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THE GOVERNOR’S RACE | BACK STORIES

Baker’s role in Big Dig financing process was anything but ‘small’

Records undercut his campaign claim

By Michael Rezendes and Noah Bierman
Globe Staff / June 13, 2010

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Throughout his campaign for governor, Republican Charles D. Baker has sought to minimize his involvement in the $15 billion Big Dig.

When he launched his candidacy last summer, Baker said he played a “small role in the Big Dig.’’ Days later, his campaign said that, as the state’s budget chief under governors William Weld and Paul Cellucci, he had a “limited role in the financing process.’’

And in March, Baker told a Globe columnist that when it came to figuring out how to pay for the massive project at one critical juncture in the 1990s, he was only “one of about 50 people’’ involved.

But those statements are sharply at odds with a picture of Baker’s financial leadership of the project that emerges from hundreds of pages of memorandums, letters, and other documents culled from his four-year tenure as secretary of the Executive Office of Administration and Finance, from 1994 to 1998. The documents show that Baker was the chief architect of a financing plan to sustain the project during its peak construction years, just as federal support was diminishing substantially.

The $3 billion plan depended almost exclusively on heavy borrowing and modest toll increases, deferring the toughest decisions on tolling and taxes to future leaders. It wasn’t designed to deal with the massive cost overruns that would eventually plague the project, despite multiple warnings at the time that the price tag would likely grow.

Baker, in a recent interview, acknowledged that he played a major role in assembling the financing plan, but said many others participated in the effort. He also said the plan was responsible, effective, and based on good-faith assurances by other government officials that the Big Dig would be built on time and on budget.

“There were a lot of other people involved in it, all the way through,’’ he said. “And I was looking to build consensus with all those other people who ultimately had to sign off on whatever we were doing, including the Legislature and the governor and the Turnpike Authority and Massport and all these other folks.’’

A valued officer
By the time Weld named Baker as the state’s top fiscal officer in November 1994, Baker had already served as his secretary of health and human services and was considered a rising star. So valued was Baker’s counsel that Weld referred to him as “the man behind the curtain’’ and “the soul’’ of his administration.

By 1997, when the state was enjoying huge budget surpluses, the Big Dig, then expected to cost $10.8 billion, was the most daunting fiscal challenge on Baker’s desk.

At the time, the federal government was preparing to cut funding for the project by about $300 million per year. Project managers were desperate to find billions of dollars to fund the most expensive years, when contractors would be tunneling through downtown Boston.

While former state transportation secretary James J. Kerasiotes was the public face of the project, supervising the depression of the elevated Central Artery and construction of a new cross-harbor tunnel to Logan Airport, Baker was working out of the limelight, to find a way to pay for it, records show.

Among the Big Dig records reviewed by the Globe — obtained under a public records request — that bear Baker’s name are official agreements among the state agencies involved in financing the project; letters to key legislators; a $600 million securities prospectus for potential lenders; and dozens of internal memorandums, including several between Baker and his staff outlining the borrowing plans.

As he struggled to find a way to overcome the drop in federal dollars, Baker, in crafting a financing plan, also had to contend with politics. His Republican bosses, Weld and Cellucci, were dead-set against new taxes and fees.

In 1996, Weld knocked down three turnpike tollbooths during his unsuccessful Senate campaign against John F. Kerry, eliminating a potential source of Big Dig revenue. Weld also oversaw the elimination of some motor vehicle registration fees, another potential source of direct funding.

At the time, Baker could have relied on the money overflowing from state coffers. In June of 1998, Baker was presiding over a $1 billion budget surplus, with state income tax collections rising.

But with acting governor Paul Cellucci campaigning on a pledge to cut more than $1 billion from the state’s revenue stream by slashing the state income tax rate, there was little enthusiasm in the administration for diverting surplus funds to the Big Dig.

“People, generally speaking, thought that the tax policy that was being pursued by state government at that point in time was a positive development with respect to the economic growth of the state,’’ Baker said.

Baker’s borrowing plan
With federal dollars dwindling and little political appetite for raising tolls or taxes, Baker engineered a two-track financing plan.

The first part relied on selling short-term bonds to investors that would be repaid by the Massachusetts Turnpike Authority and the Massachusetts Port Authority. The Turnpike Authority would kick in $1 billion, while Massport would contribute $300 million.

That money, under agreements Baker signed in 1997 and 1998, would be provided in large part through tolls collected on the Mass. Pike and the Tobin Bridge.

As a result, in 1997, tolls in the tunnels were raised from $1 to $2, and on the Tobin from $.50 to $1, inciting the ire of commuters and concern among elected officials about the political consequences. But it could have been steeper: Further increases, including higher tolls at turnpike booths in Greater Boston, were put off until 2002, after Baker and his bosses were gone. From there, turnpike and tunnel tolls in Greater Boston were scheduled to go up every six years.

The second part of Baker’s borrowing plan was more complex and, at the time, more innovative. It called for selling up to $1.5 billion in Grant Anticipation Notes, known as GANs, which allowed the government to borrow money and pay back the principal using future federal highway grants to the state. The interest — an estimated $550 million over 18 years, which has since ballooned to an estimated $840 million — would be picked up by taxpayers.

Although the sale of GANs is common today, they had been used only occasionally at the time, and never on the scale that Baker proposed, according to state and federal records. The GANs eventually raised $1.5 billion, and will not be paid off until 2015, a decade after the project was virtually finished.

