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White (and Orange) Noise

Mayoral and council candidates who say they’ll shut down the streetcar ignore the realities facing the project

By German Lopez · October 9th, 2013 · News
streetcarRendering: CAF USA / City of Cincinnati

Roughly half a mile of streetcar track will be laid out before Cincinnati’s next mayor takes office in December, and $117 million is already spent or contractually obligated to the transit project. But one of the two leading mayoral candidates still insists he’ll be able to shut it all down if he wins the election in November.

Over the past year, canceling the $133 million streetcar project has become a cornerstone of former Councilman John Cranley’s mayoral campaign. Throughout multiple debates and while stumping on the campaign trail, Cranley has flexed his opposition as the one way he can differentiate himself from his opponent, fellow Democrat and Vice Mayor Roxanne Qualls.

But with construction underway, federal grants tied to the project and multimillion-dollar contracts signed, more questions remain about what it would cost to cancel the project than what it would cost to finish it. 

If Cincinnati’s obligations — including contracts with the construction companies currently working on the project and the design firm that on Oct. 7 released renderings of Cincinnati’s cars — are fully called on, the city could have to pay millions of dollars more to cancel the project than to complete it.  

The move would also require support from City Council. A majority of the current City Council supports the streetcar project, but several council candidates oppose it, including P.G. Sittenfeld, Pam Thomas, Chris Smitherman, Charlie Winburn and Amy Murray.

The high costs involved in cancellation raise questions about whether opponents of the streetcar, who claim to be concerned with the project’s costs, would go so far as to take on even more expenses just to terminate it.

Calling on contracts

Because Cincinnati already signed contracts for the streetcar project, the city could call it quits and still be on the hook for up to $95 million that’s encumbered to developers and suppliers involved in the project, on top of the $22 million the city has already spent, according to the city’s monthly streetcar progress report.

Meanwhile, completing development and construction of the 3.6-mile streetcar line would cost the city $88 million. The rest will be financed by $45 million in federal grants specifically allocated to the streetcar project — nearly $41 million of which would be taken back by the federal government if the project were canceled.

In other words, after accounting for lost federal grant money, the city could be on the hook for an extra $29 million if it cancels the project over completing it. 

Cities rarely cancel projects of this magnitude at such a late stage, so it’s unclear exactly how much stopping it would cost. But it would involve canceling a $71.4 million construction contract with Messer Construction, Prus Construction and Delta Railroad and a nearly $21 million contract to build the cars with CAF USA. Trying to pull back from the contracts would likely spur litigation from the companies that want to complete and get paid for the work they were hired to do.

For the Messer contract, the city would have to at least pay for all work leading up to cancellation and any construction necessary to close the project. For the CAF USA contract, the city is obligated to at least pay for all work done up to the point of cancellation — most of which is costly design work — and a little more to make CAF’s work profitable.

Should the city lose these lawsuits, the payments — for work that never was completed — would have to come out of the operating budget, as opposed to the capital budget that is currently financing the project. The operating budget, which was more than $350 million in 2013, pays for cops, firefighters, human services and other year-to-year city operations, while the capital budget uses debt obligations and other capital funds to finance big development projects. Since the contractual payments wouldn’t be going toward a capital project following cancellation, they would have to come out of the operating budget.

Cincinnati’s operating budget has remained structurally imbalanced since 2001, which means the city currently takes in less revenue than it pays out in operating expenses. Adding tens of millions more to the operating budget could force the city to dramatically cut services or raise taxes.

Cranley says one possibility is to get out of the contracts. “We’d see what the options are to cancel the contract,” he says. “We always have the option of renegotiating the contracts to do other infrastructure work in the city.”

But that means the city would need to work out a new deal with Messer, CAF USA and other developers, which might have little interest in taking on more work with a city that is, in this scenario, trying to cancel the first project they were hired to do. 

Alternate infrastructure projects also wouldn’t be eligible for federal grants allocated to the streetcar project, so the entire cost of the contracts would theoretically need to be put to use and actually amount to a higher cost to the city after the federal money goes away. 

For streetcar supporters like Qualls, the price tag of cancellation is just another reason the project must move forward.

“It would be financially reckless to cancel it at this point,” Qualls says.

“We don’t know how much we would actually end up paying for, but we would be paying for something that we don’t have.”

Breaking the trust

Even if Cincinnati could get the cleanest possible break from the contracts, concerns remain about how the city’s partners — CAF, Messer, the federal government and other businesses — would react to the sudden cancellation of one of the city’s costliest projects in decades.

“Once (the city) makes a decision, people need to be able to take it to the bank — literally,” Qualls says. “Reneging on something like this creates huge uncertainty, not just for this project but other projects.”

Qualls says the city would also spend more political capital canceling the project than completing it. In 2008 and 2012, part of President Barack Obama’s platform touted light rail projects around the country. That, Qualls argues, shows Cincinnati is actually taking on one of the Obama administration’s top goals, and terminating the deal would actively go against federal priorities.

