Office of California State Auditor: Audit of High Speed Rail Program (2010)

8/9/2019 Office of California State Auditor: Audit of High Speed Rail Program (2010)

1/52

High-Speed Rail Authority:It Risks Delays or an Incomplete System Becauseof Inadequate Planning, Weak Oversight, and LaxContract Management

April Report 9-6

IndependentTRANSPARENT Accountability

NONPARTISAN


2/52

Te rst ve copies of each California State Auditor report are free. Additional copies are $3 each, payable by

check or money order. You can obtain reports by contacting the Bureau of State Audits at the following address:

California State Auditor

Bureau of State Audits

555 Capitol Mall, Suite 300

Sacramento, California 95814

916.445.0255 or Y 916.445.0033

OR

Tis report is also available on the World Wide Web http://www.bsa.ca.gov

Te California State Auditor is pleased to announce the availability of an on-line subscription service. Forinformation on how to subscribe, please contact the Information echnology Unit at 916.445.0255, ext. 456,

or visit our Web site at www.bsa.ca.gov.

Alternate format reports available upon request.

Permission is granted to reproduce reports.

For questions regarding the contents of this report,

please contact Margarita Fernndez, Chief of Public Aairs, at 916.445.0255.


3/52

CALIFORNIA STATE AUDITORB u r e a u o f S t a t e A u d i t sDoug Cordiner

Chief Deputy

Elaine M. Howle

State Auditor

555 C a pit o l Ma l l , Su i t e 300 Sa c ra m ent o , C A 5814 1 . 4 4 5 . 0 2 5 5 1 . 3 2 7 . 0 0 1 f a x www.bs a .c a .go v

April 29, 2010 2009-106

e Governor of California

President pro Tempore of the Senate

Speaker of the Assembly

State Capitol

Sacramento, California 95814

Dear Governor and Legislative Leaders:

As requested by the Joint Legislative Audit Committee, the California State Auditor presents its audit report

concerning the High-Speed Rail Authoritys (Authority) readiness to manage funds authorized for building the

high-speed rail network (program) in California, including the $9 billion in general obligation bonds the votersauthorized in November 2008.

is report concludes that the High-Speed Rail Authority has not adequately planned for the future development

of the program. For example, in its 2009 business plan, the Authority outlined the sources from which it expected

to receive the funds necessary to meet the estimated $42.6 billion cost of the program. e Authority stated it

would need $17 billion to $19 billion from the federal government; however, the Authority has received a federal

commitment of only $2.25 billion. In addition, the business plan does not make clear which government would

be responsible for a revenue guarantee needed to attract private investors, or how much it might cost. e

program risks signicant delays without more well-developed plans for obtaining funds.

e Authority also needs to improve some administrative practices. State law requires the Authority to

establish an independent peer review group (review group) to review the Authoritys plans, but only ve of the

eight members have been appointed. us, the Authority cannot fully benet from the expertise the review

group would provide. Additionally, the Authority does not currently categorize and track expenditures for

administration, which state law limits to 2.5 percent ($225 million) of the $9 billion in bond funds authorized.

Unless it tracks these funds and develops long-range plans for spending them, it risks running out of

them prematurely.

Finally, a primary tool for monitoring the program has been inadequate and the Authority has not implemented

eective controls over invoice processing and in some cases has paid for work that was not part of contracts or

work plans. ree recent monthly progress reports the contractor managing the program (Program Manager)

submitted to the Authority contained inconsistent information and did not compare actions performed and

products created to what contractors promised to complete in their work plans. Additionally, the Authority paidat least $4 million of invoices for which it had no evidence from the Program Manager that the contractors had

performed the work invoiced. e Authority also paid more than $268,000 for work that was not included in

contractors work plans, impairing its ability to measure performance against those plans, and it misused public

funds when it paid $46,000 for furniture not covered in the contract with its Program Manager.

Respectfully submitted,

ELAINE M. HOWLE, CPA

State Auditor


4/52

California State Auditor Report 2009-106

April 2010

Contents

Summary 1

Introduction 5

Audit Results

TheHighSpeedRailAuthoritysPlanningLacksDetails 17

TheAuthorityNeedstoImproveOversightandAdministrative Controls 26

ContractMonitoringandInternalControlsDoNotProvideSufcient Accountability 31

Recommendations 39

Response to the Audit

HighSpeedRail Authority 41

CaliorniaStateAuditorsCommentsontheResponseFromthe HighSpeedRail Authority 47


5/52


April 2010

Suary

Results in Brief

Te Legislature created the High-Speed Rail Authority (Authority)in 1996. State law charges the nine-member Authority withthe development and implementation of intercity, high-speedrail service. According to state law, the entire network, fromSacramento to San Diego, is intended to be complete by 2020. InNovember 2008 voters approved the Safe, Reliable High-SpeedPassenger rain Bond Act for the 21st Century (Proposition 1A),providing $9 billion for construction of a high-speed railnetwork (program).

Although the Authoritys 2009 business plan contains theelements required by the Legislature, it lacks detail regarding howit proposes to nance the program. For example, the Authorityestimates it needs $17 billion to $19 billion in federal grants. Tebusiness plan, however, species only $4.7 billion in possiblefunds from the American Recovery and Reinvestment Act of 2009(Recovery Act) and a few other small federal grants. Accordingto its communications director, the Authority has no denitecommitments from the federal government other than RecoveryAct funding, which actually amounted to $2.25 billion when awardswere announced in January 2010. Te program risks signicantdelays without more well-developed plans for obtaining orreplacing federal funds.

Further, the Authoritys plan relies heavily on federal funds toleverage state bond dollars through 2013. Proposition 1A bondfunds may be used to support only up to 50 percent of the total costof construction of each corridor of the program. Te remaining50 percent must come from other funding sources. Tus, the awardof up to $2.25 billion in Recovery Act funds allows for the use of anequal amount of state bond funds for construction, for a total ofabout $4.5 billion. However, the Authoritys spending plan includesalmost $12 billion in federal and state funds through 2013, more

than 2.5 times what is now available. Additionally, creating a viablefunding plan may be a challenge as matched funding for the leastexpensive corridor eligible for Recovery Act fundsLos Angelesto Anaheimamounts to $4.5 billion, while projected costs total$5.5 billion. Barring additional non-Proposition 1A funding,the Authority may have to settle for a plan covering less than acomplete corridor. Te Authority must decide relatively quicklywhich corridors will receive federal funds. Its chief deputy directorsays it must prepare funding plans by spring 2011 in order to meetfederal deadlines.

Audit Highlights . . .

Our review of the High-Speed Rail Authority

(Authority) revealed the following.

The Authoritys 2009 business plan

estimates it needs $17 billion to

$19 billion in federal funds. However, the

Authority has no federal commitments

beyond $2.25 billion from the

American Recovery and Reinvestment

Act of 2009 (Recovery Act), and other

potential federal programs are small.

The Authoritys plan for spending includes

almost $12 billion in federal and state

funds through 2013, more than 2.5 times

what is now available.

The Authority does not have a system

in place to track expenditures according

to categories established by the Safe,

Reliable High-Speed Passenger Train

Bond Act for the 21st Century, its largest

source of committed funding.

The Authority has not completed some

systems needed to administer Recovery

Act funds, for example, a system to track

jobs created and saved.

Some monthly progress reports, issued

by the Authoritys contracted Program

Manager to provide a summary of

program status, contain inconsistent and

inaccurate information.

Authority sta paid at least $4 million

of invoices from regional contractors

received after December 2008, without

having documented written notication

that the Program Manager had reviewed

and approved the invoices for payment.

continued on next page . . .


6/52


April 2010

2

Te Authoritys plans for private nancing include a revenueguarantee that needs further specication, but it is working to

improve its approach to risk management. According to the 2009business plan, the Authority expects private investors to supply$10 billion to $12 billion, but also indicates these investors willrequire a minimum revenue guarantee from a public entity. TeAuthoritys nancial planning consultant has addressed concernsraised by the Legislative Analysts Oce that this might be aprohibited operating subsidy; however, details on how muchthe revenue guarantee may cost or who might pay it are scant.Additionally, the 2009 business plan provided little detail on howthe Authority would manage risk in general, but the Authority isplanning to improve risk management for the program.