Kerasiotes, recalling the funding crisis confronting Big Dig officials, praised Baker’s work.

“We were caught in a confluence of events,’’ Kerasiotes said. “Charlie had a job to do, and he did his job and he did it well.’’

State legislators, eager to find a way to keep the Big Dig going while avoiding unpopular toll increases, largely embraced the overall plan.

Joseph Sullivan, the House transportation committee chairman at the time, said there was general cooperation among political leaders, as well as state and federal transportation officials, on the need to find a new source of funding for the project. Sullivan said Baker was a key player, especially in bringing all the parties together.

“When you are the secretary of administration and finance, your voice matters,’’ Sullivan said.

Underfunded needs
While the Legislature approved the plan with little objection, others raised red flags. That was because borrowing against future federal transportation aid was nearly certain to delay other highway and bridge projects.

Baker maintained that using the money for the Big Dig would not compromise road and bridge work elsewhere in the state, arguing that at least $400 million would be available every year for other projects.

“I don’t see how anybody could argue that the artery will be pulling money away from non-artery projects,’’ he said during a 1998 legislative hearing.

But others disagreed. “The administration kept denying the obvious,’’ Michael Widmer, president of the Massachusetts Taxpayers Foundation, a business-backed watchdog group, said in a recent interview. “If you keep spending more on the Central Artery, you’re going to have less to spend on state highways. I learned that in second grade. If you’ve got a dollar, you can only spend it once.’’

In the interview, Baker said overall spending on other state road and bridge projects actually grew — with the help of additional state funds — after the financing plan was approved.

Nevertheless, the need for road and bridge repairs has long exceeded the state’s ability to pay for the work, and Baker’s financing plan for the Big Dig exacerbated the problem, by committing federal aid to the project until 2015. A blue-ribbon panel in 2007 concluded that the state was underfunding its transportation needs by nearly $1 billion a year.

Moreover, in a 1999 report, the Taxpayers Foundation pointed out that issuing the GANs would require taxpayers to pay substantial interest on the loans, “adding to the mounting spending pressures on the budget.’’

Today, Baker stands by his plan, insisting it was the right tool for the right job at the right time.

“I think the GANs worked,’’ he said. “They served their purpose as intended. They made it possible to finish the project on an uninterrupted basis. They dealt with the cash flow problem that we would have otherwise faced.’’

Governor Deval Patrick, faced with limited revenue to rebuild deteriorating roads and bridges, has used a similar approach in borrowing $1.1 billion against future federal highways grants. Like Baker’s plan, this has drawn criticism from Widmer, who says it “puts a burden on future taxpayers because of a refusal to pay for our obligations now.’’

The decision, during Baker’s tenure, to delay major toll increases also had ripple effects. As the Big Dig’s needs grew, successive governors, transportation officials, and state lawmakers also balked at raising tolls and entered into ever-more complex financing schemes, leaving the Turnpike Authority at the brink of insolvency before the Legislature and Patrick agreed to dissolve it last year. Patrick and state lawmakers also increased the state sales tax rate in 2009, in part to pump $100 million a year into turnpike debt and avoid a politically unpopular toll increase.

Warnings on cost overruns
The financing plan structured by Baker left no cushion for future cost overruns in the project, even though, at the time, fiscal watchdogs said overruns were probable.

In 1994, a project manager with Bechtel Parsons/Brinckerhoff, the private engineering consortium overseeing the project, told Weld and other administration officials that costs were likely to rise dramatically, but the administration kept the information private.

The Taxpayers Foundation in 1997 said publicly that it would take a “Herculean’’ effort to avoid cost overruns. The federal Government Accounting Office warned in 1997 and again in 1998 that Baker’s borrowing plan could fall hundreds of millions of dollars short because it failed to account for $450 million in cost increases announced in March 1997, and as much as $500 million more in potential construction overruns.

“If current trends continue, further cost increases of some magnitude seem likely,’’ the 1997 audit cautioned, advising the state to update its cost estimate.

In his interview, Baker said that he believed his plan was flexible, and that he was more concerned at the time with the ups and downs of federal funding than changes in the official price tag.

“I know there was a lot of other chatter going on at the time,’’ he said. “But the people who were closest to it, who had direct oversight of it, were basically saying that that was a reasonable estimate at that point in time and all the way through.’’

Baker said he was not at the 1994 meeting where the Bechtel official briefed Weld on cost overruns, and does not recall being informed about it.

By 2005, seven years after Baker left the State House, and five years after Big Dig managers conceded that the project would cost more than $1 billion more than the public had been told, the final bill came to nearly $15 billion, with taxpayers facing another $7 billion in interest that will not be paid off until 2038.

Today, as Baker runs for governor, one of the central tenets of his campaign is that state government should live within its means.

“In my administration,’’ he pledged, as he was accepting the Republican convention endorsement in April, “we’re going to stop spending money we don’t have, starting on day one.’’

In his interview with the Globe, Baker said he has no regrets about the course he pursued. But he did take away a larger lesson.

“The biggest issue on all of this stuff,’’ Baker said, “is we should be very careful about entering into these things going forward unless we really know what they’re going to cost.’’

Noah Bierman can be reached at nbierman@globe.com., Michael Rezendes can be reached at rezendes@globe.com.

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