U.S. Department of Transportation Federal Highway Administration

May 8, 2000

400 Seventh Street Washington, DC  20590 Refer to: HIF

Mr. Andrew S. Natsios
Chairman
Massachusetts Turnpike Authority
185 Kneeland Street
Boston, MA 02110

Dear Mr. Natsios:

After reviewing the Central Artery/Tunnel (CA/T) Project Finance Plan Update submitted on March 15, 2000, we are unable to accept it as submitted.

The most critical issue to resolve is the identification of new funding resources. The State Legislature must act to make funding resources available to cover the cost of the CA/T Project, including the cost increase and adequate contingencies, with such actions signed into law by the Governor before a plan can be accepted. Documentation that these actions have been completed must be provided to the Federal Highway Administration (FHWA) by May 19, 2000, or we will freeze the use of obligation authority (OA) for the CA/T Project. Prior to May 19, 2000, any use of OA will be on an exception basis for work that cannot be deferred without cost increases.

The following comments are offered for your consideration and action. These items should be addressed in the form of a completely revised Finance Plan Update. Submission is required by June 16, 2000, and the transmittal letter should indicate the response or action taken regarding these comments:

Funding and Funding Resources

The FHWA is limiting new Advance Construction (AC) authorizations on the CA/T Project to the amount specified in previous accepted Finance Plan Updates. This amount, $222 million, is defined by Exhibit 5-4 on page 32 in the March 15 Update. Advance Construction authorizations for the CA/T Project cannot exceed the existing AC balance plus $222 million.

Similarly, the FHWA will limit the use of OA on the CA/T Project to amounts indicated in the Finance Plan Update on page 30, as Federal obligations of $7.049 billion plus the Grant Anticipation Notes (GAN) of $1.5 billion. This action limits Federal funds for the CA/T Project to $8.549 billion as defined in Exhibit 5-1: Summary of $11.7 billion Obliga- tions by Funding Source. Our Massachusetts Division Office will control this limitation through the Financial Management Information System. The new Finance Plan Update must show the projected use of OA annually in the years beyond 2003, including planned conversions to repay the $1.5 billion GAN's, any other AC conversions since the AC balance at the end of 2005 is projected to be over $300 million in excess of the amount needed for the GAN's, or any other planned use of OA.

Subject to an agreement between the State and the FHWA that describes an AC conversion process, the State would be allowed to use additional OA above the $8.549 million level to convert up to the full amount of AC limit being authorized for the CA/T Project. The process for doing this would require a formal public notice process enabling the public and Regional Transportation Planning bodies to comment. In addition, the amount of increase would have to be approved by the Governor and incorporated in future statewide transportation improvement program approvals.

Balanced Statewide Program

The Finance Plan Update submitted on March 15 discussed the statewide program in very broad terms. The lack of specific actions and a time table to develop a consensus on this issue is a significant concern. On March 13, 2000, the FHWA wrote to Secretary Kevin Sullivan to request that the State take the lead with its partners and constituents to build consensus on how to define the commitment to a Statewide Road and Bridge Program. The State must consult with the planning agencies and other transportation constituents on a statewide basis to develop a statewide program funding level, a definition of how to measure attainment of the program funding level, and what activities will be included in the statewide program funding commitment (e.g., planning, design, or construction).

I want to stress that Secretary of Transportation Rodney E. Slater and Federal Highway Administrator Kenneth R. Wykle have made clear that the Finance Plan Update must account for a balanced statewide transportation program. The establishment of a statewide program funding commitment and identification of appropriate funding resources for the Statewide Road and Bridge Program must be completed before the Finance Plan Update can be accepted.

Insurance Program

The February 29 deadline for this information has passed and the information submitted is not adequate. The information presented about exposure and funding needs for the period after construction (the so-called tail period) needs to be clarified. The State must define the insurance program, how the risk/exposures are to be covered, what trust reserves are required and/or how coverages will be funded. No insurance program reserves can be included in the funding plan as credit until the State has submitted an insurance program that is acceptable to the FHWA.

The FHWA's Cost Estimate

Our Massachusetts Division Office has completed an independent assessment of the cost to complete the CA/T Project. The FHWA's estimate indicates that project costs will most likely exceed the State's announced $1.4 billion increase by $300 to $480 million. This estimate and the estimate by the State's consultant would indicate that funding resources in excess of $13.1 billion should be anticipated. The Finance Plan Update should include an estimated project cost and identify the resources that could be made available to cover any additional costs.

