While the COVID-19 virus was occupying most of our attention, an event so unforeseeable and strange occurred that anything remotely resembling it had previously been considered unthinkable. For a brief time in April, oil literally became equivalent to trash. It brought a negative price on the market, which meant that its owners had to pay to get rid of it, as the cost to store it kept rising. That phenomenon was a momentary hiccup of our virus-based economy, but it says something about supply, demand and the cost of infrastructure. This does have something to do with the Gateway Program, and it is time for the members of the Board of the Gateway Development Corp. (GDC) to start noticing some recent changes. As of the May 28 meeting, they had not.
At this writing, the three GDC Board members are all attorneys, politically connected and well-established in their fields. Because they are attorneys, we should expect them to understand the idea of “changed circumstances,” the time-honored concept that outside events can alter a situation so much that prior decisions, even prior paradigms, may no longer make sense.
Circumstances around Gateway have changed greatly over the past several months. Gateway Board Vice Chair (and Amtrak Board Chair) Anthony Coscia revealed last year that the existing North River Tunnels could fail by the time new tunnels could be built on Gateway’s current schedule (ten years or more; see The Existing Tunnels May Fail First, Part 8 in this series). Perhaps noticing that development, USDOT Secretary Elaine Chao told the U.S. Senate Budget Committee on Feb. 27 that the existing tunnels will be repaired first, in cooperation with Amtrak (see Chao Calls for Expedited Hudson Tunnels Repair. Could USDOT Be Listening to Us?, Part 9).
Shortly thereafter, the coronavirus came along and changed everything. Ridership between New Jersey and New York City, among other places, has collapsed to less than 10% of its former level. How far it will rebound in the foreseeable future is unclear. It is now difficult to imagine how the economy of the future could afford the $30 billion or more that the entire Gateway Program would cost, with unemployment in New Jersey now exceeding 15%, a level unknown since the 1930s. To make matters worse, the U.S. Department of Justice (DOJ) has placed a further restriction on Gateway funding. We will deal with these issues later in this article, but let’s return to the oil fields first.
For a brief time at the end of April, crude oil had a negative price! That price has recovered to previous levels, but there was a time when oil producers could not give the stuff away. They had to pay somebody else to store it because it kept coming out of the ground, and consumers who poured its end-products into their trucks and automobiles (among other users) had all they wanted. New Orleans rail and environmental advocate Alan S. Drake, who watches the oil business, told Railway Age: “The pipeline from crude oil to gas tank was full, because it was backed up at every step, including the refineries and the distributors. The oil was coming out faster than the consumers could put it into their tanks. Whatever spare capacity existed at every step was full.” Because of the general shutdown of the economy due to the lock-down conditions imposed for fear of the COVID-19 virus, nobody was going anywhere. Here at Railway Age, we documented the decline of transit, as commuting to the office was replaced with “commuting” from the bedroom to the living room or the study. It was even worse for the millions who were thrown out of work entirely. The highways were and remain the emptiest they have been in years, and air quality has reached its highest levels in living memory.
As long as the highways were full, demand for gasoline and similar oil-based fuels was so price-inelastic that vehicles drank all of it, and their owners paid the price, no matter how high it rose. Nobody even thought about the price-elasticity of the supply, because it did not matter. The goal was to produce enough supply to keep up with the demand. Then the demand dropped off the proverbial cliff, and everybody learned how price-inelastic the supply was.
What does that have to do with the Gateway Program?
The infrastructure required for extracting oil from the ground is expensive. It costs a lot to drill traditional oil wells, and putting those wells in inhospitable places (like under the sea floor) or fracking raises the price considerably. Also, once the oil starts flowing, there is no easy or inexpensive way to turn it off. In essence, it keeps flowing, no matter how little or how much people are willing to pay for it. That means that the supply is price-inelastic.
The proposed Gateway Program is similar. Gateway proponents are looking at more than $13 billion for additional tunnel capacity with two new tracks into New York City, about $3.5 billion for new Portal North and Portal South Bridges, more billions for the proposed Penn South Station, and still more on top of that. The total is now in the neighborhood of $30 billion to $33 billion, and rising. Once that infrastructure is completed, the loans will still have to be repaid, and money spent on Gateway projects will carry the “opportunity cost” that it could not have been spent on other projects, no matter how necessary those other projects might have been.
Two big questions: Is the demand there? Is the money there?
As far as the demand is concerned, the answer appears to be: probably not. The economy is collapsing at the moment, and nobody knows when it will recover, or to what extent.