Qualls’ perspective helps explain why the Obama administration has been so willing to hand over money for the streetcar project, even as the local politics surrounding the issue have become more and more heated. The federal government in June agreed to give the city another $5 million for the streetcar as long as City Council managed to fill a $17.4-million budget gap for the project, which council agreed to do later in the month.

Given the federal government’s consistent support for the project, Qualls says pulling back now would betray the federal government’s confidence and trust in Cincinnati. At the very least, the U.S. Department of Transportation (DOT) would take its money back.

U.S. Secretary of Transportation Ray LaHood said as much in a June 19 letter to Mayor Mark Mallory: “(A)bsent the satisfactory deployment of the project, DOT will be required to deobligate both the existing $10.9 million TIGER grant and the $25 million in Urban Circulator program funds. However, the $4 million in CMAQ funding for the Cincinnati area would be available to the region to reprogram in support of eligible projects.”

Cranley says he could still lobby DOT, with the support of Republicans such as local Rep. Steve Chabot and Gov. John Kasich, to redirect the grants to the interchange project for Interstate 71 and Martin Luther King Drive. That could also save the city the expense of putting its own funds toward the highway project.

“Right now, we have a divided approach to Washington,” Cranley says. “We have all of our Congress people and governor saying one thing, which is we want MLK and the Brent Spence Bridge done and prioritized, and we got the mayor and vice mayor saying we want the streetcar.”

But, as LaHood’s letter states, the federal government would likely pull its funding if the streetcar project isn’t completed. The grants are part of a highly competitive process that pits transportation projects around the nation against each other, so the federal government awarded the money after a lot of vetting with the streetcar specifically in mind. Some of the awards are also intended for public transit projects and light rail, not highway systems.

Given the risks, Qualls says it would be irresponsible to cancel the project and potentially anger the federal government and other business partners, which could damage far more than the streetcar and impact the city’s ability to lobby partners for other projects.

On track

While the mayoral debate rages on, construction for the streetcar project is well underway. John Deatrick, executive director of the streetcar project, says tracks should arrive starting in mid-October, and roughly half a mile of track should be laid out between 12th and Henry streets by December, when a new mayor takes office.

Deatrick says he’s also been in regular discussions with CAF USA about building the actual streetcars. The big milestone for him is testing the cars on the Over-the-Rhine loop once the track is fully laid out in June 2015. That, he says, is when the kinks should be worked out of the system and the project will take its finishing steps — hopefully in time for its opening day on Sept. 15, 2016.

But Cranley says he’s concerned that construction for the project is ongoing and claims it should be halted for two months until the new mayor is sworn in. 

“Stop the reckless spending,” he says. “Eight weeks between now and the swearing in of the next mayor is not going to change anything for their schedule, but it wastes money if I’m elected.”

Streetcar supporters argue slowing down a project every time it becomes politically controversial would freeze the city’s abilities to take on big ideas. 

In this case, a two-month delay could prove hard to swallow for developers who have already put in supply orders and worked on the project. Companies don’t typically make multimillion-dollar buy-ins with months-long delays in mind.

Cranley counters that the streetcar project is a “unique situation” that comes at a huge cost to voters. “Do they really need to lay half a mile of track five weeks before an election?” he asks. “They are doing this in a political manner.”

It wouldn’t be the first time the streetcar project was delayed because of politics.

The biggest obstacle came when Gov. Kasich, shortly after he defeated former Gov. Ted Strickland in 2010, pulled $52 million in state-allocated federal funds from the streetcar project. That forced Cincinnati to reconsider the scope of the project and, ultimately, eliminate a route to the uptown area, which includes the University of Cincinnati and nearby hospitals.

More delays also came through two voter referendums that voters eventually rejected to effectively back the streetcar project. In 2009, voters dismissed a city charter amendment proposed by the conservative Coalition Opposed to Additional Spending and Taxes (COAST) and the local branch of the National Association for the Advancement of Colored People (NAACP) that would have required a local vote for every rail project involving Cincinnati. In 2011, voters rebuffed another referendum led by COAST and the NAACP that would have stopped any spending on rail projects until 2021.

Earlier in 2013, the project was stalled again when construction bids came in $21.7 million higher than initial city estimates. That forced the city to make some cuts and commit another $17.4 million to the project, which caused more delays as the city administration and City Council worked out the details.

Given the circumstances, Cranley says that another delay wouldn’t mean much. But streetcar supporters, anxious to get the project going after years of delays, say it’s time to get the project on a clear track to completion.

Playing politics

Considering the streetcar project’s progress, contractual obligations and voter support to this point, some streetcar supporters have raised questions as to why Cranley, a Democrat who is seen as progressive in most other policy areas, has staunchly staked his campaign on stopping the project. 

Cranley says canceling the project is necessary because it has pulled funding from other essential capital projects and forced the city to raise property taxes. He says a streetcar should be low on the city’s priorities.

