High- Speed Rail Authority:
It Risks Delays or an Incomplete System Because
of Inadequate Planning, Weak Oversight, and Lax
Contract Management
April 2010 Report 2009- 106
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CALIFORNIA STATE AUDITOR
B u Doug Cordiner r e a u o f S t a t e A u d i t s
Chief Deputy
Elaine M. Howle
State Auditor
555 Capi tol Mal l , Sui te 300 Sac ramento, CA 95814 916.445.0255 916.327.0019 fax www. bsa. ca. gov
April 29, 2010 2009- 106
The 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 Authority’s ( 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 voters
authorized in November 2008.
This 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. The 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. The
program risks significant delays without more well- developed plans for obtaining funds.
The 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 Authority’s plans, but only five of the
eight members have been appointed. Thus, the Authority cannot fully benefit 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
effective controls over invoice processing and in some cases has paid for work that was not part of contracts or
work plans. Three 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 paid
at least $ 4 million of invoices for which it had no evidence from the Program Manager that the contractors had
performed the work invoiced. The 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
California State Auditor Report 2009- 106 vii
April 2010
Contents
Summary 1
Introduction 5
Audit Results
The High‑Speed Rail Authority’s Planning Lacks Details 17
The Authority Needs to Improve Oversight and Administrative Controls 26
Contract Monitoring and Internal Controls Do Not Provide
Sufficient Accountability 31
Recommendations 39
Response to the Audit
High- Speed Rail Authority 41
California State Auditor’s Comments on the Response From
the High‑Speed Rail Authority 47
California State Auditor Report 2009- 106 1
April 2010
Summary
Results in Brief
The Legislature created the High‑Speed Rail Authority ( Authority)
in 1996. State law charges the nine‑member Authority with
the development and implementation of intercity, high‑speed
rail service. According to state law, the entire network, from
Sacramento to San Diego, is intended to be complete by 2020. In
November 2008 voters approved the Safe, Reliable High‑Speed
Passenger Train Bond Act for the 21st Century ( Proposition 1A),
providing $ 9 billion for construction of a high‑speed rail
network ( program).
Although the Authority’s 2009 business plan contains the
elements required by the Legislature, it lacks detail regarding how
it proposes to finance the program. For example, the Authority
estimates it needs $ 17 billion to $ 19 billion in federal grants. The
business plan, however, specifies only $ 4.7 billion in possible
funds from the American Recovery and Reinvestment Act of 2009
( Recovery Act) and a few other small federal grants. According
to its communications director, the Authority has no definite
commitments from the federal government other than Recovery
Act funding, which actually amounted to $ 2.25 billion when awards
were announced in January 2010. The program risks significant
delays without more well‑developed plans for obtaining or
replacing federal funds.
Further, the Authority’s plan relies heavily on federal funds to
leverage state bond dollars through 2013. Proposition 1A bond
funds may be used to support only up to 50 percent of the total cost
of construction of each corridor of the program. The remaining
50 percent must come from other funding sources. Thus, the award
of up to $ 2.25 billion in Recovery Act funds allows for the use of an
equal amount of state bond funds for construction, for a total of
about $ 4.5 billion. However, the Authority’s spending plan includes
almost $ 12 billion in federal and state funds through 2013, more
than 2.5 times what is now available. Additionally, creating a viable
funding plan may be a challenge as matched funding for the least
expensive corridor eligible for Recovery Act funds— Los Angeles
to Anaheim— amounts 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 a
complete corridor. The Authority must decide relatively quickly
which corridors will receive federal funds. Its chief deputy director
says it must prepare funding plans by spring 2011 in order to meet
federal deadlines.
Audit Highlights . . .
Our review of the High- Speed Rail Authority
( Authority) revealed the following.
» » The Authority’s 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 Authority’s 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 Authority’s contracted Program
Manager to provide a summary of
program status, contain inconsistent and
inaccurate information.
» » Authority staff paid at least $ 4 million
of invoices from regional contractors
received after December 2008, without
having documented written notification
that the Program Manager had reviewed
and approved the invoices for payment.
continued on next page . . .
California State Auditor Report 2009- 106
April 2010
2
The Authority’s plans for private financing include a revenue
guarantee that needs further specification, but it is working to
improve its approach to risk management. According to the 2009
business plan, the Authority expects private investors to supply
$ 10 billion to $ 12 billion, but also indicates these investors will
require a minimum revenue guarantee from a public entity. The
Authority’s financial planning consultant has addressed concerns
raised by the Legislative Analyst’s Office that this might be a
prohibited operating subsidy; however, details on how much
the revenue guarantee may cost or who might pay it are scant.
Additionally, the 2009 business plan provided little detail on how
the Authority would manage risk in general, but the Authority is
planning to improve risk management for the program.
The Authority also needs to improve its oversight and
administrative controls. State law creates a peer review group
( review group) to assess the Authority’s plans. Most significantly,
the review group is to issue an analysis and evaluation of the
viability of the Authority’s funding plan for each corridor of
the program. As of February 2010, however, only five of the group’s
eight members had been appointed, limiting the expertise available
to the Authority. Moreover, according to our legal counsel, the
review group is likely subject to the Bagley‑Keene Open Meeting
Act ( Meeting Act), although the Authority has received informal
advice to the contrary. Nevertheless, the review group’s work could
be voided if this issue is not resolved.
Additionally, the Authority lacks systems to comply with state law
regarding bond funds. According to state law, only up to 2.5 percent
($ 225 million) of its portion of bond funds from Proposition 1A
may be used for administration and only 10 percent ($ 900 million)
may be used for planning, environmental review, and preliminary
engineering ( preconstruction tasks). According to its fiscal officer,
the Authority is unsure how it will classify the expenditure of bond
proceeds and does not have a system for tracking expenditures
by category. Until such a process is in place, the authority cannot
report accurately on its expenditures and risks running out of bond
funds available for administration or preconstruction task costs.
This is a serious problem because it is set to have spent $ 168 million
of the $ 1.1 billion in bond proceeds authorized for these purposes
by the end of fiscal year 2009– 10.
Contractors accounted for 95 percent of the program’s total
expenditures over the past three fiscal years. Although the
Authority generally followed state requirements for awarding
contracts, its processes for monitoring the performance and
accountability of its contractors— especially the entity that has
been contracted to manage the program ( Program Manager)— are
inadequate. The Program Manager’s monthly progress reports, a
» » The Authority paid contractors more
than $ 268,000 for services performed
outside of the contractors’ work plans
and purchased $ 46,000 in furniture for
one of its contractor’s use, based on an
oral agreement contradicted by a later
written contract.
California State Auditor Report 2009- 106 3
April 2010
primary document summarizing monthly progress on a regional
and program level, have contained inaccurate and inconsistent
information. For example, the July 2009 report indicated that
the regional contractor working on the Los Angeles‑to‑Anaheim
corridor had completed 81 percent of planned hours but had spent
230 percent of planned dollars. In addition, although the progress
reports described actions taken or products created, they did
not compare those actions and products to what the contractors
promised to complete in their work plans. The work plan for a
consultant the Authority recently hired to oversee the Program
Manager does not include a review of the monthly reports.
The Authority does not generally ensure that invoices reflect
work performed by contractors. According to the chief deputy
director, the Program Manager should review each regional
contractor’s invoice to ensure that the work claimed actually
has been performed and then notify Authority staff whether the
invoice should be paid. The chief deputy director further stated
that staff should not pay invoices without notifications. However,
Authority staff paid at least $ 4 million of invoices from regional
contractors received after December 2008— when the Authority’s
fiscal officer says she was informed that such notifications were
required— without documenting notification. The Authority only
recently adopted written policies and procedures related to invoice
payment. However, those policies and procedures do not adequately
describe its controls or their implementation.
Finally, the Authority made some payments that did not reflect
the terms of its agreements, risking its ability to hold contractors
accountable for their performance. For example, it spent $ 46,000
on furniture for its Program Manager’s use based on an oral
agreement, despite the fact that its written contract expressly states
that oral agreements not incorporated in the written contract are
not binding. The written contract requires the Program Manager
to provide its own furniture, equipment, and systems. Additionally,
the Authority paid a regional contractor more than $ 194,000 to
subcontract for tasks not included in the regional contractor’s work
plan and paid the Program Manager $ 53,000 for work on Recovery
Act applications, which was also outside the Program Manager’s
work plan.
Recommendations
To ensure that it can respond adequately to funding levels that may
vary from its 2009 business plan, the Authority should develop and
publish alternative funding scenarios that reflect the possibility of
California State Auditor Report 2009- 106
April 2010
4
reduced or delayed funding from planned sources. These scenarios
should detail the implications of variations in the level or timing of
funding for the program and its schedule.
To plan adequately for private investment, the Authority should
further specify the potential cost of revenue guarantees and who
would pay for them.
In order to respond effectively to circumstances that could
significantly delay or halt the program, the Authority should ensure
that it implements planned actions related to risk management.
