Overview
The Massachusetts Bay Transportation Authority (MBTA) was created in 1964, pursuant to Chapter 161A of the Massachusetts General Laws. The agency provides the following: a rapid transit system, commuter rail services, bus services, ferry routes, and transit services for people with disabilities. According to its website, the MBTA is “one of the largest public transit systems in the country, serving nearly 200 cities and towns and over 1 million daily riders."
According to Section 7 of Chapter 161A of the General Laws,2 the MBTA is governed by a nine-member board of directors. This section states:
The board shall consist of: the secretary [of Transportation], who shall serve ex officio; 1 person to be appointed by the mayor of the city of Boston; 1 person to be appointed by the advisory board who shall have municipal government experience in the service area constituting the authority and experience in transportation operations, transportation planning, housing policy, urban planning or public or private finance; provided, however, that said person shall not represent the city of Boston; and 6 persons to be appointed by the governor, 1 of whom shall have experience in safety, 1 of whom shall have experience in transportation operations, 1 of whom shall have experience in public or private finance, 1 of whom shall be a rider as defined in section 1 and a resident of an environmental justice population as defined in section 62 of chapter 30, 1 of whom shall be a municipal official representing a city or town located in the area constituting the authority representing the service area . . . and 1 of whom shall be selected from a list of 3 persons recommended by the president of the Massachusetts State Labor Council. . . .
Not less than 2 of the appointed members shall also be members of the board of directors of the Massachusetts Department of Transportation.
The MBTA is also overseen by the Massachusetts Department of Transportation’s board of directors, whose 11 members are appointed by the Governor. According to Section 3(d) of Chapter 161A of the General Laws, the general manager of the MBTA is hired by the Secretary of Transportation and oversees the MBTA’s day-to-day activities.
Automated Fare Collection System 2.0
The automated fare collection system (AFC) 2.0 project was created by the MBTA to replace the current Charlie Ticket / Charlie Card fare collection system. The AFC project began in 2018 when the MBTA contracted with Boston AFC 2.0 OpCo LLC, a partnership of Cubic Transportation Systems, Inc., referred to in this report as Cubic, and John Laing.3 Boston AFC 2.0 OpCo LLC would provide the MBTA with the financing, development, and operation of a next-generation fare payment system within the MBTA system. Both the MBTA and Boston AFC 2.0 OpCo LLC recognized that the contract was insufficient to satisfy the needs of the project, so in 2020 they entered into an amended contract, known as the Amended and Restated Project Agreement. Boston AFC 2.0 OpCo LLC served as the Systems Integrator (SI) and is 90% owned by John Laing and 10% owned by Cubic. Cubic served as the Implementation Contractor for the AFC 2.0 system.
The purpose of the Amended and Restated Project Agreement was to replace the existing fare collection system (Charlie Card) with an advanced tap-and-go system that would allow the public to pay fares using multiple modes of payment. The new AFC 2.0 system will be installed on subway, commuter rail, bus, trolley, and ferry lines.
The MBTA’s website states, “Our current fare payment technology and policies are outdated and overly complex. Fare Transformation will completely replace this system to ensure equal access to an updated fare payment system that works—and will work for many years to come.”
The MBTA’s website also states that the new system will contribute to improving the MBTA’s operational efficiency and will allow the MBTA to initiate new changes in the future geared toward growth and faster service.
Finally, the MBTA’s website states the following:
The MBTA’s Fare Transformation will make paying for transit easier and more convenient. Upon completion, you’ll be able to:
- Tap and board at any door with a fare card, smartphone, or contactless credit card
- Reload using cash or credit card at vending machines at all stations and some bus stops
- Manage your account online 24 hours a day.
