Graham Johnson’s KIRO report on ST3 cost escalation was notable for its literate discussion of inflation adjustment:
Sound Transit says the estimate in ST3 was $5.8 billion in 2014 dollars, which the agency considers equivalent to $6.8 billion in 2018 dollars. The newest estimate is $7.5 billion in 2018 dollars.
First of all, good for both ST and Johnson that they took the care to compute and report this. Although the real increases here are indeed a story, revising an estimate from 2014 to 2018 dollars is no news at all. That context is usually sorely lacking in stories about increasing costs.
Our comment thread had a spirited discussion as to what inflation measure the estimate used. ST’s Scott Thompson verified for STB that they used “Construction Cost Index for construction estimates, Right of Way index for real estate, and the Consumer Price Index for soft costs.” This seems reasonable enough. But there are at least three different ways one can deflate rising costs, and they serve different purposes.
The CPI provides the most straightforward definition of 2014 and 2018 dollars, and therefore is the way to communicate inflation in a concise and technically accurate way. However, it doesn’t communicate much else, except that construction costs are rising faster than other things.
If you’re interested in assessing Sound Transit’s project management, then the measure they provided is the right one. If the 2014 estimate were 100% designed and they’d stuck to that plan, the estimate would have increased accordingly. It makes it clear that the remaining $700m is some combination of unforeseeable costs, deliberate lowballing, and scope creep. Your opinion on which is probably based on your prior prejudices about Sound Transit.
Those interested in checking on project delivery, rather than assessing blame, would most benefit from hearing how expenses have changed with respect to revenues. A strong economy escalates both costs and income and in theory that might even out. The extent that they don’t is the extent that it will affect project delivery.
While the agency has come a long way by clearly separating out construction inflation from other problems, the current formulation leaves questions. In particular, it’s not clear what the $700m overrun entails, or what the implications are for project delivery. Perhaps that will come out in the coming months.
21 Replies to “Inflation on Transit Projects”
Sound Transit factored inflation in when it provided the ST3 cost estimates. What people voted on specified the anticipated capital costs were YOE $$. The ballot measure said that, as did the resolution the board adopted when it put the ST3 measure on the ballot. The big issue now that we have a full year of actual tax revenues is how much tax revenue will be obtained in each subarea over the ST3 period. That amount must be spent on capital projects in each subarea.
E. King and N. King will have MUCH more tax revenue over the ST3 construction period, so there will be much more tax revenue available for spending in those subareas. We’re talking ST-financed tunnels to West Seattle and Ballard, given how much more tax revenue is expected from N. King alone . . .
“E. King and N. King will have MUCH more tax revenue over the ST3 construction period”
All revenues during and after construction are assumed in the ST financial plan and committed building the projects, operating the services, and servicing the band debt. There is no surplus money in the ST financial plan during the “construction period.” ST is required by law to provide a balanced financial plan. They have to deliver the program with the money they have; if they’re short they either need to cut scope, add time, or find outside money. They did a combination of all these things in delivering ST1 (the projects were delayed, scope was cut, and two federal grants were used instead of one).
“ST is required by law to provide a balanced financial plan. ”
So much misunderstanding. You people need to read the financial policies voters approved.
Sound Transit is required to provide a financial plan every year that projects by subarea the revenues that will be available during the construction period. Projects can be cut back or eliminated in any subarea if the revenues are projected to be insufficient. The financial policies the voters approved also allow additional projects, or improvements to approved projects, if the revenues are projected to be available in any subarea.
“There is no surplus money in the ST financial plan during the “construction period.” ”
I guess that depends on how you define “surplus money”. ST2’s funding formula includes Sound Move tax surpluses; ST3’s funding formula includes the tax surpluses from both Sound Move and ST2.
“ST is required by law to provide a balanced financial plan.”
What exactly do you mean by “balanced financial plan”? Do you simply mean balancing the sources (funding) with the uses (expenses) over the 25-year capital program? What statute are you referring to here?