Te Authority also needs to improve its oversight andadministrative controls. State law creates a peer review group(review group) to assess the Authoritys plans. Most signicantly,the review group is to issue an analysis and evaluation of theviability of the Authoritys funding plan for each corridor ofthe program. As of February 2010, however, only ve of the groupseight members had been appointed, limiting the expertise availableto the Authority. Moreover, according to our legal counsel, thereview group is likely subject to the Bagley-Keene Open MeetingAct (Meeting Act), although the Authority has received informaladvice to the contrary. Nevertheless, the review groups work couldbe voided if this issue is not resolved.

Additionally, the Authority lacks systems to comply with state lawregarding bond funds. According to state law, only up to 2.5 percent($225 million) of its portion of bond funds from Proposition 1Amay be used for administration and only 10 percent ($900 million)may be used for planning, environmental review, and preliminaryengineering (preconstruction tasks). According to its scal ocer,the Authority is unsure how it will classify the expenditure of bondproceeds and does not have a system for tracking expendituresby category. Until such a process is in place, the authority cannotreport accurately on its expenditures and risks running out of bond

funds available for administration or preconstruction task costs.Tis is a serious problem because it is set to have spent $168 millionof the $1.1 billion in bond proceeds authorized for these purposesby the end of scal year 200910.

Contractors accounted for 95 percent of the programs totalexpenditures over the past three scal years. Although theAuthority generally followed state requirements for awardingcontracts, its processes for monitoring the performance andaccountability of its contractorsespecially the entity that hasbeen contracted to manage the program (Program Manager)areinadequate. Te Program Managers monthly progress reports, a

The Authority paid contractors more

than $268,000 for services performed

outside of the contractors work plansand purchased $46,000 in furniture for

one of its contractors use, based on an

oral agreement contradicted by a later

written contract.


7/52


April 2010

primary document summarizing monthly progress on a regionaland program level, have contained inaccurate and inconsistent

information. For example, the July 2009 report indicated thatthe regional contractor working on the Los Angeles-to-Anaheimcorridor had completed 81 percent of planned hours but had spent230 percent of planned dollars. In addition, although the progressreports described actions taken or products created, they didnot compare those actions and products to what the contractorspromised to complete in their work plans. Te work plan for aconsultant the Authority recently hired to oversee the ProgramManager does not include a review of the monthly reports.

Te Authority does not generally ensure that invoices reectwork performed by contractors. According to the chief deputy

director, the Program Manager should review each regionalcontractors invoice to ensure that the work claimed actuallyhas been performed and then notify Authority sta whether theinvoice should be paid. Te chief deputy director further statedthat sta should not pay invoices without notications. However,Authority sta paid at least $4 million of invoices from regionalcontractors received after December 2008when the Authoritysscal ocer says she was informed that such notications wererequiredwithout documenting notication. Te Authority onlyrecently adopted written policies and procedures related to invoicepayment. However, those policies and procedures do not adequatelydescribe its controls or their implementation.

Finally, the Authority made some payments that did not reectthe terms of its agreements, risking its ability to hold contractorsaccountable for their performance. For example, it spent $46,000on furniture for its Program Managers use based on an oralagreement, despite the fact that its written contract expressly statesthat oral agreements not incorporated in the written contract arenot binding. Te written contract requires the Program Managerto provide its own furniture, equipment, and systems. Additionally,the Authority paid a regional contractor more than $194,000 tosubcontract for tasks not included in the regional contractors work

plan and paid the Program Manager $53,000 for work on RecoveryAct applications, which was also outside the Program Managerswork plan.

Recommendations

o ensure that it can respond adequately to funding levels that mayvary from its 2009 business plan, the Authority should develop andpublish alternative funding scenarios that reect the possibility of


8/52


April 2010

4

reduced or delayed funding from planned sources. Tese scenariosshould detail the implications of variations in the level or timing of

funding for the program and its schedule.

o plan adequately for private investment, the Authority shouldfurther specify the potential cost of revenue guarantees and whowould pay for them.

In order to respond eectively to circumstances that couldsignicantly delay or halt the program, the Authority should ensurethat it implements planned actions related to risk management.

o avert possible legal challenges, the Authority should ensurethat the review group adheres to the Meeting Act or seek a formal

opinion from the Oce of the Attorney General regarding whetherthe review group is subject to this act.

o ensure that it does not run out of funds for administrative andpreconstruction tasks prematurely, the Authority should trackexpenditures for these activities and develop a long-term spendingplan for them.

o ensure that Authority sta receive relevant information on theprograms status, they should amend the program managementoversight consultants work plan to include a critical review ofprogress reports for accuracy and consistency. Authority staalso should ensure that the Program Manager revises its progressreports to include information on the status of promised productsand services.

o determine if it is paying invoices that accurately reect workperformed, the Authority should ensure that sta adhere to controlsfor processing invoices. For example, sta should not pay invoicesfrom regional contractors until they receive notication from theProgram Manager that the work billed has been performed, or untilthey have conducted an independent verication.

o ensure that it does not misuse public funds and can holdcontractors accountable, the Authority should adhere to theconditions of its contracts and work plans, and make anyamendments or modications to contracts or work plans in writing.

Agency Comments

Te Authority raised concerns about the report title but agreedwith our recommendations and outlined actions it is taking or plansto take to address them.


9/52


April 2010

Introduction

Background

Te Legislature created the High-Speed RailAuthority (Authority) in 1996. Among otherduties, state law charges it with the developmentand implementation of intercity, high-speedrail service that is fully integrated with existingintercity rail and bus networks. Te Authoritysnine members, described in the text box,have exclusive responsibility for the planning,construction, and implementation of a high-speedpassenger train network, with trains traveling

at speeds exceeding 125 miles per hour. InNovember 2008 voters approved the Safe, ReliableHigh-Speed Passenger rain Bond Act for the21st Century (Proposition 1A), which provides$9 billion from the sale of general obligation bondsfor construction of a high-speed rail network(program) and $950 million from the sale of generalobligation bonds for improvements to other railsystems connecting to it. According to the statelaw that placed Proposition 1A on the ballot, theentire network, from Sacramento to San Diego,is intended to be completed by 2020. Further, the law stipulatesthat a person using nonstop service will be able to travel betweenSan Francisco and Los Angeles in two hours and 40 minutes, orless. According to the Authoritys latest business plan, trains musttravel at speeds up to 220 miles per hour during parts of the trip toreach this goal.

Beginning in 1996, the State issued several plans and reports todevelop and construct the program in California. In 1996 theAuthoritys predecessor, the Intercity High-Speed Rail Commission,issued a summary report and action plan concluding that ahigh-speed rail system is feasible. In 2000 the Authority released

its rst business plan, and in 2004 it released a draft program-levelenvironmental impact report and environmental impactstatement to describe the proposed programs environmentaleects on a statewide scale. In 2005 it certied the program-levelenvironmental impact report and statement.

1 An agency certies a nal environmental impact report by conrming that the report complieswith the California Environmental Quality Act, was reviewed by the agencys decisionmakingbody before approving the project, and reects the agencys independent judgmentand analysis.

The High-Speed Rail Authoritys Membership

TheHighSpeedRailAuthority(Authority)consistso

nine membersappointedbytheollowing:

Thegovernorve

TheSenateonRulesCommitteetwo

TheSpeakerotheAssemblytwo

Authoritymembersserveortermsoouryears.Thereisnolimitonthenumberotermstheymayserve.TheAuthority

electsachairromamongitsmemberswhoservesor

one year.

Authoritymembersreceive$100oreachdaytheyattend

to Authoritybusiness,upto$500permonth,plusactual

travel expenses.

Source: California Public Utilities Code.


10/52


April 2010

6

In 2008 the Authority certied an additional environmental impactreport and statement focused on the section of the program linking

the San Francisco Bay Area and the Central Valley. However, inAugust 2009 a court determined that the Authority needed tomake changes to the 2008 report in several areas and to recirculateit. Areas needing revision include a description of the trackalignment between San Jose and Gilroy and the Authoritys ndingon vibration impacts. Consequently, the Authority rescinded itscertication in December 2009 and in March 2010 circulateda revised environmental impact report. Te Authority releasedrevised business plans in November 2008 and December 2009.