To avert possible legal challenges, the Authority should ensure
that the review group adheres to the Meeting Act or seek a formal
opinion from the Office of the Attorney General regarding whether
the review group is subject to this act.
To ensure that it does not run out of funds for administrative and
preconstruction tasks prematurely, the Authority should track
expenditures for these activities and develop a long‑term spending
plan for them.
To ensure that Authority staff receive relevant information on the
program’s status, they should amend the program management
oversight consultant’s work plan to include a critical review of
progress reports for accuracy and consistency. Authority staff
also should ensure that the Program Manager revises its progress
reports to include information on the status of promised products
and services.
To determine if it is paying invoices that accurately reflect work
performed, the Authority should ensure that staff adhere to controls
for processing invoices. For example, staff should not pay invoices
from regional contractors until they receive notification from the
Program Manager that the work billed has been performed, or until
they have conducted an independent verification.
To ensure that it does not misuse public funds and can hold
contractors accountable, the Authority should adhere to the
conditions of its contracts and work plans, and make any
amendments or modifications to contracts or work plans in writing.
Agency Comments
The Authority raised concerns about the report title but agreed
with our recommendations and outlined actions it is taking or plans
to take to address them.
California State Auditor Report 2009- 106 5
April 2010
Introduction
Background
The Legislature created the High‑Speed Rail
Authority ( Authority) in 1996. Among other
duties, state law charges it with the development
and implementation of intercity, high‑speed
rail service that is fully integrated with existing
intercity rail and bus networks. The Authority’s
nine members, described in the text box,
have exclusive responsibility for the planning,
construction, and implementation of a high‑speed
passenger train network, with trains traveling
at speeds exceeding 125 miles per hour. In
November 2008 voters approved the Safe, Reliable
High‑Speed Passenger Train Bond Act for the
21st Century ( Proposition 1A), which provides
$ 9 billion from the sale of general obligation bonds
for construction of a high‑speed rail network
( program) and $ 950 million from the sale of general
obligation bonds for improvements to other rail
systems connecting to it. According to the state
law that placed Proposition 1A on the ballot, the
entire network, from Sacramento to San Diego,
is intended to be completed by 2020. Further, the law stipulates
that a person using nonstop service will be able to travel between
San Francisco and Los Angeles in two hours and 40 minutes, or
less. According to the Authority’s latest business plan, trains must
travel at speeds up to 220 miles per hour during parts of the trip to
reach this goal.
Beginning in 1996, the State issued several plans and reports to
develop and construct the program in California. In 1996 the
Authority’s predecessor, the Intercity High‑Speed Rail Commission,
issued a summary report and action plan concluding that a
high‑speed rail system is feasible. In 2000 the Authority released
its first business plan, and in 2004 it released a draft program‑level
environmental impact report and environmental impact
statement to describe the proposed program’s environmental
effects on a statewide scale. In 2005 it certified1 the program‑level
environmental impact report and statement.
1 An agency certifies a final environmental impact report by confirming that the report complies
with the California Environmental Quality Act, was reviewed by the agency’s decision‑making
body before approving the project, and reflects the agency’s independent judgment
and analysis.
The High- Speed Rail Authority’s Membership
The High- Speed Rail Authority ( Authority) consists of
nine members appointed by the following:
• The governor— five
• The Senate on Rules Committee— two
• The Speaker of the Assembly— two
Authority members serve for terms of four years. There is no
limit on the number of terms they may serve. The Authority
elects a chair from among its members who serves for
one year.
Authority members receive $ 100 for each day they attend
to Authority business, up to $ 500 per month, plus actual
travel expenses.
Source: California Public Utilities Code.
California State Auditor Report 2009- 106
April 2010
6
In 2008 the Authority certified an additional environmental impact
report and statement focused on the section of the program linking
the San Francisco Bay Area and the Central Valley. However, in
August 2009 a court determined that the Authority needed to
make changes to the 2008 report in several areas and to recirculate
it. Areas needing revision include a description of the track
alignment between San Jose and Gilroy and the Authority’s finding
on vibration impacts. Consequently, the Authority rescinded its
certification in December 2009 and in March 2010 circulated
a revised environmental impact report. The Authority released
revised business plans in November 2008 and December 2009.
Until recently, the Authority operated with a very small staff. State
law requires it to appoint an executive director to administer
its affairs. The executive director may hire staff as allowed by
the Authority. Between fiscal years 2000– 01 and 2006– 07, the
Authority operated with three to five staff members, including
the executive director. The Authority gained additional positions
and increased its staff to seven in fiscal year 2007– 08 and nine in
fiscal year 2008– 09. As of January 2010, it has nine full‑time staff
members and one half‑time staff member.
In June 2009 the Authority contracted for an organizational
assessment. The assessment, published in December 2009, was
conducted to facilitate the Authority’s shift from a planning
entity to one focused on implementation. The assessment
includes an organizational chart proposing 37 total staff plus
administrative/ office tech positions. According to the chief deputy
director, in September 2009 the Authority requested funding
for 35 new positions. The proposed 2010– 11 Governor’s Budget
includes an additional 27 positions for the Authority. New proposed
staff include a chief financial officer, a chief program manager,
regional directors, and transportation and environmental planners.
As part of increasing the size of its staff, the Authority hired a
deputy 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 Authority’s members more informed of staff
activities. Consequently, at the request of the Authority chair,
the communications director initiated a weekly report issued
to Authority members in August 2009 that provides high‑level
information on the staff’s progress and is posted to the Authority’s
Web site. The Authority has made a number of other documents
available on its Web site, including agendas, minutes, and other
materials related to meetings, business plans, economic studies,
and information relevant to specific sections of the program— for
California State Auditor Report 2009- 106 7
April 2010
example, the corridor between Los Angeles and Anaheim. In
addition, the Authority posts its budget appropriation on the main
page of its Web site and a detailed budget within the meeting
materials on its Web site. Finally, the Authority is using electronic
and social media to communicate with the public, specifically an
e‑mail list, Twitter, and Posterous.
As the Authority’s staff has grown, so have its expenditures. As
Figure 1 demonstrates, it spent $ 6 million in fiscal year 2000– 01.
In contrast, its appropriated budget for fiscal year 2009– 10 is
$ 139.1 million, and the 2010– 11 Governor’s Budget proposes
expenditures totaling $ 958.2 million as of January 2010.
Proposition 1A funds would cover $ 583.2 million of this
amount—$ 50.4 million for administration and $ 532.8 million
for capital costs— and federal funds would provide $ 375 million for
capital costs.
Figure 1
High- Speed Rail Authority Expenditures
Fiscal Years 2000– 01 to 2009– 10
( In Millions)
2004– 05
Fiscal Years
2005– 06
2006– 07
2007– 08
2008– 09
2003– 04 2009– 10*
2002– 03
2001– 02
2000– 01
Expenditures
0
20
40
60
80
100
120
$ 140
Sources: Governor’s budgets for fiscal years 2002– 03 through 2010– 11, State Controller’s Office
expenditure reports, and High- Speed Rail Authority ( Authority) payment logs.
Note: The fiscal year 2010– 11 Governor’s Budget proposes $ 958.2 million for the Authority as of
January 2010.
* Estimated expenditures.
California State Auditor Report 2009- 106
April 2010
8
Proposition 1A
In 2008 California voters approved Proposition 1A, which provides
funding for development of the program. Proposition 1A authorizes
the 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 improvements
to intercity, urban, and commuter rail systems connecting to it.
The Authority is to administer the $ 9 billion, while the California
Transportation Commission is to allocate the $ 950 million for
connecting systems.
The proposition sets additional limits on how the Authority can
request and spend its bond funds. These include a 2.5 percent
($ 225 million) cap on administrative costs— which the Legislature
may increase up to 5 percent ($ 450 million). The proposition also
limits the overall amount of funds the Authority may spend on
environmental studies, planning, and preliminary engineering
activities to 10 percent of its total bond funds ($ 900 million). The
Authority also must submit a detailed funding plan to a peer review
group, the director of the Department of Finance ( Finance), the
policy committees with jurisdiction over transportation, and
the fiscal committees in both houses of the Legislature, no later
than 90 days before submitting initial appropriation requests for
capital costs for each corridor. Further, before committing funding
for expenditures on construction and real property and equipment
acquisition on each corridor or portion of a corridor, the Authority
must submit a detailed funding plan— separate from the funding
plan described earlier— to the director of Finance and the Joint
Legislative Budget Committee. The director of Finance must
determine whether the plan is likely to be successfully implemented
as proposed. 2 Bond proceeds may not be used to support more
than 50 percent of the total cost of construction for each corridor
or usable segment of the program; the remainder must come from
other funding sources. 3 However, the Authority need not submit
either 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, improvements
to rights‑of‑way, and relocation assistance. These costs are also not
subject to the 50 percent limitation. As of March 1, 2010, the State
had issued $ 258.4 million in Proposition 1A bonds.
