 15, 2011

Misleading the Public on Savings in the Metrorail Agreement, Terry Maynard, November 15, 2011

Contrary to statements by politicians and the media, the DOT-initiated agreement to reduce the cost of the Silver Line will result in few savings from current estimates of construction costs and future tolls.  Moreover, the actual costs of Phase 2 construction will likely be much higher than current estimates if history is any guide, actually driving up the costs to all parties, including toll road users.

To much fanfare and even the reported giddiness on the part of Secretary LaHood--“I’m on cloud nine”-- the DOT announced last Thursday a new deal for Phase II of Metrorail that “will reduce the cost of the Phase 2 project by hundreds of millions of dollars and keep tolls more affordable for Dulles Toll Road users.”  Since then, the chairmen of the Fairfax and Loudoun county boards have strongly endorsed the Memorandum of Agreement (MOA) and they and MWAA expect to ratify it quickly—well before people have a chance to find the absence of savings in this deal.  Loudoun acts today and MWAA will ratify the agreement tomorrow--unheard of speed for action by these boards.

So, will the MOA do what is promised?  Not so much, and it certainly doesn’t guarantee reduced costs for anyone, especially toll road users.  And, if the deal really provided some financial advantage for the partners and their constituencies, wouldn’t you think that the area incumbents running for re-election in northern Virginia would have demanded that it be publicized well before the elections instead of two days afterwards? 

One thing I’ve learned in five decades of adulthood is to be skeptical about enthusiastic statements from politicians; and the more enthusiastic politicians are, the more skeptical—even fearful—the citizenry should become. 

First, there is the problem of what forecast cost are you saving from.  Of course, the players say they have saved about one billion dollars off the $3.8 billion cost of Phase 2 of the Silver Line—the highest possible cost yet forecast.  That included the Dulles Metrorail station under the terminal at the airport, a notion that was largely dead on arrival when it was announced a year ago.  In fact, MWAA agreed to change to an above ground station at Dulles—truly saving about $600 million—in July in response to the local public outrage, just a month after DOT stepped in and five months before this MOA was announced.  Yet there is nothing quite like a politician declaring victory in a battle others fought.

Then there is the outright deception.  DOT says it is saving about $300 million on Phase 2 by shifting—not cutting—the cost of Phase 2 construction to the two counties.  No, it’s not.  The MOA merely specifies which costs the two counties will absorb—several local Metro stations and parking garages.  The only real savings in this process are minor changes in design, such as steel versus concrete construction.  These were presented in the Federal Transit Administration’s (FTA’s) white paper in July. 

Moreover, the costs the counties have agreed to pick up counts only against their existing share commitment; it is not an addition to it.  The MOA specifically states that none of the parties will increase its share contribution to the effort—16.1% for Fairfax, 4.8% for Loudoun, and 4.1% for MWAA.  Please note the obtuseness of the language in the MOA on this matter:

c. To the extent that Additional Funding Sources are used to pay any portion of the cost to design and construct any of the Phase 2 facilities described in Sections 3.2(a) or 3.2(b), then solely for purposes of computing the capital contribution percentages of the parties to the Funding Agreement, the amount paid by any such Additional Funding Sources shall not be credited as provided by the last sentence of Section 2.2(b)(3)(e) of the Funding Agreement, but instead shall be credited 16.1% against the Phase 2 funding obligation of Fairfax, 4.8% against the Phase 2 funding obligation of Loudoun, 4.1% against the Phase 2 funding obligation of MWAA from non-DTR Funds, and 75% against the obligation of MWAA to fund a portion of Phase 2 from DTR Funds, as those terms are used in the Funding Agreement.

And, as for Fairfax County, the penultimate paragraph of the MOA makes this even clearer:

All provisions of the Funding Agreement not specifically modified by this MOA, including, but not limited to, the provisions of Section 2.3 of the Funding Agreement, remain in full force and effect and are not superseded by the execution of this MOA. Nothing in this MOA requires Fairfax to pay or will result in Fairfax paying more than 16.1% of the total Dulles Rail Project Cost as such term is used in the Funding Agreement.

So the result of this cost shifting is that the counties just know some specific parts of Phase 2 they are paying for, not that they will pay any more than the share they originally agreed to pay.  Dulles Toll Road users remain stuck paying for three-quarters of Phase 2 construction.