Until recently, the Authority operated with a very small sta. Statelaw requires it to appoint an executive director to administer

its aairs. Te executive director may hire sta as allowed bythe Authority. Between scal years 200001 and 200607, theAuthority operated with three to ve sta members, includingthe executive director. Te Authority gained additional positionsand increased its sta to seven in scal year 200708 and nine inscal year 200809. As of January 2010, it has nine full-time stamembers and one half-time sta member.

In June 2009 the Authority contracted for an organizationalassessment. Te assessment, published in December 2009, wasconducted to facilitate the Authoritys shift from a planningentity to one focused on implementation. Te assessmentincludes an organizational chart proposing 37 total sta plusadministrative/ oce tech positions. According to the chief deputydirector, in September 2009 the Authority requested fundingfor 35 new positions. Te proposed 201011 Governors Budgetincludes an additional 27 positions for the Authority. New proposedsta include a chief nancial ocer, a chief program manager,regional directors, and transportation and environmental planners.

As part of increasing the size of its sta, the Authority hired adeputy director for communications, policy, and public outreach(communications director) in 2009 to bring outreach activities

under its direct control, to streamline the outreach program,and to increase the quantity and quality of outreach activities.An additional goal, according to the communications director,is to keep the Authoritys members more informed of staactivities. Consequently, at the request of the Authority chair,the communications director initiated a weekly report issuedto Authority members in August 2009 that provides high-levelinformation on the stas progress and is posted to the AuthoritysWeb site. Te Authority has made a number of other documentsavailable on its Web site, including agendas, minutes, and othermaterials related to meetings, business plans, economic studies,and information relevant to specic sections of the program for


11/52


April 2010

example, the corridor between Los Angeles and Anaheim. Inaddition, the Authority posts its budget appropriation on the main

page of its Web site and a detailed budget within the meetingmaterials on its Web site. Finally, the Authority is using electronicand social media to communicate with the public, specically ane-mail list, witter, and Posterous.

As the Authoritys sta has grown, so have its expenditures. AsFigure 1 demonstrates, it spent $6 million in scal year 200001.In contrast, its appropriated budget for scal year 200910 is$139.1 million, and the 201011 Governors Budget proposesexpenditures totaling $958.2 million as of January 2010.Proposition 1A funds would cover $583.2 million of thisamount$50.4 million for administration and $532.8 million

for capital costsand federal funds would provide $375 million forcapital costs.

Figure 1

High-Speed Rail Authority Expenditures

Fiscal Years 200001 to 200910

(In Millions)

200405

Fiscal Years

200506

200607

200708

200809

200910*200304

200203

200102

200001

Expenditures

0

20

40

60

80

100

120

$140

Sources: Governors budgets for scal years 200203 through 201011, State Controllers Oceexpenditure reports, and HighSpeed Rail Authority (Authority) payment logs.

Note: The scal year 201011 Governors Budget proposes $958.2 million for the Authority as ofJanuary 2010.

* Estimated expenditures.


12/52


April 2010

8

Proposition 1A

In 2008 California voters approved Proposition 1A, which providesfunding for development of the program. Proposition 1A authorizesthe State to sell $9 billion in general obligation bonds for planning,engineering, and construction of the network and an additional$950 million in general obligation bonds for capital improvementsto intercity, urban, and commuter rail systems connecting to it.Te Authority is to administer the $9 billion, while the Californiaransportation Commission is to allocate the $950 million forconnecting systems.

Te proposition sets additional limits on how the Authority canrequest and spend its bond funds. Tese include a 2.5 percent

($225 million) cap on administrative costswhich the Legislaturemay increase up to 5 percent ($450 million). Te proposition alsolimits the overall amount of funds the Authority may spend onenvironmental studies, planning, and preliminary engineeringactivities to 10 percent of its total bond funds ($900 million). TeAuthority also must submit a detailed funding plan to a peer reviewgroup, the director of the Department of Finance (Finance), thepolicy committees with jurisdiction over transportation, andthe scal committees in both houses of the Legislature, no laterthan 90 days before submitting initial appropriation requests forcapital costs for each corridor. Further, before committing fundingfor expenditures on construction and real property and equipmentacquisition on each corridor or portion of a corridor, the Authoritymust submit a detailed funding planseparate from the fundingplan described earlierto the director of Finance and the JointLegislative Budget Committee. Te director of Finance mustdetermine whether the plan is likely to be successfully implementedas proposed. Bond proceeds may not be used to support morethan 50 percent of the total cost of construction for each corridoror usable segment of the program; the remainder must come fromother funding sources. However, the Authority need not submiteither funding plan before using up to 7.5 percent ($675 million)for environmental studies, planning, and preliminary engineering

activities, as well as for acquisition of rights-of-way, improvementsto rights-of-way, and relocation assistance. Tese costs are also notsubject to the 50 percent limitation. As of March 1, 2010, the Statehad issued $258.4 million in Proposition 1A bonds.

2 State law requires two dierent funding plans, one before requesting appropriation of certainbond funds and one before committing those funds for expenditure. Although the requirementsfor both plans are similar in most respects, state law requires that the plan submitted beforecommitting bond funds for expenditure include one or more reports, prepared by independentrms, that indicate, among other things, that construction can be completed as proposed andthat planned train service will not require an operating subsidy.

3 According to state law, a corridor is a portion of the highspeed rail system, and a usable segmentis a portion of a corridor that includes at least two stations.


13/52


April 2010

The High-Speed Rail Network

Te proposed program would run from Sacramento andSan Francisco in the north to San Diego in the south. Figure 2 onthe following page depicts the proposed routes for the program.According to the Authoritys 2009 business plan, phase onecomprises six corridors between San Francisco and Anaheim:

San Francisco to San Jose

San Jose to Merced

Merced to Bakerseld

Bakerseld to Palmdale

Palmdale to Los Angeles

Los Angeles to Anaheim

Although state law sets 2020 as the intended date to complete theentire system between Sacramento and San Diego, the Authoritysays that ideally it plans to complete phase one of the programby 2020. Figure 3 on page 11 shows the Authoritys timeline, aspresented in its 2009 business plan. According to the timeline,the Authority plans to complete environmental and preliminaryengineering work on the Los Angeles-to-Anaheim corridor by theend of scal year 201011 and expects to complete constructionof phase one by the beginning of scal year 201920. Later inthe report, we discuss several issues that raise doubts about theAuthoritys ability to meet these goals.

Projected Costs and Committed Funding

In December 2009 the Authority estimated that the total cost forphase one of the program would be $35.7 billion in 2009 dollars.

Tis represents an increase of $2.1 billion over the costs it projectedin 2008. Te increase is almost entirely attributable to an increase inestimated costs for the Los Angeles-to-Anaheim corridor, whichjumped from $2.2 billion in 2008 to $4.6 billion in 2009. TeAuthority also estimated phase one would cost $42.6 billion inyear-of-expenditure dollars. It calculates year-of-expendituredollars by distributing and escalating costs based on the year ofplanned expenditure. In this way, it incorporates ination, which

4 The Authority estimates that the Los AngelestoAnaheim corridor will cost . billion inyearofexpenditure dollars.


14/52


April 2010

10

makes up about 80 percent of the dierence in costs, into itsprojections. Te Authority believes this method provides a more

credible view of program costs and therefore uses it throughout itsdiscussion of expenditures and revenues.

Figure 2

Proposed Routes for the High-Speed Rail Network

Phase one

Later phases

Altamont Corridor*

Stations

Sacramento

Merced

Fresno

Bakersfield

Palmdale

StocktonSan Francisco

Millbrae

Redwood Cityor Palo Alto

San Jose

Gilroy

Modesto

Anaheim

Los AngelesBurbank

Sylmar

San Diego

Source: HighSpeed Rail Authority (Authority).

* This corridor relates to a rail project separate from the highspeed rail network that the Authorityis pursuing with local and regional transit agencies.


15/52


April 2010

Figure 3

Projected Timeline of Program Activities for Phase One of the High-Speed Rail Network

Design standards/specifications

Engineering design submittalreview/acceptance

Regulatory approvals

Environmental/preliminary engineering

Environmental management

San Francisco to San Jose

San Jose to Merced

Merced to Bakersfield

Bakersfield to Palmdale

Palmdale to Los Angeles

Los Angeles to Anaheim

Environmental compliance

Right-of-way assessment and acquisition

Ridership and revenue analysis*

Staging/procurement

Construction planning

Procurement and bid management

Construction management

Testing and commissioning

200910 201011 201112 201213 201314 201415 201516 201617 201718 201819 201920

JUN JUN JUN JUN JUN JUN JUN JUN JUN JUN SEPTPROGRAM ACTIVITY

FISCAL YEAR

Source: HighSpeed Rail Authority, 2009 business plan.

