Project Executive Estimates Cost to Cancel Streetcar Would Far Exceed $100M

The project executive for the Cincinnati Streetcar project, John Deatrick, gave a presentation to Cincinnati City Council’s Budget & Finance Committee today to outline the anticipated costs, time frame risks associated with cancelling or temporarily stopping work on the $133 million project.

Deatrick emphasized that at this point approximately $32 million has or will be spent prior to December 1. In addition to that, he explained exactly why the city would forfeit approximately $45 million in Federal funds, and be subject to local payment of any funds committed that would have otherwise been paid by those Federal funds. In addition to that, Deatrick and the project team estimate that it would cost $31-48 million to close-out the project.

Streetcar Cancellation and Close-Out Costs


What it means is that the professionals involved with overseeing the project believe the costs to cancel will be between $108 million and $125 million, not including any of the highly anticipated litigation costs.

The presentation also included a breakdown of more intangible numbers like the damage to the reputation the city has with the Federal government, and the future inability to receive Federal funding for any transportation projects as a result.

Cincinnati’s Budget Director, Lea Erickson, then explained how those costs would be paid and that the cancellation of the project would also result in the loss of any realized property and economic gains anticipated due to the streetcar, as outlined by an economic feasibility report done by HDR Economics. That total of lost tax revenue for the City of Cincinnati and Cincinnati Public Schools, she estimates, would $237 million in today’s dollars – or $594 million over the course of the next 35 years.

The 39-page presentation is packed with detailed breakouts and explanations for these figures. It also explains the relationship of the various contractors involved in the project.

  • ArcticSix

    It makes me nervous that Cranley said he’ll hire independent people to check these numbers. Not because he said it, all numbers should be double-checked. It was the way that he said it. He made it sound like findings that go against his agenda come from biased sources. Coupled with my distrust of politicians who use words like “objective” when they hire private fact checkers to double-check numbers, it makes me wonder what impact this report will have.

    That said, there’s still the issue of giving up grants and paying for litigation. From what I understand, we can’t pay for the resulting litigation from the capital fund budget, so we would take a hit to the operating budget from cancellation that we would not take if we kept the project going. Can anyone verify that? If the cancellation does hit the OB more than keeping the project going I can’t see any justification for it being the “responsible” option.

    • Margaret McGurk

      It is beyond insulting to suggest that John Deatrick is somehow deceiving City Council with his report. The man is a widely respected, rock-solid professional who brought in Fort Washington Way and The Banks on time and on budget in spite of crazy-making objections by political opponents and delays. For the mayor to bandy about the idea that his report is somehow untrustworthy is nothing more than character assassination, pure and simple.

    • ArcticSix

      I totally agree with you. I want to give him the benefit of doubt, but this sounds like he’s taken a page straight out of Cincinnati’s “political boss” era. He’s very aware that making a compelling argument is more important than making a factual one when it comes to gaining political clout. Maybe he’s just upset that there’s not enough grey vinyl siding on the streetcar or the Banks.

  • TimSchirmang

    For several days now a number of pro-streetcar sources (citybeat, Cincinnatians for Progress, and the Streetcar facebook page) have included 1) money already spent, and 2) unspent federal money that will be returned, in their estimates of the cost to stop the streetcar. It was disappointing but I got over it.

    I am bewildered that a professional project manager would put his name on, and personally deliver, a presentation bursting with the same foolish analysis.

    This is not a complicated concept. Moving forward from today, what are the costs to the City of Cincinnati to stop the project? What are the benefits? That’s option 1.

    Moving forward from today, what are the costs to the City of Cincinnati to finish phase 1? What are the benefits? That’s option 2.

    Compare.

    Unspent federal money is irrelevant. It is not a cost to stop. It is not part of the cost to finish.

    Local money already spent is irrelevant. It is not a cost to stop. It is not part of the cost to finish.

    How did John Deatrick give this presentation with a straight face? Over 2/3rds of his ‘Grand Total’ cost to cancel consisted of numbers that are completely immaterial to the decision at hand.

    Turning to the benefits side, the analysis was no less amusing. The 2007 HDR study has gotten more mileage than any economic study in history. The difference between OTR in 2007 and OTR now is night and day. The numbers from that study, insofar as it describes potential economic development, are beyond stale. In a footnote the presentation admits the numbers need to be updated. But Deatrick said he didn’t have time to make the adjustments to base property values. Re-phrased – ‘we don’t have time to care about the validity of our numbers before we make a decision.’

    I and a lot of other moderate residents want better rail transit options in Cincinnati. But it is going to be a long long time, and quite possibly never, if the urbanist avant garde continues to put forth arguments that are devoid of elementary, rational thinking.

    • http://www.UrbanCincy.com/ Randy A. Simes

      Contractually obligated money that would have been reimbursed by the Federal government is very real. So while the Feds would have paid for $45M, any bit that is spent of that or is committed to be spent, would then have to be paid by the City. That means while the overall local cost for the project is $88M, it could rise above that as the financial burdens associated with that $45M would be passed along to the City.

      I don’t understand why already spent money isn’t a cost. It is money that has been spent for which the city will get nothing in return. That’s what these figures show…approximately $108-125M in costs to get absolutely nothing. Or, you could continue the project and spend a grand total of $8M more and actually have something that is projected to generate a 2.7:1 return on investment (which yes was estimated in 2007, but was verified in 2011), improve mobility and set the region up for expanded light rail options.