2 State law requires two different funding plans, one before requesting appropriation of certain
bond funds and one before committing those funds for expenditure. Although the requirements
for both plans are similar in most respects, state law requires that the plan submitted before
committing bond funds for expenditure include one or more reports, prepared by independent
firms, that indicate, among other things, that construction can be completed as proposed and
that planned train service will not require an operating subsidy.
3 According to state law, a corridor is a portion of the high‑speed rail system, and a usable segment
is a portion of a corridor that includes at least two stations.
California State Auditor Report 2009- 106 9
April 2010
The High‑Speed Rail Network
The proposed program would run from Sacramento and
San Francisco in the north to San Diego in the south. Figure 2 on
the following page depicts the proposed routes for the program.
According to the Authority’s 2009 business plan, phase one
comprises six corridors between San Francisco and Anaheim:
• San Francisco to San Jose
• San Jose to Merced
• Merced to Bakersfield
• Bakersfield to Palmdale
• Palmdale to Los Angeles
• Los Angeles to Anaheim
Although state law sets 2020 as the intended date to complete the
entire system between Sacramento and San Diego, the Authority
says that ideally it plans to complete phase one of the program
by 2020. Figure 3 on page 11 shows the Authority’s timeline, as
presented in its 2009 business plan. According to the timeline,
the Authority plans to complete environmental and preliminary
engineering work on the Los Angeles‑to‑Anaheim corridor by the
end of fiscal year 2010– 11 and expects to complete construction
of phase one by the beginning of fiscal year 2019– 20. Later in
the report, we discuss several issues that raise doubts about the
Authority’s ability to meet these goals.
Projected Costs and Committed Funding
In December 2009 the Authority estimated that the total cost for
phase one of the program would be $ 35.7 billion in 2009 dollars.
This represents an increase of $ 2.1 billion over the costs it projected
in 2008. The increase is almost entirely attributable to an increase in
estimated costs for the Los Angeles‑to‑Anaheim corridor, which
jumped from $ 2.2 billion in 2008 to $ 4.6 billion in 2009.4 The
Authority also estimated phase one would cost $ 42.6 billion in
“ year‑of‑expenditure” dollars. It calculates year‑of‑expenditure
dollars by distributing and escalating costs based on the year of
planned expenditure. In this way, it incorporates inflation, which
4 The Authority estimates that the Los Angeles‑to‑Anaheim corridor will cost $ 5.5 billion in
year‑of‑expenditure dollars.
California State Auditor Report 2009- 106
April 2010
10
makes up about 80 percent of the difference in costs, into its
projections. The Authority believes this method provides a more
credible view of program costs and therefore uses it throughout its
discussion 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
San Francisco Stockton
Millbrae
Redwood City
or Palo Alto
San Jose
Gilroy
Modesto
Anaheim
Los Angeles
Burbank
Sylmar
San Diego
Source: High- Speed Rail Authority ( Authority).
* This corridor relates to a rail project separate from the high- speed rail network that the Authority
is pursuing with local and regional transit agencies.
California State Auditor Report 2009- 106 11
April 2010
Figure 3
Projected Timeline of Program Activities for Phase One of the High- Speed Rail Network
Design standards/ specifications
Engineering design submittal
review/ 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
2009  10 2010  11 2011  12 2012  13 2013  14 2014  15 2015  16 2016  17 2017  18 2018  19 2019  20
JUN JUN JUN JUN JUN JUN JUN JUN JUN JUN SEPT
PROGRAM ACTIVITY
FISCAL YEAR
Source: High- Speed 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 Authority’s program management team, the solid line represents planned work for updating relevant ridership and
revenue projections; the dotted line represents likely ongoing review of these projections.
As of February 2010, the Authority had about $ 11.6 billion
of funding committed for the program: $ 9 billion in state
bond 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 State
would match federal participation on a dollar‑for‑dollar basis,
using state, local, and private funds. The Authority submitted
seven applications to the Federal Railroad Administration ( Railroad
Administration)— three for planning and four for construction— for
a total of $ 4.7 billion in Recovery Act funds. In January 2010
the Railroad Administration announced that it had approved
five of the Authority’s applications: one for planning and four for
construction, totaling $ 2.25 billion. As of March 2010, the chief
deputy director said the Authority expected to receive $ 194 million
California State Auditor Report 2009- 106
April 2010
12
in planning funds but is continuing to work with the Railroad
Administration to determine how to distribute the remainder of
the Recovery Act grant among the four approved construction
applications. We further discuss issues related to the program’s
funding plan in the Audit Results section of this report.
In recent years, most of the Authority’s cash expenditures were
related to contracts for architectural and engineering services. As
Figure 4 demonstrates, for fiscal years 2006– 07 through 2008– 09,
about 87 percent of its $ 75 million in cash expenditures related to
payments to private firms with contracts exceeding $ 20 million
( major contracts). The largest single recipient of Authority funds,
with a $ 199 million contract extending more than six years, was
the contractor that serves as the Authority’s program management
team ( Program Manager). It provides day‑to‑day management and
directs the contractors working on specific corridors.
Figure 4
Payments Made by the High- Speed Rail Authority by Type and Region
Fiscal Years 2006– 07 Through 2008– 09
( 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: High- Speed Rail Authority payment logs.
Note: The total value of each of the regional contracts and the Program Manager’s contract is more than $ 20 million. These are multiyear contracts that
extend beyond fiscal year 2008– 09.
An additional 8.3 percent of the Authority’s cash expenditures
between fiscal years 2006– 07 and 2008– 09 went to other contracts,
including those for financial planning, legal assistance, and visual
simulations of the train system. Only 4.8 percent of the Authority’s
California State Auditor Report 2009- 106 13
April 2010
cash expenditures during these three years were for other costs
such as those for facilities, travel, interdepartmental agreements,
and compensation of Authority staff.
The Authority recently contracted with a consultant for program
management oversight. This consultant is to review and monitor the
Program Manager’s work to ensure that it is proceeding on schedule
and in conformance with approved work plans. This structure, one
contractor reviewing the work of another contractor, is not unique to
the Authority. The California Department of Transportation and the
Federal Transit Administration have used similar structures.
Between fiscal years 2006– 07 and 2008– 09, the Authority paid
its major contractors from three state funds and two local grants.
Figure 5 outlines the amount of funding from each source. State
funds came from the Public Transportation Account, which
receives its funding from retail sales and use taxes on gasoline; the
Clean Air and Transportation Improvement Fund, which receives
its funding from the sale of general obligation bonds approved by
voters in 1990; and Proposition 1A funds, discussed previously.
The two local grants reimbursed costs originally paid by the Public
Transportation Account.
Figure 5
Funding Sources for Major Contracts
Fiscal Years 2006– 07 Through 2008– 09
( In Millions)
2006– 07 2007– 08 2008– 09
0
5
10
15
20
25
$ 30 Public Transportation Account
Proposition 116
Proposition 1A
Local entity grants*
Fiscal Years
Sources: High- Speed Rail Authority contract files.
Note: “ Major contracts” are multiyear contracts with a total value greater than $ 20 million. This graph represents total amounts provided for these
contracts 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 fiscal year 2008– 09).
California State Auditor Report 2009- 106
April 2010
14
Scope and Methodology
The Joint Legislative Audit Committee ( audit committee) asked the
Bureau of State Audits to assess the Authority’s readiness to
manage funds authorized for building the high- speed rail network.
Specifically, the audit committee asked us to determine if the
Authority is structured to administer its funding in compliance with
laws and regulations and whether its processes and controls are
transparent, provide accountability, and ensure the cost‑effective
use of public resources. The audit committee also asked us to
identify and assess the steps the Authority’s governing board5 has
taken to establish a process for strong program oversight and to
review and evaluate the Authority’s strategic plan to determine if its
goals and objectives are reasonable.
In addition, the audit committee requested that we identify the
Authority’s funding sources for all major contracts over the past
three years. It also asked us to evaluate the Authority’s contracting
procedures and practices for awarding, managing, and monitoring
contracts and to determine the Authority’s controls to ensure
the appropriateness and accuracy of contract payments. Finally,
we were asked to review a sample of contracts and paid invoices
to ensure that they comply with applicable policies, procedures,
and controls, and to determine if Authority expenditures were
reasonable and aligned with its goals and objectives.
To determine if the Authority is structured to administer its funding
in compliance with laws and regulations, we identified key aspects
of state law related to Proposition 1A bond proceeds, reviewed
records pertaining to the peer review group, interviewed Authority
staff responsible for accounting, assessed accounting processes, and
reviewed the Authority’s efforts to prepare for receiving Recovery
Act funds. We also assessed its efforts to monitor potential conflicts
of interest. The Authority’s business plan is a key document
that describes the Authority’s vision for the program, so we also
assessed whether it contains required elements and provides a clear
path going forward, focusing on those sections related to program
financing and risk management. Further, we assessed whether
the Authority’s processes and controls are transparent, provide
accountability, and ensure the cost‑effective use of public resources
in conjunction with other audit procedures. For example, we
assessed transparency by reviewing the Authority’s business plan
and we assessed accountability and cost‑effectiveness by reviewing
the Authority’s process for awarding contracts and its controls over
invoice payments.