Note: The following program activities extend through the entire length of the program: Program management and controls

Public education and communication

Engineering criteria and design management

Risk management

* According to the director of the Authoritys program management team, the solid line represents planned work for updating relevant ridership andrevenue projections; the dotted line represents likely ongoing review of these projections.

As of February 2010, the Authority had about $11.6 billionof funding committed for the program: $9 billion in statebond funds, $2.25 billion in federal funds from the American

Recovery and Reinvestment Act of 2009 (Recovery Act), and$336 million in other public funding. Although not required to,the Authority stated in its Recovery Act applications that the Statewould match federal participation on a dollar-for-dollar basis,using state, local, and private funds. Te Authority submittedseven applications to the Federal Railroad Administration (RailroadAdministration)three for planning and four for construction fora total of $4.7 billion in Recovery Act funds. In January 2010the Railroad Administration announced that it had approvedve of the Authoritys applications: one for planning and four forconstruction, totaling $2.25 billion. As of March 2010, the chiefdeputy director said the Authority expected to receive $194 million


16/52


April 2010

12

in planning funds but is continuing to work with the RailroadAdministration to determine how to distribute the remainder of

the Recovery Act grant among the four approved constructionapplications. We further discuss issues related to the programsfunding plan in the Audit Results section of this report.

In recent years, most of the Authoritys cash expenditures wererelated to contracts for architectural and engineering services. AsFigure 4 demonstrates, for scal years 200607 through 200809,about 87 percent of its $75 million in cash expenditures related topayments to private rms with contracts exceeding $20 million(major contracts). Te largest single recipient of Authority funds,with a $199 million contract extending more than six years, wasthe contractor that serves as the Authoritys program management

team (Program Manager). It provides day-to-day management anddirects the contractors working on specic corridors.

Figure 4

Payments Made by the High-Speed Rail Authority by Type and Region

Fiscal Years 200607 Through 200809

(Dollars in Millions)

Other contracts$6.2 (8.3%)

Regional contractors:Los Angeles to Orange County $13.5 (17.9%)Los Angeles to Palmdale $7.5 (10.0%)Fresno to Palmdale $6.6 (8.7%)Sacramento to Fresno $3.9 (5.2%)Los Angeles to San Diego $3.1 (4.1%)San Francisco to San Jose $3.0 (4.0%)San Jose to Merced $2.0 (2.7%)Altamont Corridor $0.8 (1.2%)

Program Manager$24.8 (33.1%)

Noncontract expenditures$3.6 (4.8%)

Sources: HighSpeed Rail Authority payment logs.

Note: The total value of each of the regional contracts and the Program Managers contract is more than $20 million. These are multiyear contracts thatextend beyond scal year 200809.

An additional 8.3 percent of the Authoritys cash expendituresbetween scal years 200607 and 200809 went to other contracts,including those for nancial planning, legal assistance, and visualsimulations of the train system. Only 4.8 percent of the Authoritys


17/52


April 2010

cash expenditures during these three years were for other costssuch as those for facilities, travel, interdepartmental agreements,

and compensation of Authority sta.

Te Authority recently contracted with a consultant for programmanagement oversight. Tis consultant is to review and monitor theProgram Managers work to ensure that it is proceeding on scheduleand in conformance with approved work plans. Tis structure, onecontractor reviewing the work of another contractor, is not unique tothe Authority. Te California Department of ransportation and theFederal ransit Administration have used similar structures.

Between scal years 200607 and 200809, the Authority paidits major contractors from three state funds and two local grants.

Figure 5 outlines the amount of funding from each source. Statefunds came from the Public ransportation Account, whichreceives its funding from retail sales and use taxes on gasoline; theClean Air and ransportation Improvement Fund, which receivesits funding from the sale of general obligation bonds approved byvoters in 1990; and Proposition 1A funds, discussed previously.Te two local grants reimbursed costs originally paid by the Publicransportation Account.

Figure 5

Funding Sources for Major Contracts

Fiscal Years 200607 Through 200809

(In Millions)

200607 200708 200809

0

5

10

15

20

25

$30 Public Transportation Account

Proposition 116

Proposition 1A

Local entity grants*

Fiscal Years

Sources: HighSpeed Rail Authority contract les.

Note: Major contracts are multiyear contracts with a total value greater than $20 million. This graph represents total amounts provided for thesecontracts by each source. The nine contracts were entered into between 2006 and 2008 and end between 2012 and 2014.

* Local entity grants come from the Orange County Transportation Authority ($7 million) and the Fresno Area Council of Governments

($250,000 in scal year 200809).


18/52


April 2010

14

Scope and Methodology

Te Joint Legislative Audit Committee (audit committee) asked theBureau of State Audits to assess the Authoritys readiness tomanage funds authorized for building the high-speed rail network.Specically, the audit committee asked us to determine if theAuthority is structured to administer its funding in compliance withlaws and regulations and whether its processes and controls aretransparent, provide accountability, and ensure the cost-eectiveuse of public resources. Te audit committee also asked us toidentify and assess the steps the Authoritys governing board hastaken to establish a process for strong program oversight and toreview and evaluate the Authoritys strategic plan to determine if itsgoals and objectives are reasonable.

In addition, the audit committee requested that we identify theAuthoritys funding sources for all major contracts over the pastthree years. It also asked us to evaluate the Authoritys contractingprocedures and practices for awarding, managing, and monitoringcontracts and to determine the Authoritys controls to ensurethe appropriateness and accuracy of contract payments. Finally,we were asked to review a sample of contracts and paid invoicesto ensure that they comply with applicable policies, procedures,and controls, and to determine if Authority expenditures werereasonable and aligned with its goals and objectives.

o determine if the Authority is structured to administer its fundingin compliance with laws and regulations, we identied key aspectsof state law related to Proposition 1A bond proceeds, reviewedrecords pertaining to the peer review group, interviewed Authoritysta responsible for accounting, assessed accounting processes, andreviewed the Authoritys eorts to prepare for receiving RecoveryAct funds. We also assessed its eorts to monitor potential conictsof interest. Te Authoritys business plan is a key documentthat describes the Authoritys vision for the program, so we alsoassessed whether it contains required elements and provides a clearpath going forward, focusing on those sections related to program

nancing and risk management. Further, we assessed whetherthe Authoritys processes and controls are transparent, provideaccountability, and ensure the cost-eective use of public resourcesin conjunction with other audit procedures. For example, weassessed transparency by reviewing the Authoritys business planand we assessed accountability and cost-eectiveness by reviewingthe Authoritys process for awarding contracts and its controls overinvoice payments.

5 According to state law, the HighSpeed Rail Authority is comprised of the nine members of itsgoverning board. In this report, we refer to the governing board as the Authority.


19/52


April 2010

o identify the steps the Authoritys governing board has taken toestablish a process for strong program oversight, we interviewed the

former executive director, chief deputy director, communicationsdirector, and Authority chair. We also assessed the communicationsthe Authority receives from its sta and the access Authoritymembers have to information regarding the program. Further, wereviewed the Authoritys policies and procedures.

o review and evaluate its strategic plan, we interviewed Authoritysta responsible for the plan, the Authority chair, and a consultanthired to develop the plan. Te Authority had not nalized itsstrategic plan at the time of our eldwork, so we limited our reviewto determining whether the draft plan includes the necessaryelements of a strategic plan as described by Finance.

o identify the Authoritys funding sources for major contracts,we reviewed contracts in eect at the end of 2009 and decidedthat we would classify contracts with a total value greater than$20 million as major. Nine major contracts totaled $757.9 millionand accounted for 98.6 percent of the value of Authority contractsactive as of December 31, 2009. Te remaining eight contracts totaled$10.8 million. Further, all the major contracts are for architectural andengineering services. We totaled funding for scal years 2006 07through 200809, by source, for each major contract.

o evaluate contracting procedures and practices for awarding,managing, and monitoring contracts, we focused our review onarchitectural and engineering contracts, as those account for theoverwhelming majority of contracts in terms of aggregate dollarvalue. We interviewed Authority sta and reviewed state law andthe Authoritys policies regarding awarding of architectural andengineering contracts. Also, we identied key criteria for awardingcontracts and compared the Authoritys process in awardingthree contracts to these key criteria.

o determine the Authoritys controls to ensure the appropriatenessand accuracy of contract payments, we interviewed its chief

deputy director, scal ocer, and other sta involved withprocessing contract payments. We also reviewed its contractadministration manual. o review a sample of contracts andpaid invoices to ensure that they comply with applicable policies,procedures, and controls, we judgmentally selected 30 invoicesrelated to major contracts and paid with funds appropriated inscal years 200607 through 200809. Our selection reected thedistribution of expenditures across scal years and also among the

6 The Authoritys executive director resigned eective March , . We refer to him as t heformer executive director throughout this report.