We do not know:
• How many small businesses that have been ordered closed as “unessential” will ever reopen, and how many of them will survive long-term.
• How many of their employees will be able to find work elsewhere, and how much income they will be able to earn.
• How many office workers who now work “remotely” from home will continue to do so, at least on some workdays
• How many peak-hour seats on trains will be needed in the future.
We do know:
• None of the infrastructure connected with the Gateway Program was needed outside the historic peak-commuting hours.
• There was always enough non-peak capacity on weekdays, and on weekends.
• The current weekend schedule has run for many years with single-track operation in and near the existing tunnels, and rehabilitating them now will accommodate a level of service that ran only once in the past decade: The 2014 Super Bowl.
So, if demand for peak-hour seats decreases, is any of the proposed Gateway Program infrastructure really necessary? Perhaps none of it will be needed, but GDC is not yet acknowledging that there is anything we can do without.
As far as funding is concerned, there are new obstacles that have appeared. Tax revenues are down. Many people have lost income, so income-tax revenue will decrease. Purchasing is down, so sales tax revenue is plummeting. In this climate, the public sector is in trouble, and many elected officials are warning of huge cutbacks in spending. Those officials include New Jersey Gov. Phil Murphy and New York Gov. Andrew Cuomo, the heads of the two states on whose soil the Gateway projects would be built.
To make matters even worse, the program is losing another anticipated source of funds, an event that has gone largely unnoticed. On Feb. 13, the Office of the General Council for the U.S. Department of Justice (DOJ) released a Memorandum Opinion entitled: “Applicability of Section 410 of the Amtrak Reform and Accountability Act of 1997 to the Gateway Development Commission” in anticipation of the completion of the Gateway Program Development Corporation’s transition to “Commission” status. The document’s headnote summarized its content: “New Jersey’s proposed diversion of a portion of its annual payment to Amtrak to a bridge project subject to the authority of the Gateway Development Commission, an interstate entity established by New York and New Jersey, would violate section 410 of the Amtrak Reform and Accountability Act of 1997, which prohibits States from carrying out an interstate compact by using state or federal funds made available for Amtrak.”
The Compacts Clause of the U.S. Constitution (Article I, §10, cl. 3) does not allow interstate compacts to act in areas governed by federal law, unless authorized by federal statute. The DOJ memo cited §410(a)(2) of the Amtrak Reform and Accountability Act of 1997 as saying: “[A]n interstate compact established by States under sub–section (a) may provide that, in order to carry out the compact, the States may … use any Federal or State funds made available for intercity passenger rail service except funds made available for Amtrak” (emphasis added). New Jersey had asked for a variance that would have allowed the money that NJT pays to Amtrak under the Passenger Rail Investment and Improvement Act of 2008 (PRIIA) to be used instead toward the proposed Portal North Bridge, a Gateway project. The DOJ had found the GDC to be an interstate compact (at 5), due to the reciprocal state statutes that created it, and stated: “The two States not only entered into an interstate agreement, but the agreement is one with the potential to encroach on federal supremacy” (Id.). Therefore, it was subject to Congressional authority, including the exception in the Amtrak Reform and Accountability Act of 1997.
The memo went on to say: “The proposed variance demonstrated that the GDC’s authority may directly impinge upon federal equities. New Jersey had proposed to meet its financial obligations for a bridge project [Portal North] subject to the GDC’s authority by diverting funds from Amtrak, and … such a diversion, if permitted, would have decreased Amtrak’s available ‘good repair’ funds, which could have created a shortfall requiring replenishment from other federal or state sources” (at 6). It concluded: “Because NJT’s request would have reduced the funds provided to Amtrak, we believe that the proposed variance would have presented precisely the kind of diversion prohibited by the Amtrak Reform Act” (at 9).
So, in effect, NJT’s request for the variance and the funding was disapproved.
Amtrak acts as a commercial landlord on the NEC, renting trackage rights to NJT and other “regional” railroads for their trains. Those railroads are required to pay an annual fee to Amtrak under PRIIA §212 for “state of good repair” purposes, the same way a commercial lease would require tenants to pay a “common areas charge” as part of the rent (sometimes called “additional rent” in the lease). In effect, NJT requested that its “common areas charge” be used instead for its special project, the Portal North Bridge. Section 410(a)(2) does not allow such a diversion, which would have taken money away from the Act’s authorized purpose of keeping the NEC in a state of good repair. Amtrak’s PRIIA money from New Jersey is off-limits to GDC and cannot be used to pay for the proposed Portal North Bridge.