5 According to state law, the “ High‑Speed Rail Authority” is comprised of the nine members of its
“ governing board.” In this report, we refer to the governing board as “ the Authority.”
California State Auditor Report 2009- 106 15
April 2010
To identify the steps the Authority’s governing board has taken to
establish a process for strong program oversight, we interviewed the
former executive director, 6 chief deputy director, communications
director, and Authority chair. We also assessed the communications
the Authority receives from its staff and the access Authority
members have to information regarding the program. Further, we
reviewed the Authority’s policies and procedures.
To review and evaluate its strategic plan, we interviewed Authority
staff responsible for the plan, the Authority chair, and a consultant
hired to develop the plan. The Authority had not finalized its
strategic plan at the time of our fieldwork, so we limited our review
to determining whether the draft plan includes the necessary
elements of a strategic plan as described by Finance.
To identify the Authority’s funding sources for major contracts,
we reviewed contracts in effect at the end of 2009 and decided
that we would classify contracts with a total value greater than
$ 20 million as major. Nine major contracts totaled $ 757.9 million
and accounted for 98.6 percent of the value of Authority contracts
active as of December 31, 2009. The remaining eight contracts totaled
$ 10.8 million. Further, all the major contracts are for architectural and
engineering services. We totaled funding for fiscal years 2006– 07
through 2008– 09, by source, for each major contract.
To evaluate contracting procedures and practices for awarding,
managing, and monitoring contracts, we focused our review on
architectural and engineering contracts, as those account for the
overwhelming majority of contracts in terms of aggregate dollar
value. We interviewed Authority staff and reviewed state law and
the Authority’s policies regarding awarding of architectural and
engineering contracts. Also, we identified key criteria for awarding
contracts and compared the Authority’s process in awarding
three contracts to these key criteria.
To determine the Authority’s controls to ensure the appropriateness
and accuracy of contract payments, we interviewed its chief
deputy director, fiscal officer, and other staff involved with
processing contract payments. We also reviewed its contract
administration manual. To review a sample of contracts and
paid invoices to ensure that they comply with applicable policies,
procedures, and controls, we judgmentally selected 30 invoices
related to major contracts and paid with funds appropriated in
fiscal years 2006– 07 through 2008– 09. Our selection reflected the
distribution of expenditures across fiscal years and also among the
6 The Authority’s executive director resigned effective March 31, 2010. We refer to him as the
“ former executive director” throughout this report.
California State Auditor Report 2009- 106
April 2010
16
major contracts. We determined whether the Authority followed its
internal control procedures when paying the invoices. To select our
sample, we used electronic logs of invoice payments maintained by
the Authority. We reconciled payment totals on the logs, for each
year and funding source, to accounting records of the Authority
and to records from the State Controller’s Office and determined
that the logs were materially complete. Our testing also found the
amounts in the logs to be accurate.
To determine if the Authority’s expenditures were reasonable
and aligned with its goals and objectives, we used our sample of
contract payments, as described earlier, because major contracts
represented the vast majority— 87 percent— of payments made by
the Authority from appropriations for fiscal years 2006– 07 through
2008– 09. We compared tasks billed on each invoice to those
outlined in contractors’ annual work plans. Further, we analyzed the
Authority’s accounting reports between July 2006 and June 2009
to identify other‑than‑major contract costs that were unusual
and could indicate nonalignment with the Authority’s goals and
objectives. Related to this analysis, we reviewed 10 travel claims in
detail. Finally, we determined whether a number of foreign trips
by Authority staff and board members met state guidelines and
were for purposes that aligned with Authority goals. We found no
exceptions related to other‑than‑major contract costs.
California State Auditor Report 2009- 106 17
April 2010
Audit Results
The High‑Speed Rail Authority’s Planning Lacks Details
The December 2009 business plan of the High‑Speed Rail Authority
( Authority) lacks detail regarding how it proposes to finance
the high‑speed rail network ( program) and mitigate associated
risks. Further, the Authority has not yet completed a strategic
plan. According to its 2009 business plan, it anticipates needing
$ 17 billion to $ 19 billion from the federal government to finance
the program, but the business plan provides detail on only a small
portion of this. Plan details include $ 4.7 billion in anticipated
grants from the American Recovery and Reinvestment Act
of 2009 ( Recovery Act), which the Authority has since learned will
amount to only $ 2.25 billion. Further, the Authority estimates it
will need $ 10 billion to $ 12 billion in private investment. Although
it claims private interest is high, the Authority has not received
any commitments from private investors. Additionally, a revenue
guarantee, without which the private investors are unlikely to
participate, lacks specifics. Also, the Authority has identified a
number of risks that could affect the program and is working
to improve its approach to risk management. Finally, the draft
strategic plan, which Authority staff anticipate completing in
April 2010, includes all the elements it should, but the Authority
itself has been involved in its creation to only a limited extent.
The Authority’s 2009 Business Plan Contains the Elements Required
by the Legislature
The Authority published its first business plan
in 2000 and revised plans in 2008 and 2009. In
November 2008, three days after voters approved
the Safe, Reliable High- Speed Passenger Train
Bond Act for the 21st Century ( Proposition 1A)
bond measure, the Authority released its
second business plan. In March 2009 the Legislative
Analyst’s Office ( Legislative Analyst) stated that the
revised plan lacked many details and recommended
that the Legislature require the Authority to
provide additional information. In amendments
to the 2009 Budget Act, the Legislature required a
revised business plan by December 15, 2009, that
would include various details about the program, as
described in the text box. Further, the Legislature
made almost $ 70 million— or half of the Authority’s
funding for fiscal year 2009– 10— contingent on
receiving the business plan. The Authority released
its 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:
• A thorough discussion describing steps being pursued to
secure financing.
• A working timeline with specific, achievable milestones.
• Strategies the Authority will pursue to mitigate different
risks and threats.
• Additional information related to ridership, capacity, cost,
and private investment strategies.
• System details such as route selection and alternative
alignment considerations.
Source: Chapter 1, Statutes of 2009 ( ABX4 1),
Fourth Extraordinary Session.
California State Auditor Report 2009- 106
April 2010
18
The Authority’s 2009 business plan contains information related
to each element the Legislature requested. For example, it contains
program details such as updated cost estimates, general route
selection and alternative alignments, and a working timeline with
specific milestones related to environmental work. In addition,
the 2009 business plan includes a description of the funding the
Authority needs to complete phase one— the portion between
San Francisco and Anaheim.
The Authority’s financial plan includes federal funding, such as that
available from the Recovery Act, state bond funds from Proposition 1A,
private investment primarily backed by projected operating surpluses
of the high‑speed rail system, and local funding in the form of such
things as naming rights and development around stations. Figure 6
shows the revenues the Authority indicates it will need from each
source over the next 11 years. According to the business plan, phase
one is projected to cost $ 42.6 billion in year‑of‑expenditure dollars7
and 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: High- Speed Rail Authority’s 2009 business plan.
Note: Projected amounts for federal assistance and private funding in this graph are somewhat
different from those reported in the text of the business plan. Funding for federal assistance
is $ 751 million more than the upper range of the Authority’s 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 year‑of‑expenditure dollars by distributing and escalating costs for each
corridor based on the year of planned expenditure.
California State Auditor Report 2009- 106 19
April 2010
The Authority’s Financial Projections Indicate Almost Total Reliance on
State and Federal Funds Through 2014
The business plan provides little detail on how the Authority
expects to obtain a total of $ 17 billion to $ 19 billion in federal
grants. As the federal government is by far the largest funding
source in the plan, we expected to find concrete details indicating
how the Authority expects to secure this money; however, the plan
provides detail for only a portion of the total. The plan includes
$ 4.7 billion in Recovery Act funds for which the Authority already
had applied. The plan also mentions the Passenger Rail Investment
and Improvement Act, which created a mechanism for distributing
$ 1.5 billion in grants for California and 10 other federally designated
high‑speed rail corridors in other states over five years beginning
in 2009. Further, the plan notes a $ 1 billion per year proposed
federal commitment for high‑speed rails nationally over a five‑year
period. After the plan was published, Congress appropriated
$ 2.5 billion for the 2010 federal fiscal year for high‑speed rail,
intercity passenger rail, and congestion relief grants.
The program risks significant delays because the Authority’s plan
depends almost exclusively on federal and state funds through
2014 and does not include specific steps for obtaining or replacing
federal funds. Further, the Authority’s plan includes its request for
$ 4.7 billion in anticipated Recovery Act funds. Paired with state
dollars, these funds would be sufficient to support development of
the program into 2013, according to the data in Figure 6. However,
according to a U. S. Department of Transportation announcement
in January 2010, the Authority will receive only up to $ 2.25 billion
of the $ 4.7 billion Recovery Act funding for which it applied, which
is 28 percent of the $ 8 billion in grants awarded nationwide. With
only $ 2.25 billion committed, the Authority will fall far short of
the amount it indicates it needs to meet spending goals in the next
few years, barring significant new grants or appropriations of state
funds outside of Proposition 1A. According to its communications
director, the Authority has no definite commitments from the
federal government other than Recovery Act funding.
