Los Angeles City Hall’s fiscal troubles will outlive the recession and may extend well into the 21st Century because of huge Metro Rail cost overruns the city agreed to help cover at the expense of its own anti-gridlock measures, officials told the Business Journal last week.

The city must fund half of all overruns on the subway’s first leg — up to a $125 million cap — under a little-known agreement cut between the Los Angeles County Transportation Commission and the City Council five years ago, when the Metro Rail Red Line had barely broken ground. Because that 4.4-mile segment between Union Station and Alvarado Street is already at least $200 million over its original $1.2 billion price tag, the city presently owes roughly $100 million.

“We need the commission to come over and tell us what steps they are taking to put the brakes on the costs,” said Councilwoman Joan Milke Flores. “The overruns are going to be with the city a long time to come.”

In addition, the city has agreed to shell out as much as $90 million if overruns are incurred on Metro Rail’s unbuilt $1.4 billion second phase, a 6.7-mile segment that will tie the Alvarado station with spurs in Mid-Wilshire and Hollywood by 1998. Still ahead are negotiations for handling any overruns that may occur on the third phase.

Those overrun charges incurred on the subway’s first phase, which opens in September 1993, will undercut long-range city funding for a bevy of congestion-easing programs. Among them are shuttle-bus services in downtown Los Angeles, Westwood and Watts, freeway commuter vans, bus subsidies for the elderly and local spending for new light rail lines, according to Ed Rowe, general manager for the Los Angeles Department of Transportation.

“The city wanted Metro Rail and this is just one of the costs,” he said. “Somebody had to foot the bill.”

But Councilman Nate Holden, who negotiated the overrun limits on the subway’s second leg, was angered by the $100 million bill for the first phase.

“I want to find out if the cost overruns are attributable to the LACTC falling asleep on the job or contract-change orders,” said Holden, who chairs the council’s transportation committee. “Somebody should justify this.”

Right now, the commission and city negotiators are gearing up to set limits on what overruns Los Angeles will owe on a third subway route that will link the system with North Hollywood and an area southwest of Koreatown near the turn of the century.

The confirmation of Los Angeles’ subway-overrun tab comes two weeks after the City Controller’s office reported that city revenues were $208.6 million below budget projections when the fiscal year hit its midway mark Jan. 1. Contributing to that shortfall were business taxes, which were nearly $40 million off estimates because of the stagnant economy.

Aside from its commitment to pick up added costs, the city has also made up-front contributions totaling $54 million for Metro Rail’s first two phases and still owes another $76 million, sources said.

Both the base contributions and the overrun deals were needed to convince the federal government that the giant public works project had local public support — and the money to back it up. Washington, D.C., is paying $1.4 billion toward the cost of the subway’s two routes, with the additional outlays covered by the LACTC, the state, the city and commercial property owners near subway stations.

Jay Curtis, executive director of the Los Angeles Taxpayers Association, predicted it will be up to industry to replace the additional money City Hall will lose on the overruns, even though developers are paying for tens of millions of dollars in transportation improvements to get their construction projects approved.

“Business will end up paying the greater part of the costs through additional taxes, because we’ll have no growth economically, and lose thousands more jobs, unless we address our congestion problems with more than Metro Rail,” Curtis said. “The city needs to make the LACTC get tough on contract administration and long-range planning . . . because these overruns are enormous. It’s a travesty.”

According to Rowe, the overrun charges will be paid out of the city’s share of Proposition A, the half-cent sales tax approved by county voters back in 1980 to fund transit improvements.

Under the complex LACTC-city arrangement, annual city payments to Metro Rail, which began this year, are limited to 22 percent of Los Angeles’ yearly Proposition A monies, plus a limited portion of funds in capital reserve accounts. Hence, the city — which expects to collect $62.4 million in Proposition A cash this year — forked out $6.3 million to the LACTC at the fiscal year’s halfway point.

But Rowe downplayed the impact of the overrun charges on sales-tax funds, saying the city has planned for it and can stretch out the payments during the next several decades. “I’d be worried if we had a bill for $60 million due this year,” Rowe added. Then again, without the overrun tab, “we could plow the Prop. A funds back into our accounts and start new programs or expand existing ones” like the shuttle buses.

Officials at the LACTC, which vowed to keep subway costs from soaring when it took over the multibillion-dollar project from the Southern California Rapid Transit District in 1989, say most of the overruns occurred on the RTD’s watch. To reduce future costs and establish private-sector-style efficiency, the commission several years ago created the Rail Construction Corp. to oversee subway design and construction.

In general, the increased costs stacked up when Metro Rail construction contractors filed change orders as the result of “unforeseen conditions.” At many of the subway stations in downtown Los Angeles, for example, contractors routinely discovered hazardous wastes, boulders and utility lines requiring more work — and more commission money.

Costs also spiraled because of federal funding delays and problems securing rights-of-way, according to Linda Bohlinger, the LACTC’s director of capital planning and programming.

“The concept was for the city to be involved financially so it would help in reducing costs and getting the project’s permits expedited,” Bohlinger said.

Yet, two LACTC board members said they are worried construction management reforms implemented by the commission and RCC may not have gone far enough to protect taxpayers and Proposition A accounts.

“The moral of the story is that the commission has not been hard enough on contractors like it promised,” said LACTC Commissioner Nick Patsaouras. “They have not gone after their (contractors’) errors and omissions and allowed them to pursue claims through the insurance companies.”

Added Commissioner Ray Remy, president of the Los Angeles Area Chamber of Commerce, “I’ve been concerned the multiplicity of things the commission is doing is making effective oversight difficult, and not just on rail construction.”

Meanwhile, Bohlinger and other LACTC officials acknowledged that the $200 million is only a rough overrun estimate for phase one. Indeed, documents show that projection was made in March 1991. In just the last six weeks, the Business Journal has reported two new sets of charges, adding up to $52 million, for the project.

copyright Los Angeles Business Journal