These are only highlights of changes that have occurred during the past few months concerning Gateway projects. Very little in the world of commuting in general, and of regional-level railroading in particular, is like it was only three short months ago. Yet, is Gateway’s policy changing with the times?
It does not appear so, from a review of the Update given at the May 28, 2020 meeting by telephone of the GDC Board (documents, including statements by members of the public can be found on the Gateway website, www.gatewayprogram.org, under “Board Meetings”). At this writing, though, the audio recording of the meeting has not been posted.
The slide presentation for the Update can be downloaded here:
The slide at Page 8 warns of massive delays resulting from the condition of the North River Tunnels, but there was no mention of Secretary Chao’s Feb. 27 announcement that they will be repaired.
There is also no mention of the failing grade that the Hudson Tunnel Project had received from the FTA, or any potential changes in peak-hour ridership demand and how they might affect the need for a new Portal North Bridge, as proposed (or a future Portal South Bridge, either). Page 12 of the slideshow mentions “COVID-19: Uncertain Impacts: An Uncertain Future” with four bullet points:
• Travel Patterns and Demand
• Reopening Timeline/Landscape
• Global Economy
• Partner Financials.
There is no doubt that these are important considerations, especially given the momentous change in circumstances over the past three months. We want to know more.
We will continue to report to you about the Gateway Program and its component projects from time to time, as events unfold. It has been almost a year since we last reported about the proposed Penn South Station (Part 5: Can We Keep Penn Station from Going South?). Now, the GDC and Gov. Cuomo have articulated competing visions about a southward expansion of the existing Penn Station. We will report on Penn South again soon. After that, we will return to the significant changes that are occurring now, and as plans unfold to reopen offices and other places.
We asked Gateway’s management a number of questions about their plans for the future, and their reactions to the latest changes in circumstances, especially how they might influence Gateway’s plans. Here are the questions we asked:
1. On Feb. 27, Secretary Elaine Chao said that Amtrak and USDOT will work together to rehabilitate the North River Tunnels, similarly to the way the Canarsie Tunnels on the L-train of the New York subway system were repaired. In light of the Secretary’s statement, what changes is GDC making in the scope, funding, and/or scheduling for the proposed Hudson Tunnels Project?
2. Anthony Coscia said that Amtrak is planning to rehabilitate the existing tunnels (we also accept his authority to speak for Amtrak in his capacity as Chair of the Amtrak Board). What is the timetable for that project, including likely completion date, and how would the rehabilitation project for the existing tunnels affect the schedule and/or funding for the Gateway proposal of the Hudson Tunnels Project?
3. Do GDC and Amtrak consider themselves bound by Secretary Chao’s Feb. 27 statement before the Senate Budget Committee, which is also the subject of the previous questions?
4. Is GDC changing its funding plans and expectations to reflect the current (and deepening) economic downturn, as well as the Feb. 13 opinion from the Justice Department that Section 410 of the Amtrak Reform & Accountability Act of 1997 precludes the use of funds that Amtrak collects from NJT from being used to finance the proposed Portal North Bridge? If so, what changes will be made?
5. If some of the workers who commuted to offices in NYC and now work from home continue to do so, even if only on some days of the week, demand for peak-hour commuting capacity will decrease from pre-COVID-19 levels. That could be expected to reduce demand enough to alleviate the capacity constraint (statutory requirement of 95% of capacity currently used, as required for a Core Capacity Project Grant), which is the official purpose for proposing the Portal North Bridge project. Does GDC have any recent forecasts of changes in such demand and, if so, where do they come from and what do they indicate? In light of that anticipated development, what sort of plans is GDC making to change the scope or funding for the PNB project?
We presented these questions to Stephen Sigmund, GDC Chief of Public Outreach, after the May 28 meeting. In his response, he did not specifically address them. We consider these questions legitimate, concerning facts of public interest and concern. Ours are among the “inquiring minds” that want to know. If and when we get answers from GDC, we will report them to you.
“THE FEDERAL TRANSIT MAN” SPEAKS UP
“There is even more to this story,” says Larry Penner, former FTA Region 2 official and the Railway Age commentator dubbed “The Federal Transit Man. “The claim by the Gateway Development Corporation that it has found a $1.4 billion reduction in project cost estimates achieved through advancement of design, engineering and technical efforts, as well as ‘encouraging private sector feedback and innovation’ sounds great on paper. The devil is in the details. Has GDC shared the actual details to justify this claim with the Federal Transit Administration, Amtrak, New Jersey Transit and other potential funding agencies, along with transit advocates and elected officials? Has it performed any value engineering exercises to see if there are other construction options that could result in savings?