The Authority’s assumptions regarding federal funding are
optimistic. According to the business plan, the estimate of federal
participation in the program is based on the federal government’s
historically high participation in large transportation infrastructure
programs such as highway, transit, and aviation projects. However,
the Highway Trust Fund is a dedicated source for highway and
transit programs and has its own revenue source— the federal tax
on motor fuels. The U. S. Government Accountability Office, in a
2009 report on the future development of high‑speed rail, noted
that no such dedicated federal revenue source exists for projects
for this mode of transportation, so high‑speed rail projects must
With only $ 2.25 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.
California State Auditor Report 2009- 106
April 2010
20
compete with other non‑transportation demands on federal
funds. Further, the Federal Railroad Administration ( Railroad
Administration) received more than $ 57 billion in applications for
the $ 8 billion of available Recovery Act grants. This suggests that
competition for any additional federal dollars will be strong and
that California can expect to receive only a fraction of the total.
However, the Authority’s plan for financing the program depends
heavily 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 1A
state bonds,
committed—
$ 9 ( 21%)
Sources: High- Speed Rail Authority ( Authority), 2009 business plan.
Note: The Authority estimated its funding in ranges. For the purpose of this graph we used the
average 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 billion
for private funding, and $ 4 billion to $ 5 billion for local grants.
* Other public funds are specific to the San Francisco- to- San Jose corridor and mostly relate to
local grants.
Through 2013 the Authority’s plans also depend on federal funding
to leverage state bond dollars. As noted in the Introduction,
Proposition 1A bond funds may be used to support only up to
50 percent of the total cost of construction of each corridor or usable
segment of the program. The remaining 50 percent must come
from other funding sources. Thus, the award of up to $ 2.25 billion
in Recovery Act funds allows for the use of an equal amount of
state bond funds for construction, for a total of about $ 4.5 billion. 8
8 The Railroad Administration approved a total of five applications submitted by the
Authority— one for planning and four for construction. The construction applications represent
about 91 percent of the total dollar amount for all five applications.
California State Auditor Report 2009- 106 21
April 2010
However, the Authority’s spending plan includes almost $ 12 billion
in 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 other
sources, the Authority will not be able to leverage adequate
state funds to meet its spending goals for specific parts of the
program. Before it may commit funds from Proposition 1A for
expenditures for construction on a corridor or usable segment,
state law requires that the Authority have a plan that estimates
the full cost of construction and identifies the sources of all funds
and the anticipated time of receipt based on offered commitments
or assurances from potential funding sources. State law also
requires that the director of the Department of Finance ( Finance)
determine whether the plan is likely to be successfully implemented
as proposed.
Without additional funding commitments, the Authority jeopardizes
its ability to create a viable funding plan for the first corridor slated to
be done with environmental work. According to Authority estimates,
the 30‑mile corridor between Los Angeles and Anaheim— the
least expensive of the corridors approved by the Railroad
Administration— will cost $ 5.5 billion. However, with the $ 2.25 billion
Recovery Act grant and an equal amount of Proposition 1A funds, the
Authority has only $ 4.5 billion potentially available. State law requires
the Authority to identify funding sources and timing of receipts
before funds from Proposition 1A can be used for construction on
any portion of the program. Thus, even if all the $ 4.5 billion in federal
and state funds were used on this corridor, the Authority would
need to identify at least an additional $ 1 billion, or plan to build a
segment that costs up to $ 4.5 billion and does not cover the entire
corridor. 9 As described in the Introduction, the Authority may be
able to use some Proposition 1A funds available outside of funding
plan requirements; however, if it did so the Authority would need to
spend most of these funds, leaving little or none of them available for
other corridors. Further, according to the chief deputy director, the
Authority is working with the Railroad Administration to determine
which corridors will receive federal funding. However, they will need
to decide quickly. She said the Authority must prepare funding plans
by spring 2011 to meet the Railroad Administration’s deadline to
obligate federal funds in fall 2011.
According to the communications director, the Authority presented
the data in Figure 6 on page 18 to illustrate that public funding will
be 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 first
corridor slated to be done with
environmental work.
California State Auditor Report 2009- 106
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 capital
costs also presented in the plan. In its April 2010 draft addendum to
the 2009 business plan, the Authority presented another scenario
that reflects similar funding needs in each year and still relies
heavily on federal and state dollars up‑front. The key difference
between this scenario and that in the 2009 business plan is the use
of some local grant funds in earlier years. The alternative scenario
still relies heavily on federal funding through 2013 and indicates
no new local grant commitments, so we believe our concerns
remain valid.
The Authority’s Plans for Private Funding Are Vague
Private investors have expressed interest in the program, but they
have made no commitments and the Authority expects they will
require a revenue guarantee to participate. The business plan
describes the interest of private investors as strong and diverse, and
indicates the Authority plans to rely on them to supply $ 10 billion
to $ 12 billion, primarily backed by projected future operating
surpluses. As Figure 6 on page 18 illustrates, however, it does not
expect to begin using significant funds from this second‑largest
proposed source until 2015. In spring 2008, in an effort to better
understand private interest in the program, the Authority issued a
Request for Expressions of Interest to potential investors. According
to the consultant contracted to prepare the Authority’s financial
plan, the consultant communicates regularly with about 50 parties
who responded to the spring 2008 request and others who have
approached the consultant or the Authority since then. The
consultant said the general consensus from these communications
is that private investors will require a minimum revenue guarantee
from a public entity in the event that ridership projections, and thus
operating surplus projections, are not met. This viewpoint is also
expressed in the 2009 business plan.
The Legislative Analyst expressed concern that a revenue guarantee
might violate state law prohibiting an operating subsidy for the
program. In a February 2010 memo, the Authority’s financial
consultant provided clarification, indicating that the revenue
guarantee would not be used as an operating subsidy but would
be a limited‑term contingent liability used to support up‑front
capital investment. Additionally, he said that such guarantees
with capital cost‑only limitations have been employed in both
federal and state highway and transit projects. The consultant also
stated that the guarantee would be of a limited duration, from
five to 10 years. Therefore, a guarantee could increase costs to
The Authority does not expect to
begin using significant funds from
private investors until 2015.
California State Auditor Report 2009- 106 23
April 2010
the public sector. The business plan does not make clear which
government would be responsible for the guarantee or how much it
might cost.
The Authority has addressed a number of concerns surrounding the
model it uses to project ridership, which is fundamental to
operating revenue projections, and thus to private investors’
interest in supporting the program. In memos released together
in March 2010 and published on its Web site, the Authority’s
former executive director10 and the consultant responsible for
developing the ridership model responded to concerns from the
public regarding ridership and revenue projections. For example,
an advocacy group alleged that the Metropolitan Transportation
Commission, which contracted for the study, made drastic
changes to the model, yet did not include these changes in the
public documentation or the final project report. The consultant
responded that the model development team adjusted coefficients
and constants to address peer review comments, that these
coefficients and constants were in the final model, and that they
were not later changed. The consultant also explained that the final
coefficients, constants, and related details were not included in the
final report but were in the model itself, part of a package that also
included the final report and a user’s guide.
The Authority addressed additional concerns in its April 2010 draft
addendum to the 2009 business plan. For example, in a background
document for a joint hearing in January 2010, the Senate
Transportation and Housing Committee and a Senate budget and
fiscal review subcommittee quoted Authority projections indicating
that more passengers traveling between regions would board in
Merced or Palmdale ( 5,300 and 5,200 per day, respectively) than
would board in Los Angeles ( 3,700), a much larger city. 11 According
to the addendum, these apparent discrepancies are due to several
factors. For example, it explained that Merced and Palmdale do not
have frequent, inexpensive air service available to travelers, as does
Los Angeles. Further, many riders from Merced and Palmdale count
as “ inter‑regional” travelers because of the way regional boundaries
are drawn.
More significantly, the Authority is working to review and revise the
ridership model. According to the draft addendum, the contractor
responsible for the model is working with the University of
10 The Authority’s executive director resigned effective March 31, 2010. We refer to him as the
“ former executive director” throughout this report.
11 According to the background document, the Program Manager gave revised figures to the
legislative committees subsequent to the release of the 2009 business plan. These figures were
slightly different from those in the business plan, which estimated that daily inter‑regional
boardings would be 5,600 and 5,500 in Merced and Palmdale, respectively, and 3,800 in
Los Angeles.
The business plan does not make
clear which government would be
responsible for a revenue guarantee
to private investors or how much it
might cost.
California State Auditor Report 2009- 106
April 2010
24
California, Davis to refine the current forecasting models, develop
independent forecasts, and conduct a risk analysis. This effort is to
involve an independent peer review panel to assess the resulting
products. In addition, the draft addendum stated that the Authority
entered into a contract with the University of California, Berkeley’s
Institute of Transportation Studies in March 2010— at the request
of the Senate Transportation and Housing Committee— to
peer review the Authority’s past and current ridership models
and forecasts.