So, in reality, the MOA will lead to the possible saving of about $100 million from current construction cost estimates, and “as much as $75 million” of that is on hypothetical “value engineering”—as if the engineers are now planning some gold-plated rail line.  In short, the cost of Phase 2 is now estimated at $3.1 billion versus $3.2 billion with an above ground station at Dulles airport.

There is also some marginally good news on financing Phase 2 construction, but these savings will have no effect on the direct construction cost of the Silver Line and are certainly nothing to be giddy about.  First, the parties have agreed to seek “additional funding sources.” Not sure who might step up to provide more financing, but—in the end—any new funds would count against the partners’ shares for funding Phase 2.    Similarly in the MOA, DOT pledges to consider applications for TIFIA financing not to exceed $315 million from the partners with a credit subsidy not to exceed $30 million in aggregate.  That’s 10% of the cost of Phase 2 that could be financed at low federal rates, running about 3% right now.  Finally, Gov. McDonnell has pledged to ask the state legislature next year to contribute $150 million.  As the MOA states, “This assistance is intended to be used to pay interest on MWAA’s Dulles Toll Road Revenue Bonds. The funds shall be held by the bond trustee and drawn to support the debt service payments in the first five years following their issuance.” On balance, these limited debt arrangements will almost certainly save less than one billion dollars on debt service charges paid by toll road users that will range between $10-$15 billion over the next 40 years or so.  

Besides the minimal savings in either construction or financing costs, the core of the problem is that the MOA does nothing relieve Dulles Toll Road users of the primary burden for financing the construction of the Silver Line.  As planned in the 2004 Final Environmental Impact Statement (FEIS), toll road users would pay 20% of the then-estimated $3.5 billion cost of the entire line—about $700 million.  Under the MOA and the 2007 agreement among the “funding partners”—Fairfax, Loudoun, and MWAA:
  •  Toll road users will still pay 75% of the cost of Phase 2 or $2.3 billion.  That’s almost eight times toll road users’ forecast 20% share of $300 million for Phase 2 as described in the 2004 FEIS.
  • Toll road users will pay more than two-thirds ($4.1 billion) of the currently projected $6.0 billion cost for the entire Silver Line.  That’s nearly a six-fold increase in the cost to Dulles Toll Road users since 2004.
Only fools and politicians would believe this will make “tolls more affordable for Dulles Toll Road users.”   In fact, all the blather in this agreement might result in a five to ten percent reduction in current estimates of future $15-$20 toll two decades from now, but that will still mean a huge five- to ten-fold increase in family toll road commuting budgets.

But, as they say in the infomercials, “Wait, that’s not all!” 

All these savings, such as they are, are premised on the April 2011 analysis laid out by MWAA in evaluating the four Dulles station location alternatives.  People close to MWAA’s effort indicate that the analysis—other than the Dulles station cost—is essentially a “100% preliminary engineering” analysis, although the study does not say that anywhere.  According to the financial agreement among the funding partners, Fairfax and Loudoun counties have 90 days after receiving MWAA’s final 100% preliminary engineering study to approve their participation in Phase 2 of the Silver Line.  So we can reasonably expect that the final engineering report—due early in 2012—to come close to current estimates and a commitment by the counties to participate will follow soon thereafter.

Unfortunately, the history of Phase 1 of the Silver Line project has demonstrated the large margin of error of 100% preliminary engineering analyses in underestimating the true cost of construction.  In fact, two 100% preliminary engineering studies were done for Phase 1, according to a 2007 DOT Office of Inspector General (OIG) audit:
  • An April 2006 estimate for Phase 1 by FTA's project management oversight consultant (PMOC) put the cost for Phase 1 at $2.07 billion.  Since then, the estimated cost of Phase 1 has risen by more than 40 percent.
  • In July 2007, the PMOC did an "updated 100% preliminary engineering" assessment that put the cost of Phase 1 at $2.65 billion, 11 percent below the current $2.95 billion estimate.
So, instead of $3.1 billion, the final cost of Phase 2 construction could run $3.5-4.5 billion, putting the total cost of Silver Line construction at $6.5-$7.5 billion and raising debt requirements accordingly. 

In short, the MOA offers minimal cost and financing savings over currently estimated project costs for Phase 2 of the Silver Line, and does nothing to reduce the risk that costs will rise 10%-40% as planning and construction progress.  It is an agreement that sustains the status quo, offering little construction cost relief overall—with many price risks still unknown—or for Dulles Toll Road users in particular.

Terry Maynard
Reston, VA

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