I ask that in all sincerity because as you know ST’s financial plan both historically and forward-looking is and has been restricted by the limitations on its tax authority, its statutory bonding capacity and the solvency of its general fund. In any given year, ST may operate with a capital budget surplus or deficit
“They have to deliver the program with the money they have; if they’re short they either need to cut scope, add time, or find outside money.”
At the end of the day, so to speak, that’s what it boils down to. I might add that “finding outside money” also includes bonding, subject to the agency’s cap.
“Sound Transit is required to provide a financial plan every year…”
That’s correct. I have kind of harped about it on this blog a few times in the past as it seems like the agency takes a rather ho-hum approach to this critical annual requirement. It’s as if they find it to be some sort of tedious task being asked of them to perform. Just look at the history of when they have produced the report; it’s all over the calendar. I believe there are even some years where they didn’t even bother with it. More recently, they have rolled up the annual financial plan into their end-of-year budget process and as such the financial plan has been stripped down and doesn’t get the attention, imho, that it warrants.
My references are to the ST3 Financial plan. It must be balanced between sources and uses, meaning revenues must equal spending over the 25-year period of the plan so that voters can see what they are paying and what they are getting. This is not misunderstanding, grasshopper, this is fact.
The legislature specifically did not want ST to have discretion about what investments to build, nor did they want ST to have spare money not subject to voter decision. The plan is what the plan says, period. There is no money for extra scope. Sure, the financial plan is updated every year, as is the revenue forecast. If there is extra money, it can only be used for new scope if the Board can demonstrate the voter-approved scope can be conclusively delivered (you can find that in the financial policies as well). It will be years before the Board can meet that standard.
See page A-4: https://st32.blob.core.windows.net/media/Default/Document%20Library%20Featured/8-22-16/ST3_Appendix-A_2016_web.pdf
I think the second tunnel in Downtown Seattle is being funded by all areas. So, that means that not all subarea money stays in a subarea.
Yup, and E. King is paying for all the 1-90 bridge reconstruction work. Once we get the 5 subareas’ revenues projections we’ll know how much capital spending the board can sign off on in each subarea. It’s a revenues “problem” — the spending is not driven by costs (thanks to subarea equity).
aldo mistated even the former subarea fiscal policy; expenditures should benefit the respective subareas, not be in them. for example, all of north Sounder is covered by the Snohomish County subarea, even the projects that lie in King County.
It is true that probably half the tax revenues from Pierce and Snohomish County will be spent on N. King projects and services — that spending will benefit Pierce and Snohomish Counties. My point still is correct though.
My posting above about needing the updated subarea revenues projections related to the subject of this blog — the Ballard and Seattle extensions. Those are N. King projects, benefitting N. King residents and businesses primarily. Much more revenue will be obtained from N. King over the ST3 period than originally expected. Accordingly, ST probably could finance tunnels instead of bridges for those extensions, as those unexpected revenues must be spent in N. King.
I think there could be a problem with initial estimates, rather than a problem with cost inflation. I haven’t seen that fully assessed. I’m not trashing the initial estimates; I’m only pointing out that each round of planning and design in any project ends up finding unforeseen cost items. It should be expected.
This is why I think that the contingencies are just as important as the base estimates.
In particular, it’s not clear what the $700m overrun entails, or what the implications are for project delivery. Perhaps that will come out in the coming months.
Yeah, that is the big question here. I think it is interesting that both Sound Transit and SDOT underestimated the cost of their projects. In the case of SDOT, official leadership knew about the faulty estimates before the vote was taken, and did nothing. In the case of Sound Transit, there is no way of telling at this point. Will these cost overruns doom various aspects of the project? Did they know about those overruns before the vote? Were they purposely ignorant and optimistic, so that they could later just throw up their hands and say “shucks, what bad luck”? Perhaps that will all come out in the coming months.