20/52


April 2010

16

major contracts. We determined whether the Authority followed itsinternal control procedures when paying the invoices. o select our

sample, we used electronic logs of invoice payments maintained bythe Authority. We reconciled payment totals on the logs, for eachyear and funding source, to accounting records of the Authorityand to records from the State Controllers Oce and determinedthat the logs were materially complete. Our testing also found theamounts in the logs to be accurate.

o determine if the Authoritys expenditures were reasonableand aligned with its goals and objectives, we used our sample ofcontract payments, as described earlier, because major contractsrepresented the vast majority87 percentof payments made bythe Authority from appropriations for scal years 200607 through

200809. We compared tasks billed on each invoice to thoseoutlined in contractors annual work plans. Further, we analyzed theAuthoritys accounting reports between July 2006 and June 2009to identify other-than-major contract costs that were unusualand could indicate nonalignment with the Authoritys goals andobjectives. Related to this analysis, we reviewed 10 travel claims indetail. Finally, we determined whether a number of foreign tripsby Authority sta and board members met state guidelines andwere for purposes that aligned with Authority goals. We found noexceptions related to other-than-major contract costs.


21/52


April 2010

Audit Results

The High-Speed Rail Authoritys Planning Lacks Details

Te December 2009 business plan of the High-Speed Rail Authority(Authority) lacks detail regarding how it proposes to nancethe high-speed rail network (program) and mitigate associatedrisks. Further, the Authority has not yet completed a strategicplan. According to its 2009 business plan, it anticipates needing$17 billion to $19 billion from the federal government to nancethe program, but the business plan provides detail on only a smallportion of this. Plan details include $4.7 billion in anticipatedgrants from the American Recovery and Reinvestment Actof 2009 (Recovery Act), which the Authority has since learned will

amount to only $2.25 billion. Further, the Authority estimates itwill need $10 billion to $12 billion in private investment. Althoughit claims private interest is high, the Authority has not receivedany commitments from private investors. Additionally, a revenueguarantee, without which the private investors are unlikely toparticipate, lacks specics. Also, the Authority has identied anumber of risks that could aect the program and is workingto improve its approach to risk management. Finally, the draftstrategic plan, which Authority sta anticipate completing inApril 2010, includes all the elements it should, but the Authorityitself has been involved in its creation to only a limited extent.

The Authoritys 2009 Business Plan Contains the Elements Required

by the Legislature

Te Authority published its rst business planin 2000 and revised plans in 2008 and 2009. InNovember 2008, three days after voters approvedthe Safe, Reliable High-Speed Passenger rainBond Act for the 21st Century (Proposition 1A)bond measure, the Authority released itssecond business plan. In March 2009 the Legislative

Analysts Oce (Legislative Analyst) stated that therevised plan lacked many details and recommendedthat the Legislature require the Authority toprovide additional information. In amendmentsto the 2009 Budget Act, the Legislature required arevised business plan by December 15, 2009, thatwould include various details about the program, asdescribed in the text box. Further, the Legislaturemade almost $70 millionor half of the Authoritysfunding for scal year 200910contingent onreceiving the business plan. Te Authority releasedits revised business plan on December 14, 2009.

Amendments to the 2009 Budget Act required

the High-Speed Rail Authority (Authority) to

prepare a revised business plan that includes

the following:

Athoroughdiscussiondescribingstepsbeingpursuedto

securenancing.

Aworkingtimelinewithspecic,achievablemilestones.

StrategiestheAuthoritywillpursuetomitigatedierent

risksandthreats.

Additionalinormationrelatedtoridership,capacity,cost,

andprivateinvestmentstrategies.

Systemdetailssuchasrouteselectionandalternative

alignmentconsiderations.

Source: Chapter 1, Statutes of 2009 (ABX4 1),Fourth Extraordinary Session.


22/52


April 2010

18

Te Authoritys 2009 business plan contains information relatedto each element the Legislature requested. For example, it contains

program details such as updated cost estimates, general routeselection and alternative alignments, and a working timeline withspecic milestones related to environmental work. In addition,the 2009 business plan includes a description of the funding theAuthority needs to complete phase onethe portion betweenSan Francisco and Anaheim.

Te Authoritys nancial plan includes federal funding, such as thatavailable from the Recovery Act, state bond funds from Proposition 1A,private investment primarily backed by projected operating surplusesof the high-speed rail system, and local funding in the form of suchthings as naming rights and development around stations. Figure 6

shows the revenues the Authority indicates it will need from eachsource over the next 11 years. According to the business plan, phaseone is projected to cost $42.6 billion in year-of-expenditure dollarsand has an estimated completion date of 2020.

Figure 6

High-Speed Rail Authority Projected Sources of Funds

2010 Through 2020

(In Billions)

Private funding

Local contributions

Federal assistance

State bond funds

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

0

1

2

3

4

5

6

7

8

$9

Sources: HighSpeed Rail Authoritys 2009 business plan.

Note: Projected amounts for federal assistance and private funding in this graph are somewhatdierent from those reported in the text of the business plan. Funding for federal assistanceis $751 million more than the upper range of the Authoritys projections, and private funding is$674 million less than the lower range of its projections in the text of the business plan.

7 The Authority calculated yearofexpenditure dollars by distributing and escalating costs for each

corridor based on the year of planned expenditure.


23/52


April 2010

The Authoritys Financial Projections Indicate Almost Total Reliance on

State and Federal Funds Through 20

Te business plan provides little detail on how the Authorityexpects to obtain a total of $17 billion to $19 billion in federalgrants. As the federal government is by far the largest fundingsource in the plan, we expected to nd concrete details indicatinghow the Authority expects to secure this money; however, the planprovides detail for only a portion of the total. Te plan includes$4.7 billion in Recovery Act funds for which the Authority alreadyhad applied. Te plan also mentions the Passenger Rail Investmentand Improvement Act, which created a mechanism for distributing$1.5 billion in grants for California and 10 other federally designatedhigh-speed rail corridors in other states over ve years beginning

in 2009. Further, the plan notes a $1 billion per year proposedfederal commitment for high-speed rails nationally over a ve-yearperiod. After the plan was published, Congress appropriated$2.5 billion for the 2010 federal scal year for high-speed rail,intercity passenger rail, and congestion relief grants.

Te program risks signicant delays because the Authoritys plandepends almost exclusively on federal and state funds through2014 and does not include specic steps for obtaining or replacingfederal funds. Further, the Authoritys plan includes its request for$4.7 billion in anticipated Recovery Act funds. Paired with statedollars, these funds would be sucient to support development ofthe program into 2013, according to the data in Figure 6. However,according to a U.S. Department of ransportation announcementin January 2010, the Authority will receive only up to $2.25 billionof the $4.7 billion Recovery Act funding for which it applied, whichis 28 percent of the $8 billion in grants awarded nationwide. Withonly $2.25 billion committed, the Authority will fall far short ofthe amount it indicates it needs to meet spending goals in the nextfew years, barring signicant new grants or appropriations of statefunds outside of Proposition 1A. According to its communicationsdirector, the Authority has no denite commitments from thefederal government other than Recovery Act funding.

Te Authoritys assumptions regarding federal funding areoptimistic. According to the business plan, the estimate of federalparticipation in the program is based on the federal governmentshistorically high participation in large transportation infrastructureprograms such as highway, transit, and aviation projects. However,the Highway rust Fund is a dedicated source for highway andtransit programs and has its own revenue sourcethe federal taxon motor fuels. Te U.S. Government Accountability Oce, in a2009 report on the future development of high-speed rail, notedthat no such dedicated federal revenue source exists for projectsfor this mode of transportation, so high-speed rail projects must

With only $.5 billion in committed

federal funds, the Authority will fall

far short of the amount it indicates

it needs to meet spending goals in

the next few years.