The contract between the MBTA and Boston AFC 2.0 OpCo LLC is known as a public-private partnership, or a P3. In a P3, a public entity, such as the MBTA, enters into a partnership with a private entity, such as Boston AFC 2.0 OpCo LLC, to collaborate and maintain a large public works project, such as the AFC 2.0 project. In this contract, Boston AFC 2.0 OpCo LLC would be responsible for installing the programming software and equipment and terminals in MBTA stations, on buses, and on subway cars. Boston AFC 2.0 OpCo LLC would earn most of its revenue from this project by maintaining the AFC 2.0 system after full implementation of the project. The table below shows a breakdown of the costs of the project, according to the MBTA.
| Contract | Project Cost | Paid as of September 30, 2023* | Balance Due on Contract |
|---|---|---|---|
| Amended and Restated Project Agreement | $ 935,400,000 | $ 20,769,242 | $ 914,630,758 |
| Construction Contract | 24,809,910 | 446,770 | 24,363,140 |
| MBTA Employees** | N/A | 7,942,487 | N/A |
| Total | $ 960,209,910 | $ 29,158,499 | $ 938,993,898 |
* We did not verify this information to an audit standard of verification because it is background information.
** The source of this information is data from the MBTA’s Financial Management Information System.
We note that the New York Metropolitan Transportation Authority entered into an agreement with Cubic in October 2017 for a similar project. That project was completed in January 2021 and cost the New York Metropolitan Transportation Authority $590 million. This project began only three months before the AFC 2.0 project but was completed in only a few years and for approximately 60% of the cost of the AFC 2.0 project.
Submittals to the MBTA
As stated in Section 5.7 of the Amended and Restated Project Agreement, “the Systems Integrator is obligated to deliver reports, records, designs, plans, drawings, specifications, proposals and other documentary submittals in connection with the performance of its duties.” These submittals are sent to the MBTA, which then is required to provide a written determination for each submittal. These submittals are, in effect, work orders and change orders. As work progresses through the various stages, MBTA employees receive submittals from the SI that the MBTA is required to approve or send back to the SI to address deficiencies or inconsistencies identified by the MBTA within 15 days of receipt.
In addition, there are scheduled milestone payments that the MBTA must pay to the SI based on the stage of completion. The criteria for each of these milestones are listed in the Amended and Restated Project Agreement (Table 9: Payment Milestones of Appendix 8: Payment Mechanisms). However, these criteria are not readily apparent in the contract since they reference multiple sections of the contract. For example, Milestone A is complete when the following criteria are satisfied:
- The SI achieves MBTA acceptance of the Design Addendum required in Section 3.6.1.14.2 of Appendix 3.6; and
- The SI achieves MBTA acceptance of the updated Endor worksheet required in Section 2.6.5.1.5 of Appendix 2.6.
Please see Other Matters for more information on this issue and others we identified with the Amended and Restated Project Agreement.
During the audit, we asked the MBTA at which stage (milestone) the AFC 2.0 project was currently. The MBTA refused to answer this question, stating that this information was outside the audit period. However, the MBTA did begin to roll out the tap-and-go system for riders of buses, trolleys, and subway systems in August 2024. These milestones are detailed in the table below.
| Milestone | Payment |
|---|---|
| A | $ 8,000,000 |
| B | 4,000,000 |
| C | 2,500,000 |
| D | 1,000,000 |
| E | 1,000,000 |
| F | 3,000,000 |
| G | 4,325,000 |
| H | 3,955,000 |
| I | 4,780,000 |
| J | 2,000,000 |
| K | 5,940,000 |
| L | 2,010,000 |
| M | 174,817,352 |
| Total | $ 217,327,352 |
Bonds and Guarantees
According to the National Association of Surety Bond Producers website,
A surety bond is a promise to be liable for the debt, default, or failure of another. It is a three-party contract by which one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee).
The third-party surety, sometimes called a surety company, is typically a financial institution that determines the creditworthiness of the principal before agreeing to issue a surety bond. In the case of AFC 2.0, a surety bond would protect the MBTA in the event that Boston AFC 2.0 OpCo LLC does not fulfill its obligations under contract. Typically, the second party, Boston AFC 2.0 OpCo LLC in this instance, would turn over assets to the third-party surety in the amount of the contract. The bond allows the MBTA to request the assets be turned over to the MBTA if Boston AFC 2.0 OpCo LLC does not fulfill its obligation.