Agreement to Define Future Process and Information Submissions to Improve Cost and Funding Oversight

The fact that the State began a process in late 1998 to track potential exposures and elected not to present this information on the Project Monthly Management (PMM) reports or otherwise advise the FHWA is particularly disturbing. Good management at both the State and Federal levels mandates full sharing of information regarding the project. To assure clarity and understanding of roles and requirements to implement this letter and the Federal Task Force's Report, it will be necessary to execute an agreement between the FHWA, the Massachusetts Turnpike Authority (MTA), and the Massachusetts Highway Department. The FHWA will provide a draft of this agreement for review and coordination between the parties.

1. Page 13—The Finance Plan Update discusses three parameters used to adjust the cost of anticipated design and construction efforts. The three parameters are Marketplace Competition, Escalation, and Potential Change Allowance. These concepts were first introduced in Rev 6. The basis for the values used in these assumptions was the historical record prior to 1995. The Finance Plan Update does not revise these values to reflect more recent history. The three parameters should be updated based on the recent experience of the CA/T Project. The revised Finance Plan Update will reflect these adjustments, and these parameters will be tracked in the PMM reports.

2. Page 14—The Finance Plan Update mentions air rights credits of $255 million. Any offset for air rights can be entered only if funding is going to be available to cover project costs and agreement is reached with our Division Office to include these credits in the PMM or future Finance Plan Updates. Credits from insurance, air rights, and/or real estate can be used in cash flow models but can only be shown as offsets to reduce construction cost of the CA/T Project if the credit is realized before construction is completed.

3. Page 15—The appendices discuss purchase of additional Marine Exposure Insurance. The justification for this expense is weak. The exposure analysis provided in the Finance Plan Update discusses the construction risks associated with means and methods that are not consistent with the work sites. Further, the critical construction activities at the sites are rapidly coming to a close.

4. Page 20—We concur in the need for a more open dialogue and documentation of construction contract exposure. The commitment to track potential changes and claims must be included in the PMM report. The report must pick up all reasonable anticipated exposures, including allowance for those exposures that have not been negotiated.

5. Page 27—In view of the need to extend the services of Parsons/Brinckerhoff (B/PB) thorough 2004, a transition plan for the eventual replacement of B/PB should be provided. A transition plan would allow some early phasing in of stakeholder labor for significant savings. A transition plan could also be monitored to preclude future surprises.

6. Page 32—Footnote 15 has several errors. The note refers to a "figure 6" and FFY99 (FFY 00) "projected" AC balance. The note needs to be corrected.

7. Page 41—The MTA expects to use non-toll revenue (such as air rights and the millennium project) to back new bonds. The additional debt capacity from non-toll revenue in the amount of $150 million from MTA bond proceeds appears to be inflated. It would be desirable to review the backup documentation to support this additional revenue figure from the 1999 ($2.3 billion) MTA bonding study. Conceptually, this revenue stream faces a degree of uncertainty and unattractiveness for investors as bond rates are dropping. What are the categories for non-toll revenue? Is this a reasonable assumption?

8. Page 41—Details are not clear regarding the potential use of license fees to create the Annual Contract Assistance Agreement.

9. A vehicle to track the progress on all revenue generation activities for the CA/T Project, much like the PMM tracks the cost exposure side of the equation, needs to be established and the information reported in Finance Plan Updates or through direct correspondence if critical issues arise that were not foreseen in the Finance Plan Update.

10. The O'Brien Kreitzberg report in the appendices has a number of areas that discuss potential exposure. One concern that is not covered in this Finance Plan are design cost contingencies for future redesign efforts for unforseen conditions or schedule initiatives not presently anticipated.

11. Costs borne by the State that are directly attributable to the CA/T Project, such as personnel costs, that have been excluded from the Finance Plan in the past should be identified and included in the Update.

12. Independent certification of the accuracy of the information contained in the Finance Plan Update should be submitted for our review and acceptance.

13. The next "bottom to top "assessment of to-go costs will be done to coincide with the annual Finance Plan Update.

Sincerely yours, Vincent F. Schimmoller Program Manager, Infrastructure

Last updated May 8, 2000