24/52


April 2010

20

compete with other non-transportation demands on federalfunds. Further, the Federal Railroad Administration (Railroad

Administration) received more than $57 billion in applications forthe $8 billion of available Recovery Act grants. Tis suggests thatcompetition for any additional federal dollars will be strong andthat California can expect to receive only a fraction of the total.However, the Authoritys plan for nancing the program dependsheavily on federal funding, as Figure 7 illustrates.

Figure 7

Phase One Program Funding by Source

(Year-of-Expenditure Dollars in Billions)

Private funding$11 (26%)

Federal grants$15.6 (36%) Federal American Recovery and

Reinvestment Act of 2009,

committed$2.3 (5%)

Local grants$4.4 (11%)

Other public funds, committed$0.3 (1%)*

Proposition 1Astate bonds,

committed$9 (21%)

Sources: HighSpeed Rail Authority (Authority), 2009 business plan.

Note: The Authority estimated its funding in ranges. For the purpose of this graph we used theaverage of low and high estimates. Plan ranges were $17 billion to $19 billion for federal grants(including federal American Recovery and Reinvestment Act of 2009 funds), $10 billion to $12 billionfor private funding, and $4 billion to $5 billion for local grants.

* Other public funds are specic to the San FranciscotoSan Jose corridor and mostly relate tolocal grants.

Trough 2013 the Authoritys plans also depend on federal fundingto leverage state bond dollars. As noted in the Introduction,Proposition 1A bond funds may be used to support only up to50 percent of the total cost of construction of each corridor or usablesegment of the program. Te remaining 50 percent must comefrom other funding sources. Tus, the award of up to $2.25 billionin Recovery Act funds allows for the use of an equal amount ofstate bond funds for construction, for a total of about $4.5 billion.

8 The Railroad Administration approved a total of ve applications submitted by theAuthorityone for planning and four for construction. The construction applications representabout percent of the total dollar amount for all ve applications.


25/52


April 2010

However, the Authoritys spending plan includes almost $12 billionin exclusively federal and state funds through 2013, more than

2.5 times what is now available.

Unless it can raise additional federal funds or funds from othersources, the Authority will not be able to leverage adequatestate funds to meet its spending goals for specic parts of theprogram. Before it may commit funds from Proposition 1A forexpenditures for construction on a corridor or usable segment,state law requires that the Authority have a plan that estimatesthe full cost of construction and identies the sources of all fundsand the anticipated time of receipt based on oered commitmentsor assurances from potential funding sources. State law alsorequires that the director of the Department of Finance (Finance)

determine whether the plan is likely to be successfully implementedas proposed.

Without additional funding commitments, the Authority jeopardizesits ability to create a viable funding plan for the rst corridor slated tobe done with environmental work. According to Authority estimates,the 30-mile corridor between Los Angeles and Anaheim theleast expensive of the corridors approved by the RailroadAdministrationwill cost $5.5 billion. However, with the $2.25 billionRecovery Act grant and an equal amount of Proposition 1A funds, theAuthority has only $4.5 billion potentially available. State law requiresthe Authority to identify funding sources and timing of receiptsbefore funds from Proposition 1A can be used for construction onany portion of the program. Tus, even if all the $4.5 billion in federaland state funds were used on this corridor, the Authority wouldneed to identify at least an additional $1 billion, or plan to build asegment that costs up to $4.5 billion and does not cover the entirecorridor. As described in the Introduction, the Authority may beable to use some Proposition 1A funds available outside of fundingplan requirements; however, if it did so the Authority would need tospend most of these funds, leaving little or none of them available forother corridors. Further, according to the chief deputy director, theAuthority is working with the Railroad Administration to determine

which corridors will receive federal funding. However, they will needto decide quickly. She said the Authority must prepare funding plansby spring 2011 to meet the Railroad Administrations deadline toobligate federal funds in fall 2011.

According to the communications director, the Authority presentedthe data in Figure 6 on page 18 to illustrate that public funding willbe used up-front and that private funding likely will be used toward

9 State law allows the Authority to submit a funding plan for a corridor or a usable segment,which is the portion of a corridor between at least two stations.

Without additional funding

commitments, the Authority

jeopardizes its ability to create a

viable funding plan for the rst

corridor slated to be done with

environmental work.


26/52


April 2010

22

the end of construction. We based our analysis on this presentation,as it was the only funding scenario the Authority included in its

2009 business plan and was aligned with expected yearly capitalcosts also presented in the plan. In its April 2010 draft addendum tothe 2009 business plan, the Authority presented another scenariothat reects similar funding needs in each year and still reliesheavily on federal and state dollars up-front. Te key dierencebetween this scenario and that in the 2009 business plan is the useof some local grant funds in earlier years. Te alternative scenariostill relies heavily on federal funding through 2013 and indicatesno new local grant commitments, so we believe our concernsremain valid.

The Authoritys Plans for Private Funding Are Vague

Private investors have expressed interest in the program, but theyhave made no commitments and the Authority expects they willrequire a revenue guarantee to participate. Te business plandescribes the interest of private investors as strong and diverse, andindicates the Authority plans to rely on them to supply $10 billionto $12 billion, primarily backed by projected future operatingsurpluses. As Figure 6 on page 18 illustrates, however, it does notexpect to begin using signicant funds from this second-largestproposed source until 2015. In spring 2008, in an eort to betterunderstand private interest in the program, the Authority issued aRequest for Expressions of Interest to potential investors. Accordingto the consultant contracted to prepare the Authoritys nancialplan, the consultant communicates regularly with about 50 partieswho responded to the spring 2008 request and others who haveapproached the consultant or the Authority since then. Teconsultant said the general consensus from these communicationsis that private investors will require a minimum revenue guaranteefrom a public entity in the event that ridership projections, and thusoperating surplus projections, are not met. Tis viewpoint is alsoexpressed in the 2009 business plan.

Te Legislative Analyst expressed concern that a revenue guaranteemight violate state law prohibiting an operating subsidy for theprogram. In a February 2010 memo, the Authoritys nancialconsultant provided clarication, indicating that the revenueguarantee would not be used as an operating subsidy but wouldbe a limited-term contingent liability used to support up-frontcapital investment. Additionally, he said that such guaranteeswith capital cost-only limitations have been employed in bothfederal and state highway and transit projects. Te consultant alsostated that the guarantee would be of a limited duration, fromve to 10 years. Terefore, a guarantee could increase costs to

The Authority does not expect to

begin using signicant funds from

private investors until 15.


27/52


April 2010

the public sector. Te business plan does not make clear whichgovernment would be responsible for the guarantee or how much it

might cost.

Te Authority has addressed a number of concerns surrounding themodel it uses to project ridership, which is fundamental tooperating revenue projections, and thus to private investorsinterest in supporting the program. In memos released togetherin March 2010 and published on its Web site, the Authoritysformer executive director and the consultant responsible fordeveloping the ridership model responded to concerns from thepublic regarding ridership and revenue projections. For example,an advocacy group alleged that the Metropolitan ransportationCommission, which contracted for the study, made drastic

changes to the model, yet did not include these changes in thepublic documentation or the nal project report. Te consultantresponded that the model development team adjusted coecientsand constants to address peer review comments, that thesecoecients and constants were in the nal model, and that theywere not later changed. Te consultant also explained that the nalcoecients, constants, and related details were not included in thenal report but were in the model itself, part of a package that alsoincluded the nal report and a users guide.

Te Authority addressed additional concerns in its April 2010 draftaddendum to the 2009 business plan. For example, in a backgrounddocument for a joint hearing in January 2010, the Senateransportation and Housing Committee and a Senate budget andscal review subcommittee quoted Authority projections indicatingthat more passengers traveling between regions would board inMerced or Palmdale (5,300 and 5,200 per day, respectively) thanwould board in Los Angeles (3,700), a much larger city. Accordingto the addendum, these apparent discrepancies are due to severalfactors. For example, it explained that Merced and Palmdale do nothave frequent, inexpensive air service available to travelers, as doesLos Angeles. Further, many riders from Merced and Palmdale countas inter-regional travelers because of the way regional boundaries

are drawn.