The Authority Is Working to Improve Its Approach to Risk Management
The Authority’s 2009 business plan identifies a number of risks
associated with the program, but it provides little detail on how
it will manage those risks. The Project Management Institute,
recognized for its development of standards for the practice
of project management, publishes the Guide to the Project
Management Body of Knowledge, which identifies and describes
generally accepted project management practices. According
to the guide, project risk management includes the processes of
conducting risk management planning, identification, analysis,
response planning, and monitoring and control on a project.
Risks identified in the business plan include those associated with
government funding, ridership projections, and construction costs.
The plan notes that estimated cost projections generally include
a 30 percent contingency reserve, with a 20 percent contingency
reserve being assigned to items such as track, systems, and
electrification. However, the plan does little otherwise to describe
its processes for monitoring and controlling risk. According to the
communications director, the Authority acknowledges that risk
management will be an organizational weakness if it remains as is
moving forward.
The Authority has taken steps toward improving its approach. In
March 2010 the Program Manager completed a major revision to its
risk management process to include a “ Risk Register Development
Protocol.” This protocol details how the Program Manager, regional
contractors, and Authority staff will collaborate to identify, assess,
analyze, manage, and monitor risk. The protocol also includes a
description of a process for developing broadly accurate estimates
of potential impact and probability of risks, and expectations for
personnel assigned risk management responsibilities. Further, its
consultant providing program management oversight, hired in
January, will review the risk management plan. Also, the Authority’s
risk insurance manager, hired in February 2010, will provide
services aimed at reducing exposure to project liabilities. The
The Authority says it has entered
into a contract to peer review its
past and current ridership models
and forecasts.
California State Auditor Report 2009- 106 25
April 2010
Authority must ensure that these actions for managing risk are fully
implemented so it can respond effectively to circumstances that
could significantly delay or even halt the program.
The Authority Anticipates Completing a Strategic Plan in Spring 2010
Although state law no longer requires development of strategic
plans, the State Administrative Manual says agencies must
have strategic plans before Finance will consider budget change
proposals for capital outlay. 12 The chief deputy director said the
Authority made such a request in September 2009. According to
Finance, strategic planning is a long‑term, future‑oriented process
of assessment, goal setting, and strategy building that maps an
explicit path between the present and a vision of the future. A
strategic plan is an agency’s comprehensive guide for carrying out
its mission.
According to Finance, the key elements of a strategic plan are an
internal and external assessment, mission statement, principles,
vision, goals and objectives, performance measures, and action
plans. The Authority’s strategic plan is not yet complete; however,
a draft includes all these elements except for action plans. For
example, it presents a mission to “ plan, design, build, and operate a
high‑speed train system that provides an efficient, safe, sustainable,
and reliable transportation option for the people of California.” The
draft plan also identifies two goals: to “ ensure that the Authority’s
organizational infrastructure fully supports its mission,” and to
“ advance California’s high‑speed rail system through effective
planning and construction.” According to the consultant working on
developing the strategic plan, completion is expected in April 2010,
when it will go before the Authority for approval. She expects
action plans and other implementation tasks to be completed by
June 2010.
Finance’s guidelines also state that strategic planning involves all
levels 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 the
chief deputy director, the Authority’s participation in the strategic
planning process has been limited to an invitation to take part in an
initial survey about the organization’s issues. The Authority bears
ultimate responsibility for the program’s success or failure, so we
expected it to be a more active participant in the strategic planning
process. Without such participation, the program could operate
with plans that do not fully reflect the Authority’s outlook.
12 Capital outlay includes the acquisition of real property, major construction, and improvements.
The Authority’s participation in the
strategic planning process has been
limited to an invitation to take
part in an initial survey about the
organization’s issues.
California State Auditor Report 2009- 106
April 2010
26
The Authority Needs to Improve Oversight and
Administrative Controls
The Authority has not put in place some structures it needs to
provide adequate oversight and administrative control of the
program. For example, state law requires the Authority to establish
an eight‑member peer review group ( review group) to review its
plans; however, only five of the eight members had been appointed
as of March 2010. Further, state law limits the amount of bond
funds the Authority may spend on administration, as well as
planning, environmental studies, and preliminary engineering
( preconstruction tasks), but it does not have a system in place to
track expenses in these categories; nor has it determined which
expenses should be classified 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 it
must better document its policies and procedures. Finally, the
Authority’s governing board, which is ultimately responsible for
the program’s success or failure, is expanding its oversight role.
Selection of the Peer Review Group Has Not
Been Completed
Three of the members of a statutorily defined
advisory group have not yet been appointed,
reducing the Authority’s access to important input.
State law requires it to establish an independent
review group, as described in the text box, that is
to assess various plans the Authority may develop.
The review group is also to issue independent
judgments as to the feasibility of funding plans
and the appropriateness of the Authority’s related
assumptions. State law directs the Authority to
establish this group, but it leaves appointment of
the group’s members to four other agencies. As
of March 2010, only five of the eight members had
been appointed— one by the State Treasurer’s Office
( Treasurer), one by the State Controller’s
Office ( Controller), one by Finance, and two by the
Business, Transportation and Housing Agency.
The Treasurer, Controller, and the Business,
Transportation and Housing Agency each have
one more appointment to make.
Without a complete review group, the Authority
cannot benefit fully from its expertise. As the
text box describes, review group members must
be familiar with high‑speed rail construction,
Required Qualifications for Peer Review
Group Members
According to state law, the peer review group shall include
the following individuals:
• Two with experience in the construction or operation
of high- speed trains, designated by the State
Treasurer’s Office.
• One with experience in engineering and construction of
high- speed trains, designated by the State Controller’s
Office ( Controller).
• One with experience in project finance, designated by
the Controller.
• One from a financial services or consulting firm,
designated by the director of the Department of Finance.
• One with experience in environmental planning,
designated by the secretary of the Business,
Transportation and Housing Agency.
• Two from agencies providing intercity or commuter
passenger train services, designated by the secretary of
the Business, Transportation and Housing Agency.
Source: California Public Utilities Code.
California State Auditor Report 2009- 106 27
April 2010
finance, and planning. Those members already appointed
include the former director of the California Department of
Transportation and an individual who has been involved with
high‑speed rail programs in the United Kingdom and Korea.
Further, the three members appointed in 2009 gave detailed
feedback on the organizational structure recommended in
the December 2009 assessment to the Authority mentioned in the
Introduction. They also commented on issues related to federal
funding and risk management. According to the chief deputy
director, the Authority considered the comments and incorporated
the letter from the partial review group into the report on the
organizational assessment.
According to representatives of the Treasurer and the Controller,
the positions have been challenging to fill, given the necessary
qualifications for appointees. However, representatives for all three
agencies that still must make appointments stated they are actively
pursuing qualified candidates, and two said they intend to make
their appointments in April 2010.
The Bagley‑Keene Open Meeting Act ( Meeting Act) 13 prohibits
a majority of members of a state body ( five, in this case) from
discussing, deliberating, or taking action on items of business
outside of an open meeting. Thus, according to our legal counsel,
the review group must hold a meeting that is properly announced
and open to the public when it analyzes and evaluates the
Authority’s plans. The Authority received informal advice from
its legal counsel, a lawyer with the Office of the Attorney General,
stating that the review group is not subject to the Meeting Act
because it is not similar to a board or commission in that it is not
expected to make collective decisions. State law, however, requires
the review “ group” to analyze and evaluate the Authority’s plans
and to report to the Legislature. Therefore, our legal counsel does
not see any basis in law to conclude that the review group is not
expected to make collective decisions. Moreover, the Meeting Act
is explicit in applying to multimember bodies created by state law
and allowing for very specific exceptions, which do not apply to
the review group. Without clarity on whether the review group
is subject to the Meeting Act, the Authority risks having the
group act in a manner contrary to state law, potentially voiding its
analyses, such as those related to the viability of the Authority’s
funding plans.
13 The Meeting Act establishes open‑meeting requirements for every state board, commission,
or similar multimember body. It generally requires such bodies to publicly announce their
meetings, prepare agendas, accept public testimony, and conduct their meetings in public unless
specifically authorized by the Meeting Act to meet in closed session.
Without clarity on whether the
review group is subject to the
Bagley‑Keene Open Meeting Act,
the Authority risks having the group
act in a manner contrary to state
law, potentially voiding its analyses.
California State Auditor Report 2009- 106
April 2010
28
The Authority Lacks Systems to Comply With State Law and Federal
Grant Requirements
The Authority does not have a system in place to track expenditures
funded by Proposition 1A to ensure compliance with statutory
limitations on administrative and preconstruction task costs. As
noted in the Introduction, only 2.5 percent ($ 225 million) of the
Authority’s portion of Proposition 1A bond funds may be used for
administration ( the Legislature may increase this to 5 percent), and
only 10 percent ($ 900 million) may be used for preconstruction
tasks. As Authority staff began spending funds from Proposition 1A
in 2009, we expected them to have defined the types of costs falling
in these categories and to have established systems for recording,
reporting, and planning for these costs, but that was not the case.