If I remember correctly, ST is much closer on estimating than SDOT. Wasn’t SDOT off by amounts as great as over 100 percent on some items in Move Seattle? In contrast, this difference by ST appears to be about 10-20 percent once general inflation is discounted.
I don’t want to hijack this thread to discuss Move Seattle or the CCC costing — but I will say that there is a gray ethics area about cost escalation. When do cost estimates go from being unfortunate or overly conservative to being downright deceptive or malicious? With ST, it’s likely the former, while with Move Seattle or the CCC it’s not so apparent.
You are right — the numbers for Move Seattle were much worse. SDOT was also clearly knowledgeable and thus deceptive when it came to the numbers, whereas ST may simply have been overly optimistic or just mildly deceptive.
Didn’t the Seattle Times report that ST’s Sound Move light rail capital program was off by some 86%, even in the pared down Central Link version we eventually got? I don’t think ST2 will miss the mark in a similar fashion, but I do think it’s not even going to come close to the 2008 ballot measure YOE$ estimates when it’s all said and done.
“When do cost estimates go from being unfortunate or overly conservative to being downright deceptive or malicious?”
That is indeed the $64,000 question. (Just an aside: I take it when you say “overly conservative”, in regard to the agency’s cost estimating, you are talking about the expense side which results in understating project costs. Technically, a “conservative” estimating methodology is just the opposite. I would use the term “overly aggressive” in the context of your comment. Your overall point is still valid of course.)
Yes, you are right, Tlsgwm. I probably should have said “overly optimistic”. I couldn’t think of the right adjective.
The threshold is whether the project “benefits” the subarea, not whether it’s physically in the subarea. ST decreed that the DSTT2 benefits all subareas so they all must contribute. The formula it chose is the percentage of trains in both tunnels.
The track near a subarea boundary is also usually paid by the outer subarea. So Snohomish is responsible north of 185th, South King south of Rainier Beach (although that’s done), and Pierce south of Federal Way TC or South Federal Way. East King was originally responsible for the segment from intl Dist to Lake Washington, until it begged North King to take on the part to Judkins Park Station so that East King could afford the the tunnel the City of Bellevue was insisting on, and North King agreed to. The reason Judkins Park wasn’t automatically assigned to North King was that it wasn’t a North King Priority and it wouldn’t have been built if East Link hadn’t existed. ST’s priority is to connect the designated Urban Centers, and Judkins Park is not one of those.
Strictly speaking, ST doesn’t have to spend subarea money on subarea benefits. What it has to do is, at the end of the phase cycle, disclose how much of the subarea’s money was spent on projects benefitting the subarea. So it’s like the EIS process: it’s a disclosure requirement, not an action constraint. The enforcement is in the embarrassment ST would receive if it spent substantial money on non-subarea-benefitting projects, and the possible loss of public support for future tax measures.
Mike Orr you might want to re-read the financial policies of ST3 — those contain the subarea equity limits. Subarea equity is NOT a disclosure requirement, it is a use of tax revenues requirement. Here it is:
“Equity will be defined as utilizing local tax revenues for projects and services that provide transportation benefits to the residents and businesses in each of the subareas generally in proportion to the level of revenues each subarea generates. Subareas may fund projects or services located outside of the geographic subarea when the project substantially benefits the residents and businesses of the funding subarea.”
“Our comment thread had a spirited discussion as to what inflation measure the estimate used…”
It did indeed. I took part in that and remarked that it would be interesting to see ST’s math on the matter. For some of us wonks, that’s where we really want to see the details provided. The OP’s piece above elucidates somewhat on the issue but still doesn’t show us ST’s calculations. The cause(s) for the additional $700 million needed is/are still just left to speculation.
“Your opinion on which is probably based on your prior prejudices about Sound Transit.”
That’s a fair point. Those prejudices, however, may be well founded based on following the agency since its inception and studying its track history, no pun intended.
Really wishing we could get link to Everett sooner without worrying about its timing/funds being affected by cost overruns to Ballard
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