“The president is concerned about the viability of this project and the fact that New York and New Jersey have no skin in the game. They need to step up and bear their fair share. They are two of the richest states in the country.”
— Transportation Secretary Elaine Chao, discussing the Gateway project at a House hearing, March 6, 2018

The “Gateway project” is code for a new rail tunnel connecting New Jersey and New York. Supporters say it’s sorely needed because the existing, waterlogged tunnels under the Hudson River are 108 years old and nearly unusable.

Chao once called Gateway an “absolute priority,” but she changed her tune after The Washington Post reported that President Trump, amid a feud with Senate Minority Leader Charles E. Schumer (D-N.Y.), is asking Republicans to kill funding for the tunnel.

Now, the Department of Transportation says New Jersey and New York want a fantasyland funding deal. Chao complained to lawmakers that under the states’ proposal, the federal government would be providing 100 percent of the money for the Gateway tunnel and 95 percent of the money for a related project: replacing the Portal Bridge in New Jersey. (That’s another 108-year-old structure near Manhattan that services trains traveling up and down the East Coast.)

“They’re putting in less than 5 percent on one and zero in the other,” Chao testified before the House Transportation and Infrastructure Committee.

The states, however, since 2015 have proposed to split Gateway costs 50/50 with the federal government. “Fifty percent is more than the federal government usually asks for such projects, so she’s just dead wrong,” Schumer said. “She doesn’t know her facts, or she’s dead wrong.”

What we have here is a black-and-white disagreement over basic facts. Do New Jersey and New York really want a full ride from the federal government, as Chao says?

The Facts

Train delays and derailments are a fact of life for hundreds of thousands of riders shuttling daily between New Jersey and New York. This congestion dominoes up and down the East Coast, since the Hudson River tunnels are a choke point for all Amtrak trains traveling through New York to other cities such as Boston or the District.

With few exceptions, political leaders in New Jersey and New York have long recognized this situation as a budding crisis. A previous tunnel project, called Access to the Region’s Core (ARC), had been slated for completion this year. But then-Gov. Chris Christie (R-N.J.) canceled it in 2010, citing disputed cost overruns, at a time when the tea party was flexing its muscle over federal spending.

The Gateway project, announced in 2011, became the region’s next big hope.

New Jersey and New York are seeking funding for the first phase: Building the new rail tunnel and replacing the Portal Bridge. The new tunnel is estimated to cost $11.1 billion. If it gets funded, construction would run from 2019 to 2026. Replacing the Portal Bridge would cost another $1.56 billion and is slated to be done in 2023.

Without a new tunnel, the economic and environmental impact in the region would be severe, according to several experts and a 2012 study by the Government Accountability Office. But with Trump and Republicans from other parts of the country opposed to Gateway, securing the funds will be an uphill climb.

Chao has two primary concerns with the states’ funding proposal and we’re going to unpack each of her arguments. We reached out to DOT officials and aides for several lawmakers from New Jersey and New York. Because of the sensitivity and ongoing nature of the Gateway negotiations, these officials spoke to The Fact Checker on the condition of anonymity.

‘New York and New Jersey have no skin in the game’

According to Chao, the two states are asking the federal government to provide the full $11.1 billion for the new tunnel. However, the states committed to funding 50 percent of Gateway costs in 2015, according to a letter signed by Gov. Andrew M. Cuomo (D-N.Y.) and Christie, and identified $5.55 billion in local funds to cover their share in December 2017.

The key here is that Chao is including two kinds of federal funds: grants and loans. As anyone with a credit card or a mortgage knows, loans are not free money.

The most recent funding proposal from the states asks for 50 percent of Gateway funds in the form of federal Capital Investment Grants and the other 50 percent in the form of federal loans under the Railroad Rehabilitation and Improvement Financing (RRIF) program or the Transportation Infrastructure Finance and Innovation Act (TIFIA).

The state of New York is offering to cover $1.75 billion for an RRIF loan over 35 years with a line item in its yearly budget, according to a Dec. 13 letter from Robert F. Mujica, the state’s budget director, to the Federal Transit Administration. The governor’s office would propose this appropriation and make “good faith” efforts to secure legislative support every year, Mujica added.

