How L.A. Metro plans to close billion-dollar funding gaps on major rail projects

The bids that arrived last year to extend the Gold Line east of Azusa were hundreds of millions of dollars higher than officials had expected.

The price tag ballooned 38% to $2.1 billion. To stay within budget, the Foothill Gold Line Construction Authority was forced to truncate the line, postponing the construction of two stations and three miles of track.

“We were totally shocked,” Chief Executive Habib Balian said. “It was way, way off from what our estimates were.”

The unexpected cost increase is not unique to the Gold Line: It is one of at least three planned rail projects in Southern California facing a significant funding gap, underscoring the challenges of the region’s ambitious plan to build nearly two dozen major projects over the next four decades.

With billions of dollars still to secure, and pressure building to open as many lines as possible before the 2028 Summer Olympics in Los Angeles, Metropolitan Transportation Authority officials are beginning to explore new funding models, including long-term deals with the private sector to fund and operate lines.

“Board members and the public want things now, now, now,” said Jerard Wright, a policy manager at the Los Angeles County Business Federation. “What we’re seeing at Metro is a realization that they can’t deliver everything at once without some significant help.”

Metro is juggling a grueling schedule of at least five ribbon-cuttings in the next decade, including the Westside subway, the downtown Regional Connector subway and a rail line in the San Fernando Valley.

Los Angeles Mayor Eric Garcetti and other Metro board members are pushing to finish four more major projects before 2028: a transit line through the Sepulveda Pass, a rail line to Artesia, an Eastside extension of the Gold Line and a Green Line extension to Torrance.

Accelerating those lines would require $3.3 billion more for construction, interest on an additional $10 billion in debt financing and $1.2 billion to operate the lines over a decade, officials said. The figures assume the project costs won’t rise.

The lines would need to start heavy construction by 2023 to have a chance of opening before the Olympics, said Rick Clarke, Metro’s chief program management officer.

A planned transit line through the Sepulveda Pass could cost at least $13 billion, depending on Metro’s design and route choices.

Opening the line by 2028 would require accelerating its Measure M construction schedule by at least five years. Tunneling through the Santa Monica Mountains to build a subway line would provide the fastest travel time, but would significantly add to the risk of cost overruns.

Metro is also planning a rail line between downtown L.A. and Artesia, following the path of an old freight railway through Huntington Park, Downey and Paramount.

The 20-mile line has $4 billion secured. There are two route options, each of which has a price tag of about $5.8 billion, leaving a funding gap of $1.8 billion.

The rail building boom is driven by Measure M, the sales tax increase that voters approved three years ago, and its predecessor, Measure R, approved in 2008. The taxes provide billions of dollars for rail construction, but not enough to pay for the projects outright.

Metro is pursuing what Chief Executive Phil Washington has described as a “finance lasagna,” with layers of money provided through tax revenue and bonds and grants from federal and state agencies.

He said they will also turn to the private sector for construction financing, an arrangement that’s common in Europe but new for an agency that has historically relied on bond financing.

Under a typical public-private partnership, a firm would be hired to build, operate and maintain a line for as long as 35 years, Washington said. The model could work on the Sepulveda Pass and Artesia lines, he said.

The companies hired to build the line would provide some capital during construction, which would address Metro’s immediate funding gaps. In return, Metro would pay the contractor a lump sum when the line opens, and a monthly fee for the next three decades or so.

The payments would probably carry a higher interest rate than the bond market. But, Washington said, that could be canceled out by the benefit of transferring risk for cost overruns to a private company, and saving on inflation by opening the project more quickly.

The contract would include a structure of fines and bonuses to ensure the line was delivered on time, officials said.

“They don’t get paid unless the project is delivered and it’s meeting the performance outcomes we care about,” said Joshua Schank, Metro’s chief innovation officer. “You get more value for your money.”

Los Angeles International Airport is using a public-private partnership to build the people mover train that will carry riders between a Metro station and the airport’s central terminal area.

The contractor will receive $4.9 billion to build the project and operate it for 25 years, with stiff penalties baked in for overruns and delays.

Critics say that by setting optimistically low budgets, Metro has promised more projects than it delivered despite funding from four sales tax increases since 1980.

“What we’ve seen Metro do, in the last 30 years, is put together very optimistic construction plans, discover that costs were much higher, then scramble to find resources,” said James Moore, a USC engineering professor. “They don’t really expect to be able to build projects at the costs they predict, because they never have before.”

Metro borrowed heavily in the bond market in the 1980s and 1990s to build the county’s first modern rail lines. By the late 1990s, debt service was Metro’s single largest expense, consuming more than 30% of the operating budget.

Less than a decade ago, Metro officials were forced to trim revenue estimates for Measure R, the sales tax approved in 2008, after the economy turned sour. Falling retail sales sliced more than $5 billion from the tax’s estimated revenue over its three-decade lifespan, from $40 billion to about $35 billion.

Metro officials say Measure M was not designed to cover every cost. Building lines more quickly, they say, will save money in the long run and provide a greater public benefit.

“We are meeting or exceeding what we took out to voters,” Washington said, adding that though the 2028 acceleration plan is important, it was not part of what the public approved. “Not every region, not every program, can say that.”

The rail building boom in Los Angeles County comes during a tight construction market that is partly of its own making. LAX is undergoing a multibillion-dollar renovation, an NFL stadium is rising in Inglewood, and Seattle officials are adding to the market pressure by embarking on their own ambitious, multi-decade transit construction program.

The surge in construction, coupled with low unemployment and stricter immigration policies, has made it difficult for contractors to hire qualified workers, which has driven up wages, the Associated General Contractors of America said.

That was the case on the Gold Line’s San Gabriel Valley extension, which faced a “perfect storm” of economic uncertainty and rising costs when bids came back in the summer of 2018, said Balian, the Gold Line authority’s CEO.

The construction authority had planned on building light-rail tracks from the current terminus in Azusa to Montclair. Instead, the line’s terminus will be in Pomona. The shorter first phase of the line is slated to open in 2025, two years ahead of the original date.

If officials can find $465 million by October, the contractor will keep building east, adding stations in Claremont and Montclair, Balian said.

To Balian, the unexpected budget problems were a reminder that Measure M’s vast list of projects, schedules and budgets should not be seen as set in stone. After all, he said, “you never know what’s going to happen.”