“In 2015, the estimated cost for the Gateway Program grew by $3.9 billion, from $20 billion to $23.9 billion, In 2017, the new cost estimate grew another $5.2 billion to $29.1 billion. How, five years later, can GDC pull a rabbit out of the hat and come up with $1.4 billion in savings against an estimated $29 billion for the full-build project?
“This new figure is based on reducing the estimated cost for both the new tunnel and rehabilitated existing tunnel portions of the overall project, which previously grew from $8.7 billion to $12.7 billion over time. Did GDC reduce the scope of work? How can anyone reduce Phase One from $12.7 to $11.3 billion? Would anyone working for the GDC who came up with the new project cost estimate, including $1.4 billion in promised savings, put up their pension or 401K or mortgage their home as collateral to guarantee that the design-build process will deliver these savings?
“Design-build typically requires the construction contractor to advance final design beyond 30% in parallel with actual construction. One can only guess what the construction contractor’s winning bid will actually be. There is no way of knowing if it will come in higher than the new promised $11.3 billion for two new tunnels plus rehabilitation of the existing ones. There are also contract change orders during construction. They are based on unforeseen site conditions or last-minute changes in scope. Amtrak, Port Authority and GDC must share the details to justify these promised savings beyond their cheery news release. Without this information, riders, taxpayers, transportation advocates and elected officials should remain skeptical.
“Historically as any major capital project advances through design and engineering, estimated project costs continue to rise. Responses to any construction procurement can easily come in above the project engineer’s estimate. Any final project cost upon completion could increase, based upon responses to bids, along with change orders during construction due to last minute changes in scope or unforeseen site conditions. It would be interesting to see the detailed project budget for Gateway, line item by line item, including how much money has been programmed for contingencies to pay for contract change orders during construction.
“As a result of COVID-19, the world we live in has changed. Commuting patterns will be different. More people will telecommute on permanent basis. The concept of urban central business districts will continue to evolve. More people will be shopping on line. More Wall Street financial institutions and major corporations based in Manhattan may continue to move additional employees to back offices in the suburbs.
“Any ridership modeling for the Gateway Program dealing with an anticipated increase in ridership over coming decades must be reevaluated.
“In the meantime, the number-one priority for transportation operating agencies such as the MTA, NJ Transit, PATH and others will be safety and security as a result of COVID-19. New maintenance activities, which may become permanent, will go on for the foreseeable future. New capital improvements to buses, trains, commuter rail, ferries, stations and terminals to deal with COVID-19 may take several years before fully implemented. Funding agencies such as the FTA will make the review, approval and oversight of billions in COVID-19 projects and programs the number-one priority. Elected officials on the local, city, state and federal level will be doing the same. As a result, many who previously advocated for Gateway as their number-one priority will be preoccupied with these more-pressing issues for many months to come. Gateway will move to the back burner for many who were previous project supporters. The GDC will have to regroup next year in making its case for billions in funding.
“The Gateway Program is reminiscent of the ongoing MTA LIRR Eastside Access to Grand Central Terminal project. In 2001, the initial estimated cost was $3.5 billion with a completion date of 2011. In 2019, 18 years later (based upon the 2016 MTA/FTA amended Full Funding Grant Agreement) and currently at $11.2 billion, ESA could grow to $12 billion, with completion in 2022. Will Gateway do the same and become New York City’s version of the infamous Boston “Big Dig” and end up costing $40, $50 or even $60 billion and completed by 2040?
The GDC reminds me of the Popeye cartoon character J. Wellington Wimpy, who famously said, ‘I’ll gladly pay you Tuesday for a hamburger today.’ Tuesday may never come for riders and taxpayers who use NJ Transit and Amtrak looking for new Hudson River tunnels to be completed within their commuting lifetime.”
It’s great to have Larry Penner on board on these issues. We all bring our own experience to our efforts; mine as a practicing lawyer with a business degree and a long history of advocacy, and Larry’s with his many years of experience at the FTA. Because of that experience, Larry has raised some important issues, which GDC must address. So when (if is not acceptable) a person of appropriate authority at GDC answers the questions I pose in this commentary, they should address the issues that Larry raised, too. We as taxpayers will be funding whatever gets repaired or built, and we as riders will be using it. As such, we are the first-order stakeholders, and we have a right to know.