New Jersey Transit is proposing to cover the cost of a $1.9 billion RRIF loan over 35 years with a new fee on its riders, specifically “a per-passenger trip charge for all NJ Transit rail passenger trips each way across the Hudson River.” This surcharge would start at 90 cents in 2020, then increase to $1.70 in 2028 and $2.20 in 2038, according to a Dec. 13 letter from then-N.J. Transit Executive Director Steven Santoro.

The Port Authority of New York and New Jersey, a transit agency jointly run by both states, would take responsibility for another $1.9 billion loan. In February 2017, the agency’s board of commissioners authorized a 10-year capital plan that includes “a commitment to support debt service payments on $2.7 billion … of low-cost borrowing for Phase 1 of the Gateway program.” (The agency would spend $2.4 billion on the tunnel loan, including accrued interest and fees, and the other $300 million on a loan for the Portal Bridge.)

Moving on to the Portal Bridge, the states’ plan is for New Jersey to contribute $29.7 million in revenue from its gas tax fund and bond $336.5 million through its economic development authority. The Port Authority would kick in $21.5 million from its revenue and take out a TIFIA loan worth $284 million. This adds up to $671.8 million, or 43 percent of the total $1.56 billion cost. The federal government would cover the rest under the states’ proposal. [Note: We first reported these numbers based on a February 2017 document, but we updated them to reflect some tweaks in November 2017.]

Let’s take stock of what we have here. New York is proposing to spend $1.75 billion of its taxpayers’ money on the Gateway tunnel. For its share, New Jersey says it will hike N.J. Transit fares to gather $1.9 billion. The Port Authority has put itself on the hook for an additional $1.9 billion. It all adds up to $5.55 billion, or 50 percent of the tunnel’s $11.1 billion price tag as currently estimated.

Granted, the states would be asking the federal government to front this $5.55 billion, but they’ve identified specific funding sources to pay back the money over 35 years. Every time the states made a payment toward the loans, that would be “skin in the game.” They would also have to secure these loans with collateral.

Regarding the Portal Bridge, the states would cover $51.3 million, or 3 percent of the cost, in revenue from the Port Authority and New Jersey’s gas tax fund. New Jersey would use state bond proceeds to cover 21.5 percent of the cost, and the Port Authority would be on the hook for an additional 18 percent using a federal loan.

Asked about Chao’s comments, a DOT official said New Jersey, New York and the Port Authority have not applied for any of the loans they’re listing. (That doesn’t mean they won’t apply.)

“There’s no documentation evidencing any commitment,” Chao said at the House hearing. “There’s no pending application on the nine projects that you collectively call Gateway. The career staff rated this project as not eligible for federal funding because the state and local government have put in 5 percent in one, 0 percent in the other. That’s not how these projects are financed.”

The 50/50 split was negotiated under the Obama administration. Under Trump, the deputy FTA administrator, K. Jane Williams, called it a “non-existent” agreement. In a Dec. 29 letter to Mujica, Williams wrote that a previous version of the Gateway tunnel plan proposed to use federal assistance for only 83 percent of the cost, as opposed to 100 percent.

A DOT official told The Fact Checker the states’ funding proposal has other holes. For example, the federal loans would require a fee, or down payment, between 2 percent and 30 percent depending on what types of funds the states used to pay back the loan and what they used as security. “If I was able to go to the bank and I was able to buy a house with 0 percent down, that’s a pretty sweet gig,” the official said.

A Senate Democratic aide said these concerns put the cart before the horse. The Gateway parties are aware of the need to cover fees once they reach the stage of applying for loans, the aide said. It’s impossible to set aside money for loan fees before knowing what those fees will be, the aide added.

‘It has always been this way. Loans are not counted as equity.’

There’s another prong to Chao’s argument. States can’t count these federal loans toward their share of the total project cost, she said in response to questions from Sens. Cory Booker (D-N.J.) and Kirsten Gillibrand (D-N.Y.) during a Senate hearing March 1.