Qualls counters with research from consulting firm HDR and the University of Cincinnati that found the streetcar project would produce a three-to-one return on investment and increase property values along the rail line. She says that makes the project a vital vehicle for economic development.

On the political side, Gene Beaupre, a political science professor at Xavier University, says the streetcar’s established recognition makes it an easy policy for two Democrats to differentiate themselves on. Beaupre says that’s true even if stopping the current phase of the streetcar project is implausible.

“If it becomes clear that that’s not possible, he can still use it to call into question the judgment of his opponent in supporting it to begin with,” Beaupre says of Cranley’s continued opposition.

According to Beaupre, the streetcar project might matter a lot to some voters, but for the majority it matters more how the candidates use discussion of the issue to show off their leadership abilities and other characteristics that voters look for in a mayor.

But even if the strategy proves politically successful for Cranley and he’s elected to office, repealing the project would take a majority vote from City Council. If the eight incumbents running for council are re-elected, whoever takes Qualls’ seat could be the necessary swing vote to save or kill the project. 

In other words, the streetcar project might be on the ballot once again when voters select their representatives for City Council and mayor on Nov. 5. The question is whether elected representatives would actually take Cincinnati down that road if given the opportunity, considering the financial and economic risks involved. ©

 
 
 
 

 

 
10.09.2013 at 10:40 Reply
Bob

German, You're double-counting the sunk costs.  The $22M that is spent is gone whether the contract is canceled or not.  At worst then, it COULD cost more to cancel that finish IF the city had to pay full-freight on the contract.  In other words, $95M - $88M = $7M.  That's a sloppy mistake to make.  Also, it COULD cost less or be break even IF, and this is presently far more likely, total expenses to date are $88M or less.  

Bob

 

10.09.2013 at 10:53

I think it's totally fair to count it. From the monthly progress report: "Through August 31, 2013, $22,101,867.70 has been expended on the project (not including Duke escrow). In addition, $95,131,038.26 remains encumbered against open contractual obligations." (Source: http://www.scribd.com/doc/170567454/Cincinnati-Streetcar-Monthly-Report-Aug-2013-FINAL.) Note I could have been less generous and counted the Duke escrow, which the city would more likely be on the hook for if the project were canceled.

If you want to frame the issue your way, then we would have to discount the $22 million from both numbers and it would actually be $95 million vs. $66 million, which is still a $29 million difference.

The second part of your statement is somewhat true, although I'm not sure what's more likely and no one I talked to seemed to be sure, either. That's why the article says "up to $95 million" and notes it's hard to tell how much developers could pull out of the city through litigation.

One thing I've noticed, though, is that streetcar opponents typically demand the city be run like a business. Would a business sign up for $117 million in expenditures and contractual obligations then cancel with nothing to show for it?

 

10.09.2013 at 10:50

What about the possibility of developer lawsuits for people who invested along the route base upon the cities promises to build the project. What would the costs of litigation be for that and the issues mentioned in the story. I submit that atty fees alone would run into the $10s of millions seeing as how COAST was just awarded $500k in fees on a $1 judgment. And the city would likely require outside legal.

 

10.09.2013 at 11:19 Reply

So, for the price of cancelling it, we could finish it & run it for a number of years?

 

10.09.2013 at 12:39 Reply

Another thing to consider is the Duke utilities relocation lawsuit. Obviously the conclusion is up in the air as it stands now, but if the City were to cancel the project they would almost assuredly lose the lawsuit because Duke would argue that the City has forced them to spend millions relocating these utilities for a project that was cancelled. Duke would end up being awarded most of if not all of the $15 million seeing as they have already completed all the design and engineering work, purchased equiptment and utilities, and signed contracts with other firms to assist in the construction. 

Granted there is a distinct possiblity that the City will lose the lawsuit even if we do follow through and complete the streetcar, and have to pay Duke. But if the City were to cancel the project, it would essentially guarantee the City would lose the lawsuit and have to pay duke.

 

10.10.2013 at 08:30 Reply
bob

The reality is that this fiasco should of never become a reality. Just another example of tyrants in office doing what they please. The entire infrastructure around the city is crumbling and we build a streetcar to nowhere. If this wasn't such a crime it would be laughable

 

10.13.2013 at 02:35

Tyrants? Are the streetcars really black men in the White house?

There were votes and elections. McCain lost. Obamacare passed. Romney lost. The Supreme Court decided Obamacare was legal. Sore losers now claim tyranny because you lost the elections about streetcars in Cincinnati. This is a democracy. Elections have consequences. Get used to it.

 

10.10.2013 at 11:32 Reply

“We have all of our Congress people and governor saying one thing, which is we want MLK and the Brent Spence Bridge...”

Is Cranley saying that he will let Kasich and Chabot set the city's development policy? Is he saying that, as mayor, he will follow the lead of Kasich and Chabot?

This really needs a follow-up!

 

 
 
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