More signicantly, the Authority is working to review and revise theridership model. According to the draft addendum, the contractorresponsible for the model is working with the University of

10 The Authoritys executive director resigned eective March , . We refer to him as t heformer executive director throughout this report.

11 According to the background document, the Program Manager gave revised gures to thelegislative committees subsequent to the release of the business plan. These gures wereslightly dierent from those in the business plan, which estimated that daily interregionalboardings would be , and , in Merced and Palmdale, respectively, and , inLos Angeles.

The business plan does not make

clear which government would be

responsible for a revenue guaranteeto private investors or how much it

might cost.


28/52


April 2010

24

California, Davis to rene the current forecasting models, developindependent forecasts, and conduct a risk analysis. Tis eort is to

involve an independent peer review panel to assess the resultingproducts. In addition, the draft addendum stated that the Authorityentered into a contract with the University of California, BerkeleysInstitute of ransportation Studies in March 2010at the requestof the Senate ransportation and Housing Committeetopeer review the Authoritys past and current ridership modelsand forecasts.

The Authority Is Working to Improve Its Approach to Risk Management

Te Authoritys 2009 business plan identies a number of risks

associated with the program, but it provides little detail on howit will manage those risks. Te Project Management Institute,recognized for its development of standards for the practiceof project management, publishes the Guide to the ProjectManagement Body of Knowledge, which identies and describesgenerally accepted project management practices. Accordingto the guide, project risk management includes the processes ofconducting risk management planning, identication, analysis,response planning, and monitoring and control on a project.

Risks identied in the business plan include those associated withgovernment funding, ridership projections, and construction costs.Te plan notes that estimated cost projections generally includea 30 percent contingency reserve, with a 20 percent contingencyreserve being assigned to items such as track, systems, andelectrication. However, the plan does little otherwise to describeits processes for monitoring and controlling risk. According to thecommunications director, the Authority acknowledges that riskmanagement will be an organizational weakness if it remains as ismoving forward.

Te Authority has taken steps toward improving its approach. InMarch 2010 the Program Manager completed a major revision to its

risk management process to include a Risk Register DevelopmentProtocol. Tis protocol details how the Program Manager, regionalcontractors, and Authority sta will collaborate to identify, assess,analyze, manage, and monitor risk. Te protocol also includes adescription of a process for developing broadly accurate estimatesof potential impact and probability of risks, and expectations forpersonnel assigned risk management responsibilities. Further, itsconsultant providing program management oversight, hired inJanuary, will review the risk management plan. Also, the Authoritysrisk insurance manager, hired in February 2010, will provideservices aimed at reducing exposure to project liabilities. Te

The Authority says it has entered

into a contract to peer review its

past and current ridership models

and forecasts.


29/52


April 2010

Authority must ensure that these actions for managing risk are fullyimplemented so it can respond eectively to circumstances that

could signicantly delay or even halt the program.

The Authority Anticipates Completing a Strategic Plan in Spring 200

Although state law no longer requires development of strategicplans, the State Administrative Manualsays agencies musthave strategic plans before Finance will consider budget changeproposals for capital outlay. Te chief deputy director said theAuthority made such a request in September 2009. According toFinance, strategic planning is a long-term, future-oriented processof assessment, goal setting, and strategy building that maps an

explicit path between the present and a vision of the future. Astrategic plan is an agencys comprehensive guide for carrying outits mission.

According to Finance, the key elements of a strategic plan are aninternal and external assessment, mission statement, principles,vision, goals and objectives, performance measures, and actionplans. Te Authoritys strategic plan is not yet complete; however,a draft includes all these elements except for action plans. Forexample, it presents a mission to plan, design, build, and operate ahigh-speed train system that provides an ecient, safe, sustainable,and reliable transportation option for the people of California. Tedraft plan also identies two goals: to ensure that the Authoritysorganizational infrastructure fully supports its mission, and toadvance Californias high-speed rail system through eectiveplanning and construction. According to the consultant working ondeveloping the strategic plan, completion is expected in April 2010,when it will go before the Authority for approval. She expectsaction plans and other implementation tasks to be completed byJune 2010.

Finances guidelines also state that strategic planning involves alllevels and functional units of an agency; boards play an important

policy-making role and can assist in developing the mission,principles, and vision of an agency. However, according to thechief deputy director, the Authoritys participation in the strategicplanning process has been limited to an invitation to take part in aninitial survey about the organizations issues. Te Authority bearsultimate responsibility for the programs success or failure, so weexpected it to be a more active participant in the strategic planningprocess. Without such participation, the program could operatewith plans that do not fully reect the Authoritys outlook.

12 Capital outlay includes the acquisition of real property, major construction, and improvements.

The Authoritys participation in the

strategic planning process has been

limited to an invitation to take

part in an initial survey about the

organizations issues.


30/52


April 2010

26

The Authority Needs to Improve Oversight and

Administrative Controls

Te Authority has not put in place some structures it needs toprovide adequate oversight and administrative control of theprogram. For example, state law requires the Authority to establishan eight-member peer review group (review group) to review itsplans; however, only ve of the eight members had been appointedas of March 2010. Further, state law limits the amount of bondfunds the Authority may spend on administration, as well asplanning, environmental studies, and preliminary engineering(preconstruction tasks), but it does not have a system in place totrack expenses in these categories; nor has it determined whichexpenses should be classied as administrative. In addition, the

Authority has taken some steps to prepare for Recovery Act funds,but it still must establish procedures to track jobs created and itmust better document its policies and procedures. Finally, theAuthoritys governing board, which is ultimately responsible forthe programs success or failure, is expanding its oversight role.

Selection of the Peer Review Group Has Not

Been Completed

Tree of the members of a statutorily denedadvisory group have not yet been appointed,reducing the Authoritys access to important input.State law requires it to establish an independentreview group, as described in the text box, that isto assess various plans the Authority may develop.Te review group is also to issue independentjudgments as to the feasibility of funding plansand the appropriateness of the Authoritys relatedassumptions. State law directs the Authority toestablish this group, but it leaves appointment ofthe groups members to four other agencies. Asof March 2010, only ve of the eight members had

been appointedone by the State reasurers Oce(reasurer), one by the State ControllersOce (Controller), one by Finance, and two by theBusiness, ransportation and Housing Agency.Te reasurer, Controller, and the Business,ransportation and Housing Agency each haveone more appointment to make.

Without a complete review group, the Authoritycannot benet fully from its expertise. As thetext box describes, review group members mustbe familiar with high-speed rail construction,

Required Qualications for Peer Review

Group Members

Accordingtostatelaw,thepeerreviewgroupshallinclude

theollowingindividuals:

Twowithexperienceintheconstructionoroperation

ohighspeedtrains,designatedbytheState

Treasurers Ofce.

Onewithexperienceinengineeringandconstructiono

highspeedtrains,designatedbytheStateControllers

Ofce(Controller).

Onewithexperienceinprojectnance,designatedby

theController.

Oneromanancialservicesorconsultingrm,

designatedbythedirectorotheDepartmentoFinance. Onewithexperienceinenvironmentalplanning,

designatedbythesecretaryotheBusiness,

TransportationandHousingAgency.

Tworomagenciesprovidingintercityorcommuter

passengertrainservices,designatedbythesecretaryo

theBusiness,TransportationandHousingAgency.



31/52


April 2010

nance, and planning. Tose members already appointedinclude the former director of the California Department of

ransportation and an individual who has been involved withhigh-speed rail programs in the United Kingdom and Korea.Further, the three members appointed in 2009 gave detailedfeedback on the organizational structure recommended inthe December 2009 assessment to the Authority mentioned in theIntroduction. Tey also commented on issues related to federalfunding and risk management. According to the chief deputydirector, the Authority considered the comments and incorporatedthe letter from the partial review group into the report on theorganizational assessment.

According to representatives of the reasurer and the Controller,

the positions have been challenging to ll, given the necessaryqualications for appointees. However, representatives for all threeagencies that still must make appointments stated they are activelypursuing qualied candidates, and two said they intend to maketheir appointments in April 2010.