      Take your pick:
      $108-125M for Nothing OR $133M for a Streetcar System

    • TimSchirmang

      C’mon Randy, be serious, you are better than this.

      If the streetcar was an internal project of Parsons Brinkerhoff and you handed your ‘Take Your Pick’ numbers to a decision maker, you’d be shown the door.

    • Josh

      You need to familiarize yourself with the concept of sunk costs. If the project is viable from this point forward and you can show that it will have a positive net present value then we should absolutely move forward with it. Unfortunately, Deatrick and other supporters have not sufficiently proved this point. This is where the streetcar side of the debate lost me and, although I am not vehemently against it, I can no longer support it in good conscience.

    • Eric Douglas

      It’s a question of how many times does a project have to be vetted and over how many years. The anti-streetcar tactic is not one based on economics, it’s if you don’t have power to stop the streetcar, delay.

    • nickfarfsing

      Great article Jake, thank you for it. Randy, thanks for the website. I’m a
      transplanted Cincinnatian but I miss my hometown and your site helps me stay
      connected.

      (Long time lurker, finally an opportunity for my economics degree and MBA to
      pay off in the blogosphere.)

      Josh and Tim, your point is very valid. In a pure financial analysis you
      shouldn’t consider sunk costs, you run the risk of throwing good money after
      bad. When evaluating a project mid-implementation, such as this, you have to
      ignore the past and look at where you stand today. BUT in this case Randy
      included sunk costs on both sides of the equation so the end result is
      basically the same.

      So here’s my back of the napkin math:

      In this case, the Federal funds that have been spent are sunk costs that need
      to be considered because those sunk costs quickly become a liability if the
      project is canceled. Unfortunately, I don’t see mention of how much of the
      federal funds have been spent, although it’s kind of irrelevant for the
      financial analysis. But here are my assumptions: federal funds have been spent at a rate of $1 federal to $2 local funds; I’m ignoring the utilities escrow
      because of uncertainty; all $ values in millions; probable rounding errors in
      my math.

      Total spent so far by the city is about $21.6, federal $10.8 (total of $32.8)

      If we want to complete this project, it is going to cost the local taxpayers
      $66.3. ($87.9 is the city’s share of the project minus $21.6 already spent)

      If we want to stop the project it is going to cost between $41.4 and $58.4
      ($30.6-47.6 close out costs plus the $10.8 federal funds that need to be paid
      back)

      So the choice is $66 million for a streetcar or $41-$58 million for no
      streetcar. So to build a streetcar it will cost between $8 and $25 million.
      Which happens to be the same difference between Randy’s “Take your
      pick:” above. Additionally, this does not take into consideration any
      of the difficult to quantify costs mentioned in the article. And of course one could also contest the close out costs which would affect the analysis.

      Now the question I don’t know how to answer is whether the proposed
      streetcar line is worth $8 million to $25 million. You would need a very good
      understanding of the benefits and then conduct an NPV analysis. But I would be willing to bet that $25 million for this streetcar line would be a steal.

    • jasomm

      good stuff, I was looking for that $10.8M number but couldn’t find it

    • Eric Douglas

      First, the unspent Federal money was not included in the $60-70m tally that produced the $8 million difference to stop/finish.
      Second, local money already spent is relevant since you’d get nothing for it, that’s called a sunk cost, of which it would take the next 20 years to pay off bonds for as mentioned in the meeting.

      If you had watched the presentation, Deatrick was very clear that he does not want to be audited for the first time in his career ranging from head of transpo/engineer projects in Cincinnati and D.C. I trust him over a guy that “forgot” to pay a loan on his incline project.

    • jasomm

      So they’ve paid $32million so far, largely on pre-development, real estate, utilities, and design. None of which are eligible for federal grant repayment. So the yes, most of the $44.9million grants should not be shown as an expense of cancellation (unless you are talking about opportunity loss, which is not what a project manager, or budget should do). but maybe a few million has been repaided by grants so far, maybe none (they never listed this amount).

      So the real number is probably $59-82million + plus litigation. So it might be ~$100 all told?

      To make the point more clearly, the public should see what a yearly net expenditure/revenue’s chart would look like including all city expenditures for construction and maintenance (operations?), balanced with property tax increases, revenue, etc. Overlay that line with the same data for construction to date, cancellation costs, estimated litigation, and expected property tax changes, etc. which are incurred for nothing.

      That would be a more powerful graphic to show benefits, and expenses to-date in a purely financial perspective. Some people will never be convinced of the unquantifiable virtues of the system.

    • ArcticSix

      You should contact Deatrick with that idea. Streetcar supporters need to use honest, easy to understand graphs to show the potential short and long term costs of completion versus cancellation. Graphs are a lot more likely to catch the public’s attention than a 39 page report, and it’s a lot harder to pull a few lines out of context and “disprove” the whole thing in the eyes of the public. Deatrick’s report above could use more breakdowns that can easily be related to the public.

  • Eric Douglas

    Pause = Cancelled?

  • David Thomas

    City Beat is saying the streetcar needs two of following three council members to vote for it to keep it going: PG, Mann and Flynn. Best hope is PG and Mann. Flynn totally flip flopped for 2 years ago when he was a supporter. I can’t even begin to state how many mailers I got from him with Amy Murray calling for cancellation.