The estimated cost of this project is $935.4 million, which includes the $217.3 million for scheduled milestone payments mentioned in the table on the previous page. The capital portion is $597.5 million, and after the full implementation of the new system, a further $337.9 million is expected for operations and management of the system.
The Amended and Restated Project Agreement also requires Boston OpCo LLC to name the MBTA as an additional obligee or beneficiary if it engages a subcontractor to perform some services as part of the AFC 2.0 project.
A demand bond in the amount of $38.9 million is also in place and was written in June 2020. Cubic is the principal on this bond. The MBTA and Boston AFC 2.0 OpCo LLC are co-obligees. This relationship, with Cubic listed as both principal and as a co-obligee by way of the partnership, poses potential conflicting interests. Please see Other Matters for more information on the potential conflicting interests with this demand bond.
In addition, the MBTA has contracted with McDonald Electrical Corporation, referred to in this report as McDonald, an independent subcontractor, to provide electrical construction services. McDonald secured the required performance bond equal to the total value of its contract with the MBTA. The performance bond in question is dated June 22, 2022 and was created through Westfield Insurance Company as the surety entity. It holds McDonald, as principal, bound to the MBTA, as the obligee, in the amount of $24.8 million. The bond would be enforceable if McDonald is declared by the MBTA to be in default under the contract.
McDonald’s work consists of removing and/or relocating specific existing fare vending machines; the contract also states that McDonald is responsible for the following:
[Installing] new fare vending machines, station validators and transition gate readers including foundations, surface restoration, modification to existing network equipment and connections, modifications to existing electrical and communications infrastructure, installation of new electrical and communications infrastructure and system testing to support the new AFC 2.0 system.
According to the contract document between the MBTA and McDonald, new equipment is to be provided by the MBTA while McDonald will perform work throughout the MBTA service area in Massachusetts, including transit stations, light rail transit, and buses, as well as bus stops, ferries, and nonstation locations.4
Using MBTA Employees to Perform Work on AFC 2.0 Project
The MBTA has used its employees to work on the AFC 2.0 project. The MBTA hiring process for the AFC 2.0 project is the same as it is for other departments within the MBTA. Before each fiscal year, all departments update their staffing by performing and documenting a headcount as part of the capital budgeting process. A request is then made to leadership. A separate department within the MBTA is tasked with handling the review and approval of these capital project requests. The AFC 2.0 project is assigned a separate code for payroll and, as such, MBTA employees in other departments or who are working on different projects, could be reassigned to the AFC 2.0 project and their payroll costs be allocated to AFC 2.0. In addition, the MBTA also hired people to work specifically on the AFC 2.0 project. The chart below details the money spent using MBTA employees in the AFC 2.0 project by fiscal year, according to the MBTA’s Financial Management Information System (FMIS).
| Fiscal Year | Amount |
|---|---|
| 2018 | $ 5,495 |
| 2019 | 541,768 |
| 2020 | 1,235,112 |
| 2021 | 1,433,316 |
| 2022 | 1,874,518 |
| 2023 | 2,152,003 |
| 2024* | 700,276 |
| Total | $ 7,942,488 |
* This includes data as of September 30, 2023.
This cost of $7.9 million in MBTA staff, contractors, and subcontractors is in addition to the project costs stated above.
The MBTA uses the Commonwealth of Massachusetts’s Human Resources Compensation Management System (HR/CMS) for its payroll ledger. Employees enter time worked on a weekly basis and certify that the information entered is accurate and complete, including codes for the projects on which employees worked. A supervisor reviews the timesheet and approves this electronic document. These employee payroll records from HR/CMS are summarized by the MBTA and recorded in the MBTA’s FMIS. The payroll amounts recorded in FMIS should agree to the payroll amounts in HR/CMS. Adjustments can be made to the FMIS payroll costs if a later review determines that an employee charged the wrong project code for the work they performed. Our audit relied on the payroll costs entered by MBTA employees in HR/CMS and therefore may not reflect all costs related to this project, as employees may have erroneously entered in their time, which was later certified by their managers.
| Date published: | January 16, 2025 |
|---|