“We are not anxious for a fight on this,” Chao told Gillibrand. “But for New York and New Jersey to consider funds, debt that we have given them, as part of their equity back to us is something that we disagree with.”

Booker said Chao appeared to be changing the rules of the game. “This would crush every area of our country if you shifted that to what you represented,” he said.

This issue is not as clear-cut as Chao makes it out to be.

The TIFIA statute, under which New Jersey and New York are proposing to borrow some of the Gateway funds, says “the proceeds of a secured loan under this chapter may be used for any non-federal share of project costs … if the loan is repayable from non-federal funds.”

The DOT official pointed out that the statute says TIFIA funds may be used — not shall be used — for the local share of a project. But it’s clear there’s discretion here and federal officials could choose to count TIFIA funds toward New Jersey and New York’s share of the Gateway project.

The TIFIA statute, the DOT official said, also says “federal assistance” may account for no more than 80 percent of a project. Loans and grants are both types of “federal assistance,” the official added.

A Senate Democratic aide pointed out that the Trump administration in July 2017 issued a “notice of funding opportunity” for a new infrastructure grant, called INFRA, in the Department of Transportation. That notice says “funds from federal credit programs, including TIFIA and RRIF, will be considered non-federal funding.”

Gateway does not involve INFRA grants, but the Senate Democratic aide said Chao is sending mixed messages by saying TIFIA and RRIF loans don’t count toward the local share in Gateway’s case, but do count in other cases.

“There has never been to our understanding in the history of the CIG [Capital Improvements Grant] program a partner who came in and said, ‘We want a big grant, and we want you to finance the rest of the money in loans,’” the DOT official said.

Is there a magic number for what a local partner should contribute to a big project? The DOT official said it varies but gave three examples. A high-speed rail project in California received a $647 million grant, representing nearly one-third of the total project cost. The Maryland Purple Line is requesting one-third in a grant and one-third as a loan from the federal government. The Honolulu light rail is seeking $1.5 billion as a grant, representing nearly 15 percent of the total project cost.

For what it’s worth, before Christie killed it, the ARC tunnel was also a 50/50 split between the states and the federal government, according to the GAO. But the states did not plan to rely as heavily on loans for that project. Schumer says the typical split for a project like Gateway is 80 percent federal government, 20 percent local.

The Pinocchio Test

Supporters call Gateway the most important infrastructure project in the United States. Chao’s comments suggest New Jersey and New York are trying to get it free. She said the states are offering to pick up 5 percent of the cost of the Portal Bridge project and none of the tunnel’s $11.1 billion outlay.

However, the states have identified $5.5 billion to cover 50 percent of the tunnel’s cost over 35 years. They’ve proposed to cover $671.8 million, or 43 percent, of the Portal Bridge replacement. Much of this money would be loaned by the federal government, but the states would have skin in the game from the moment they secured those loans, and every time they made a payment.

Chao adds that New Jersey and New York can’t even use federal loans for their share of the project costs, but a federal statute makes clear that TIFIA funds could be used. To encourage use of a different grant program, the DOT specifically says RRIF and TIFIA loan proceeds count as the local share of a project.

As any big developer in New York City knows, major infrastructure projects are often financed with large amounts of debt. Spreading out Gateway funding over 35 years would ensure that several generations of New Jerseyans and New Yorkers share the cost of a tunnel that is likely to be used for many decades.

Chao broadly mischaracterizes and then dismisses the states’ funding proposal, giving the impression that New Jersey and New York are offering no money for the tunnel when in fact they’ve outlined billions of dollars in proposed funding. She also suggests the states are playing fast and loose with the rules by counting federal loans toward their share of the Gateway costs, but a federal statute and DOT materials suggest this is par for the course.

It’s fair to ask why the states are not ponying up any cash, up front, for the tunnel. But Chao’s spin takes this to another level, perhaps to give cover to Trump as he seeks to derail the Gateway project. For her sweeping mischaracterizations, Chao earns Four Pinocchios.

Four Pinocchios

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"The president is concerned about the viability of this [Gateway] project and the fact that New York and New Jersey have no skin in the game."
testifying before the House transportation committee
Tuesday, March 6, 2018