Te Bagley-Keene Open Meeting Act (Meeting Act) prohibitsa majority of members of a state body (ve, in this case) fromdiscussing, deliberating, or taking action on items of businessoutside of an open meeting. Tus, according to our legal counsel,the review group must hold a meeting that is properly announcedand open to the public when it analyzes and evaluates theAuthoritys plans. Te Authority received informal advice fromits legal counsel, a lawyer with the Oce of the Attorney General,stating that the review group is not subject to the Meeting Actbecause it is not similar to a board or commission in that it is notexpected to make collective decisions. State law, however, requiresthe review group to analyze and evaluate the Authoritys plansand to report to the Legislature. Terefore, our legal counsel doesnot see any basis in law to conclude that the review group is notexpected to make collective decisions. Moreover, the Meeting Actis explicit in applying to multimember bodies created by state lawand allowing for very specic exceptions, which do not apply to

the review group. Without clarity on whether the review groupis subject to the Meeting Act, the Authority risks having thegroup act in a manner contrary to state law, potentially voiding itsanalyses, such as those related to the viability of the Authoritysfunding plans.

13 The Meeting Act establishes openmeeting requirements for every state board, commission,or similar multimember body. It generally requires such bodies to publicly announce theirmeetings, prepare agendas, accept public testimony, and conduct their meetings in public unlessspecically authorized by the Meeting Act to meet in closed session.

Without clarity on whether the

review group is subject to theBagleyKeene Open Meeting Act,

the Authority risks having the group

act in a manner contrary to state

law, potentially voiding its analyses.


32/52


April 2010

28

The Authority Lacks Systems to Comply With State Law and Federal

Grant Requirements

Te Authority does not have a system in place to track expendituresfunded by Proposition 1A to ensure compliance with statutorylimitations on administrative and preconstruction task costs. Asnoted in the Introduction, only 2.5 percent ($225 million) of theAuthoritys portion of Proposition 1A bond funds may be used foradministration (the Legislature may increase this to 5 percent), andonly 10 percent ($900 million) may be used for preconstructiontasks. As Authority sta began spending funds from Proposition 1Ain 2009, we expected them to have dened the types of costs fallingin these categories and to have established systems for recording,reporting, and planning for these costs, but that was not the case.

According to its scal ocer, the Authority is unsure how to classifythe expenditure of bond proceeds, although it has a general idea ofwhat should be considered administrative costs. Te scal ocerfurther stated that the Authority does not have a tracking system inplace, but it is working with its information technology consultantto develop a database to keep track of costs by category. Until sucha process is in place, the Authority cannot accurately report on itsexpenditures in each category, cannot create an accurate long-termspending plan, and risks not knowing when or whether it has runout of bond funds available for administration or preconstructiontask costs. Tis is of particular concern because the Authority is setto have spent about $168 million in bond proceeds by the end ofscal year 200910, and the proposed 201011 Governors Budgetincludes spending an additional $583 million, for a total of about$751 million. If these amounts were all spent on administration andpreconstruction task costs, the Authority would use abouttwo-thirds of all the money authorized by Proposition 1A for thesecost categories.

Furthermore, the Authority still needs to developsome systems to track and report on the use ofRecovery Act funds. Because of its $2.25 billion

federal award, the Authority will be required tocomply with both the Recovery Act reportingrequirements, some of which are described in thetext box, and with the readiness requirementsof the California Recovery ask Force (task force).Te Authority has fullled some requirements toprepare for Recovery Act funds; for example, ithas established an accounting code to track thefunds separately from other funds. Additionally,the Authority satised the task forces oversightand fraud prevention requirements by completinga risk assessment as part of its review of internal

American Recovery and Reinvestment Act of 2009

Selected Information Required in

Recipient Reports

Totalamountoundsreceived

Amountoundsexpendedorobligated

Detailedlistoprojectsandactivitiesunded

Estimatedjobscreatedandretainedbyundedprojects

Rationaleorinrastructureinvestments

Source: American Recovery and Reinvestment Act of 2009.


33/52


April 2010

controls and sending an employee to fraud prevention training.Further, the scal ocer stated the Authority is developing a

database to track all expenditures and automatically indicate thecorrect funding source. Te database also will help fulll the taskforces transparency and reporting requirements.

However, the Authority has yet to develop some systems. Forexample, the proposed database does not allow the Authorityto track the number of jobs created or saved, as the RecoveryAct requires; nor has the Authority developed an alternativemechanism to track this information. In addition, we recentlyissued a report on the States system for administering RecoveryAct funds, which includes a recommendation that agenciesincorporate Recovery Act provisions into their policies and

procedures. According to its December 2009 Financial Integrityand State Managers Accountability Act report, the Authority hasnot developed basic operational policies and procedures to whichRecovery Act provisions could be added.

According to its chief deputy director, the Authority has lacked thesta necessary to implement all Recovery Act requirements. Shefurther stated that it still has time to act, as it does not expect toreceive the award funds until late in 2010. Nevertheless, the longerthe Authority takes to ready itself to track and report on RecoveryAct funds, the more it risks being unprepared to actually meetfederal requirements. Noncompliance with grant provisions couldjeopardize its ability to receive those funds and to compete forfuture grantsboth of which are essential, given its heavy plannedreliance on federal funds.

The Authority Is Working to Increase Its Involvement

Until recently, Authority members had not provided signicantoversight to the program. As described in the text box on thefollowing page, state law requires this group of nine appointeesto direct the development and implementation of high-speed rail

service. We expected the Authority to be engaged in activitiesin a manner reecting its legislated responsibilities and powers.However, the Authoritys involvement thus far has been limited.For example, it did not have an opportunity, as a body, to discussor approve the revised business plan issued in December 2009.In fact, members received a copy of the plan only two days beforesta submitted it to the Legislature. However, according to thecommunications director, some members received a draft ofthe business plan and discussed it with him. Also, as discussedearlier, the Authority has been only minimally involved in creatingthe strategic plan. Its chair stated that the Authority is ultimately

The Authority has yet to develop

some systems needed to meet

Recovery Act requirements.


34/52


April 2010

30

responsible for the programs success or failure.Unless it exercises oversight of plans and activities,

however, it risks being unaware of signicantissues that could disrupt or delay the program.

Te Authority is taking some steps to increaseoversight of its sta and the program. Forexample, according to its chair, he requestedthat sta begin providing members withweekly, written reports on the programs status.Although the chair said these reports have methis expectations, he acknowledges that they areonly weekly snapshots of sta progress and donot contain detailed information on the programs

budget and schedule. Further, in the 29-weekperiod between the rst weekly report onAugust 17, 2009, and March 6, 2010, sta issuedonly 12 weekly reports.

Additionally, the Authority created threecommitteesoperations, nance, andexecutive/ administrative. Members haveparticipated in three workshops on issuespertinent to each committee. However, onlythe executive/ administrative committee held itsrst four scheduled meetings. Te operations

committee held two of its rst four scheduled meetings, andthe nance committee canceled its rst meeting, scheduled forMarch 2010. According to the chair, the committees have haddiculties meeting regularly because members have not alwaysbeen available.

In addition, the Authority has not always followed the policiesand procedures it develops. In June 2009 it adopted policies andprocedures related to its members communications with Authoritysta and contractors. For example, the policies and proceduresrequire Authority members to communicate with contractors only

through the executive or deputy director. However, the Authoritysformer executive director claims that member-to-contractorcontact has occurred often and provided us with documentationshowing that subsequent to the policy adoption, a board membermet directly with a contractor to receive an update on programissues. According to the former executive director, when individualmembers express opinions to contractors, the contractors may beunsure if they should consider the opinions to be direction fromthe Authority or just comments. He indicated that if contractorsignore these communications, the Authority member later mightcriticize their work. Such conduct also might aect the publics

Responsibilities and Powers of the

High-Speed Rail Authority

Responsibilities include:

Directingthedevelopmentandimplementationo

intercityhighspeedrailservice.

Appointinganexecutivedirectortoadministertheaairs

otheHighSpeedRailAuthority(Authority),asdirected

bytheAuthority.

Establishinganindependentpeerreviewgrouptoreview

theAuthoritys plans.

Powers include:

Periodicallysubmittingbusinessplans.

Enteringintocontractsordesign,construction,and

operationohighspeedtrains.

Acquiringrightsoway.

Issuingdebt.

Settingaresandschedules.



35/52


April 2010

perception of openness and accountability, and create expectationsfor contractors to respond directly to Authority members request

Office of California State Auditor: Audit of High Speed Rail Program (2010)

Documents

Transcript of Office of California State Auditor: Audit of High Speed Rail Program (2010)