According to its fiscal officer, the Authority is unsure how to classify
the expenditure of bond proceeds, although it has a general idea of
what should be considered administrative costs. The fiscal officer
further stated that the Authority does not have a tracking system in
place, but it is working with its information technology consultant
to develop a database to keep track of costs by category. Until such
a process is in place, the Authority cannot accurately report on its
expenditures in each category, cannot create an accurate long‑term
spending plan, and risks not knowing when or whether it has run
out of bond funds available for administration or preconstruction
task costs. This is of particular concern because the Authority is set
to have spent about $ 168 million in bond proceeds by the end of
fiscal year 2009– 10, and the proposed 2010– 11 Governor’s Budget
includes spending an additional $ 583 million, for a total of about
$ 751 million. If these amounts were all spent on administration and
preconstruction task costs, the Authority would use about
two‑thirds of all the money authorized by Proposition 1A for these
cost categories.
Furthermore, the Authority still needs to develop
some systems to track and report on the use of
Recovery Act funds. Because of its $ 2.25 billion
federal award, the Authority will be required to
comply with both the Recovery Act reporting
requirements, some of which are described in the
text box, and with the readiness requirements
of the California Recovery Task Force ( task force).
The Authority has fulfilled some requirements to
prepare for Recovery Act funds; for example, it
has established an accounting code to track the
funds separately from other funds. Additionally,
the Authority satisfied the task force’s oversight
and fraud prevention requirements by completing
a risk assessment as part of its review of internal
American Recovery and Reinvestment Act of 2009
Selected Information Required in
Recipient Reports
• Total amount of funds received
• Amount of funds expended or obligated
• Detailed list of projects and activities funded
• Estimated jobs created and retained by funded projects
• Rationale for infrastructure investments
Source: American Recovery and Reinvestment Act of 2009.
California State Auditor Report 2009- 106 29
April 2010
controls and sending an employee to fraud prevention training.
Further, the fiscal officer stated the Authority is developing a
database to track all expenditures and automatically indicate the
correct funding source. The database also will help fulfill the task
force’s transparency and reporting requirements.
However, the Authority has yet to develop some systems. For
example, the proposed database does not allow the Authority
to track the number of jobs created or saved, as the Recovery
Act requires; nor has the Authority developed an alternative
mechanism to track this information. In addition, we recently
issued a report on the State’s system for administering Recovery
Act funds, which includes a recommendation that agencies
incorporate Recovery Act provisions into their policies and
procedures. According to its December 2009 Financial Integrity
and State Manager’s Accountability Act report, the Authority has
not developed basic operational policies and procedures to which
Recovery Act provisions could be added.
According to its chief deputy director, the Authority has lacked the
staff necessary to implement all Recovery Act requirements. She
further stated that it still has time to act, as it does not expect to
receive the award funds until late in 2010. Nevertheless, the longer
the Authority takes to ready itself to track and report on Recovery
Act funds, the more it risks being unprepared to actually meet
federal requirements. Noncompliance with grant provisions could
jeopardize its ability to receive those funds and to compete for
future grants— both of which are essential, given its heavy planned
reliance on federal funds.
The Authority Is Working to Increase Its Involvement
Until recently, Authority members had not provided significant
oversight to the program. As described in the text box on the
following page, state law requires this group of nine appointees
to direct the development and implementation of high‑speed rail
service. We expected the Authority to be engaged in activities
in a manner reflecting its legislated responsibilities and powers.
However, the Authority’s involvement thus far has been limited.
For example, it did not have an opportunity, as a body, to discuss
or approve the revised business plan issued in December 2009.
In fact, members received a copy of the plan only two days before
staff submitted it to the Legislature. However, according to the
communications director, some members received a draft of
the business plan and discussed it with him. Also, as discussed
earlier, the Authority has been only minimally involved in creating
the strategic plan. Its chair stated that the Authority is ultimately
The Authority has yet to develop
some systems needed to meet
Recovery Act requirements.
California State Auditor Report 2009- 106
April 2010
30
responsible for the program’s success or failure.
Unless it exercises oversight of plans and activities,
however, it risks being unaware of significant
issues that could disrupt or delay the program.
The Authority is taking some steps to increase
oversight of its staff and the program. For
example, according to its chair, he requested
that staff begin providing members with
weekly, written reports on the program’s status.
Although the chair said these reports have met
his expectations, he acknowledges that they are
only weekly “ snapshots” of staff progress and do
not contain detailed information on the program’s
budget and schedule. Further, in the 29‑week
period between the first weekly report on
August 17, 2009, and March 6, 2010, staff issued
only 12 weekly reports.
Additionally, the Authority created three
committees— operations, finance, and
executive/ administrative. Members have
participated in three workshops on issues
pertinent to each committee. However, only
the executive/ administrative committee held its
first four scheduled meetings. The operations
committee held two of its first four scheduled meetings, and
the finance committee canceled its first meeting, scheduled for
March 2010. According to the chair, the committees have had
difficulties meeting regularly because members have not always
been available.
In addition, the Authority has not always followed the policies
and procedures it develops. In June 2009 it adopted policies and
procedures related to its members’ communications with Authority
staff and contractors. For example, the policies and procedures
require Authority members to communicate with contractors only
through the executive or deputy director. However, the Authority’s
former executive director claims that member‑to‑contractor
contact has occurred often and provided us with documentation
showing that subsequent to the policy adoption, a board member
met directly with a contractor to receive an update on program
issues. According to the former executive director, when individual
members express opinions to contractors, the contractors may be
unsure if they should consider the opinions to be direction from
the Authority or just comments. He indicated that if contractors
ignore these communications, the Authority member later might
criticize their work. Such conduct also might affect the public’s
Responsibilities and Powers of the
High- Speed Rail Authority
Responsibilities include:
• Directing the development and implementation of
intercity high- speed rail service.
• Appointing an executive director to administer the affairs
of the High- Speed Rail Authority ( Authority), as directed
by the Authority.
• Establishing an independent peer review group to review
the Authority’s plans.
Powers include:
• Periodically submitting business plans.
• Entering into contracts for design, construction, and
operation of high- speed trains.
• Acquiring rights- of- way.
• Issuing debt.
• Setting fares and schedules.
Source: California Public Utilities Code.
California State Auditor Report 2009- 106 31
April 2010
perception of openness and accountability, and create expectations
for contractors to respond directly to Authority members’ requests
that staff may not know about.
Contract Monitoring and Internal Controls Do Not Provide
Sufficient Accountability
Although the Authority’s process for awarding architectural
and engineering contracts generally meets state requirements,
its monitoring of these contracts has been lax. For example, the
Program Manager provides a monthly report of the program’s
overall progress— including the progress of regional contractors
working on specific corridors— to staff. However, some recent
progress reports have contained inconsistent information regarding
the program’s status and inadequate information on services
provided by the various contractors. Also, the Authority is not
consistently implementing its internal controls over contract
payments and has paid for tasks not included in contractors’
work plans.
The Authority’s Process for Awarding Architectural and Engineering
Contracts Generally Meets Requirements
Under state law, architectural and engineering contracts are
subject to different requirements from other types of contracts. For
example, before an architectural and engineering contract can be
awarded, state law requires the agency to conduct discussions with
at least three firms regarding concepts and methods of approach
for furnishing the required services. Additionally, state law requires
that architectural and engineering service contracts be awarded
to the most qualified firm rather than to the lowest responsible
bidder, as is generally the case for other service contracts. State
agencies using such contracts must develop regulations to ensure
that architectural and engineering services are engaged on the basis
of demonstrated competence and at reasonable prices. Finally,
in addition to being advertised in the State Contracts Register,
architectural and engineering projects must be announced in the
publications of professional societies. Architectural and engineering
contracts have been very significant, accounting for about
87 percent of all the Authority’s payments for fiscal years 2006– 07
through 2008– 09.
Our testing of three architectural and engineering contracts
found that the Authority generally followed state requirements for
awarding them. For example, in each case it conducted discussions
with at least three firms regarding the proposed project. It also
evaluated and ranked each proposal and selected and contracted
The Authority generally
followed state requirements
for awarding architectural and
engineering contracts.
California State Auditor Report 2009- 106
April 2010
32
with the firm it deemed to be the most qualified from a pool of
no fewer than three firms. Further, the Authority advertised each
project in the State Contracts Register. However, in one instance
it did not comply with the requirement to advertise through
professional society publications. In this case, the staff member who
advertised the contract said she believed that using the Department
of General Services’ e‑procurement system to electronically
post the project’s advertisement to the State Contracts Register
met advertising requirements. This electronic format, however,
posts advertisements only in the State Contracts Register and
does not cover other media. This appears to be an inadvertent
mistake; nevertheless, without proper advertising through various
required media, the Authority risks not reaching the widest pool of
potential contractors.
