Federal Study Faults Alameda Corridor Plan

A new congressional report contends that proponents of the $2-billion Alameda Corridor designed to link the area’s ports to rail yards in Los Angeles have made overly optimistic financial projections and set unrealistic construction deadlines for the enormous project, which is widely regarded as being crucial to the region’s economic growth.

The study by the U.S. General Accounting Office warns that the project faces a variety of potential pitfalls that congressional analysts suggest could increase the cost of the project and frustrate an ambitious plan to complete the rail link in three years.

Among other things, the report concludes that the government agency responsible for the project--the Alameda Corridor Transportation Authority--may have a harder time than expected issuing bonds and obtaining money pledged to it by the financially strapped Metropolitan Transportation Authority, which is supposed to contribute $348 million to the effort.

Congressional analysts said they were particularly wary of the troubled MTA’s role in the project because its financial contributions are supposed to pass through the discretionary portion of its budget.

Officials for the corridor authority said Monday that they were not concerned about the GAO’s conclusions. They expect that the agency will receive a good bond rating and that the MTA will honor its agreement.

“There are pitfalls in any project,” said Gill V. Hicks, the Alameda Corridor authority’s general manager. “We are not particularly alarmed by this report and neither should the public be, because we are on time, within budget, and committed to delivering the project by the end of 2001.”

The GAO report was prepared for Rep. Frank R. Wolf, a Virginia Republican who heads the House Subcommittee on Transportation and Related Agencies. Researchers evaluated eight major transportation projects across the country receiving federal funds, including the Alameda Corridor.

The estimated cost of the 20-mile rail link, which includes a 10-mile stretch built in a 30-foot-deep trench, is $2 billion. Officials say that the project has not been completely designed and only limited construction has begun.

Funding for the corridor will come primarily from the sale of revenue bonds to the public, a $400-million federal loan, and grants from the area’s two ports and the MTA.

As of December 1997, corridor officials had secured about half the project’s total funding. The GAO, however, raised concerns about the agency’s ability to obtain the rest of the money.

Researchers said the corridor authority must demonstrate to financial markets that the project is a good credit risk, and the agency must obtain all funds committed by the MTA. An estimated $866 million is supposed to come from the sale of bonds. An additional $348 million has been offered by the MTA, of which $130 million already has been committed.

The GAO said that bond ratings for the corridor authority may be affected by a December 1997 ruling from the Internal Revenue Service that limited the parts of the project that can be financed through the sale of tax-exempt bonds.

As a result of the ruling, GAO officials say, the corridor agency may have to rely more on taxable bonds, which will require higher interest rates to attract investors than tax-exempt instruments. According to the report, this could result in higher long-term costs for the project and a lower bond rating.

Hicks said he does not believe the IRS ruling will hurt the corridor agency’s ability to issue bonds or pay off the federal loan. The decision, he says, should not have much impact on the costs of financing the corridor because it only affects about $100 million of the $2-billion estimate.

Perhaps more significant is the GAO’s concern that the MTA may have trouble fulfilling its agreement to pass on an additional $218 million in state funds to the corridor authority as construction proceeds. Congressional sources said the money could be delayed if the MTA needs it to solve its own pressing financial problems.

The congressional report noted that the MTA has been plagued by shortfalls in projected sales tax revenue. The agency also must honor a consent decree to expand bus service, which will cost an estimated $1 billion by 2013. As of June 1997, according to the GAO, the MTA had an operating deficit of about $98 million. More recently, two bond rating agencies lowered their assessments of the MTA’s future credit-worthiness.

“MTA told us that getting MTA’s fiscal house in order and implementing the consent decree are MTA’s top priorities at this time,” GAO officials said.

But Allan Lipsky, deputy chief executive officer of the MTA, said his agency has a legally binding agreement to provide funding to the corridor authority with installments starting in July 1999.

“The funding is secure,” Lipsky said. “We have changed our program to provide the money from different sources than originally planned. There has never been any question that the funding would be provided on time.”

Hicks contended that the MTA’s situation will not prevent the corridor authority from issuing bonds that are attractive to investors. He said that preliminary ratings by Standard & Poor’s and Moody’s indicate the corridor’s bonds should be rated no lower than investment grade.

Fees from cargo traffic and growing port activity almost guarantee that the project will generate more than enough revenue to pay the debt service on the bonds, corridor officials said.

Although the office of Los Angeles Mayor Richard Riordan was not aware of the GAO report, Deane Leavenworth, a mayoral spokesman, said Riordan remains confident that the project will be completed and become a major economic asset for the region.

In another cautionary note, the GAO report stated that cost estimates could increase after contractors submitted their bids on the trench section in July. The trench phase, which is the project’s largest, has a price tag of at least $700 million.

If the bids are higher than expected and the corridor authority needs to raise more money, the agency will have very little time to make adjustments given its tight construction schedule.

“Any delays in completing the tasks could affect the amount or the terms of the bond issuance, the revenue derived from user fees to repay the federal loan and the bonds, and the project’s total costs,” the GAO stated.

“We have tried to anticipate potential cost increases,” Hicks said. “Costs could go up or they could go down. We don’t know what the bids are going to be. But we think it will be a very competitive process that could result in some very good bids.”