A Primary Tool for Communicating the Status of the Program Contains
Inaccurate and Inconsistent Information
The contract with the Program Manager requires it to submit a
progress report to the Authority at least once a month. According
to the Program Manager’s director, this report is the primary
document summarizing monthly progress on both a regional and
overall level. The Authority’s chief deputy director said the report
is one of its primary monitoring tools. According to the Program
Manager’s director, the progress report is essentially a snapshot of
the program at the end of a given period. As such it is designed to
provide the reader with a summary look at the status of current
work, planned work versus work progress, budgeted versus
actual costs, budgeted versus actual labor hours, identification of
critical issues that have or will affect the program’s progress, and
remediation measures to address areas of concern. The Authority’s
contract with the Program Manager requires the progress report
to be sufficiently detailed for the executive director to determine if
the Program Manager and regional contractors are performing to
expectations and are on schedule, and to air difficulties so remedies
can be developed.
Some monthly reports, however, contain information that is
inconsistent and inaccurate. For example, in the June 2009 progress
report, the program schedule, which graphically displays the
program’s progress by task, indicates that the Program Manager
had completed its fiscal year 2008– 09 regional contractor
oversight activities for all corridors. However, elsewhere in the
same document, in a table that provides further detail on the
level of task completion, the hours worked and dollars spent for
the same activities shows an average rate of completion of about
70 percent. Furthermore, according to the same report, the regional
contractor for the Los Angeles‑to‑Anaheim corridor had planned to
California State Auditor Report 2009- 106 33
April 2010
finish 65 percent of its technical reports but actually completed only
7 percent by June 30, 2009. Likewise, it planned to finish 60 percent
of its design submittals but actually completed only 20 percent.
However, the “ issues and areas of concern” section of the report
does not discuss the delay in this work.
Also, the July 2009 report indicates that the regional contractor
for the Los Angeles‑to‑Anaheim corridor— the corridor expected
to have environmental and preliminary engineering tasks finished
the earliest according to the 2009 business plan— had worked
81 percent of the hours planned for the month, but had incurred
expenditures that were 230 percent of those planned. The Program
Manager’s director provided us a statement from the regional
contractor for the Los Angeles‑to‑Anaheim corridor explaining that
the error was due to a discrepancy in the reporting periods for the
monthly report and the contractor’s payroll. The regional contractor
further stated it fixed the problem in December 2009. According
to the chief deputy director, the Authority was unaware of the
problem. The Program Manager’s director acknowledged he did not
inform the Authority of this issue.
The progress reports also did not provide the status of contractor
promised goods and services. Each fiscal year the Program Manager
and regional contractors submit work plans for acceptance by the
Authority’s executive director. Within each work plan, contractors
detail the scope of planned activities, including promised services
and due dates. Therefore, we expected progress reports to include
a discussion of which services in the work plans contractors had or
had not completed. The three progress reports we reviewed— June,
July, and September 2009— each described actions taken
or products created, but they did not compare those actions and
products to what the contractors promised in their work plans.
The Legislative Analyst had similar concerns about the information
reported in the November 2009 progress report. In its March 2010
report, the Legislative Analyst noted that the progress report
updated the status on only about half of the tasks identified in the
Program Manager’s work plan, with the remaining tasks deleted
or missing. The Program Manager’s director acknowledged to us
that the monthly reports did not contain information on promised
goods and services and stated that his team is changing the reports
to include such a discussion.
Finally, the progress reports did not indicate the significant amount
of work the Program Manager performed outside of its work
plan. According to the Program Manager’s director, Authority
staff have made ongoing requests to his team to perform tasks in
addition to the planned scope of work. For example, according to
the Authority’s chief deputy director, in June 2009 staff asked the
Program Manager to assist in the preparation of Recovery Act
Monthly progress reports from the
Program Manager to the Authority
did not compare actions taken
and products produced to what
contractors had promised in their
work plans.
California State Auditor Report 2009- 106
April 2010
34
applications. The Program Manager’s director provided us with
a list totaling 700 hours that detailed the time his team worked
on Recovery Act tasks, broken down by employee. Additionally,
according to him, his team provided support for the development
of the Authority’s 2009 business plan but did not separately track
the hours it worked on this task, which was also outside of the work
plan. As a result, work on other aspects of the program may have
been delayed or curtailed.
For example, according to the September 2009 progress report,
the Program Manager had planned to spend about 2,700 hours
overseeing regional contractors in the month reported on, but
it worked only about 1,400 hours, or about 53 percent, of the
planned level. At the same time, the progress report indicated
that for the month reported on, all regional contractors logged
about 32,100 hours, or 72 percent of their planned activity. These
results suggest that while the Program Manager worked on tasks
outside its work plan, it may have reduced its oversight of regional
contractors, increasing the risk that their work was not done
correctly or according to plan.
Problems with the monthly reports appear to stem in part from
the lack of attention Authority staff have paid to them. According
to the former executive director, he and the chief deputy director
received the reports but did not have any policies in place for their
review; they performed reviews as time allowed. The contractor
who acts as the Authority’s chief engineer said the former executive
director assigned him the task of reviewing progress reports
around August 2009. He reviewed the September 2009 report and
sent a memo to the former executive director and the Program
Manager’s director highlighting issues needing management action,
specifically various tasks that were behind schedule. His memo
did not point out inaccuracies and inconsistencies such as those
previously mentioned, although it did ask the Program Manager’s
director to further address actions to mitigate highlighted problems.
The hiring of an oversight consultant may help resolve problems
with progress reports. The duties of this consultant, hired in
January 2010, include reviewing some of the data underlying the
progress reports. For instance, the oversight consultant is to review
certain promised services, audit work in progress, and review the
Project Manager’s invoices for compliance with annual work plans.
The oversight consultant’s duties do not specifically require it to
review the progress reports; however, according to the Authority’s
project delivery director, staff could ask the consultant to do so
as part of its overall scope of work. Until they resolve issues with
the progress reports, Authority staff cannot ensure that this key
monitoring document provides accurate and consistent information
on the program’s status.
The hiring of an oversight
consultant may help resolve
problems with progress reports.
California State Auditor Report 2009- 106 35
April 2010
The Authority Paid Invoices Without Ensuring They Accurately Reflected
Work Performed
The Authority has not consistently implemented its controls
regarding paying contractor invoices and has not documented
execution of some controls, risking that it will pay for work outside
the scope of the program or for items not allowed by state rules.
For example, of 22 regional contractor invoices we reviewed, the
Authority paid 20, totaling $ 6.9 million, without documenting
that the Program Manager had performed a required review and
notified the Authority that payment was appropriate. Further, it
made some payments to contractors that constituted a misuse
of public funds because the items paid for were not included in
written contracts. Finally, the Authority’s written policies and
procedures for invoice payment were adopted only recently and do
not accurately describe significant controls staff say they are
to follow.
The Authority Paid Invoices Without Assuring They Accurately Reflected
Work Performed
The Authority paid invoices from regional contractors without
gaining assurance that the invoices reflected work performed.
According to the chief deputy director, the Program Manager
should review each regional contractor’s invoice to ensure that
the work claimed has been performed, and then notify Authority
staff whether the invoice should be paid. She further stated
that staff should not pay invoices without notifications. However,
for a sample of 22 invoices from regional contractors, the Authority
had a record of the Program Manager’s review for only two.
According to the chief deputy director, when she processed
regional contractor invoices, the Authority received only oral
notification from the Program Manager that the invoices should
be paid. Therefore, it has no record of such notifications during the
period of her review. She further stated that when the Authority’s
current fiscal officer took over invoice review in spring 2007, she
instructed the fiscal officer to get written notification from the
Program Manager before payment. However, the fiscal officer says
she was not told to obtain such notifications, nor did she receive
any. The fiscal officer stated that, before December 2008, she was
unaware of the expectation that the Program Manager would
send notifications and knew of no formal policy requiring receipt
of notifications before invoice payment. Of the 22 invoices we
tested from regional contractors, the Authority received 12 before
January 2009— totaling $ 2.9 million— for which it has no evidence
that the Program Manager performed a review. The Authority
also has no documentation that the Program Manager reviewed
eight invoices— totaling $ 4 million— of the 10 received after
Out of 22 invoices from regional
contractors, the Authority had a
record of the Program Manager’s
review for only two.
California State Auditor Report 2009- 106
April 2010
36
December 2008. Unless staff implement controls related to written
notifications from the Program Manager, the Authority risks paying
regional contractor invoices that are inaccurate or do not reflect
services performed.
Unlike the system for controlling payments to regional contractors,
Authority staff have needed to rely entirely on themselves to
oversee payments to the Program Manager. However, we found
that Authority staff paid the Program Manager’s invoices without
reviewing them to ensure they reflected work performed.
According to the chief deputy director, until recently there were
no staff members available to conduct such work. However,
the Authority has long recognized problems in this area. In
July 2006, as it sought a program manager, the Authority expressed
concerns about whether this manager would receive adequate
oversight. At that time, it directed staff to contract with a program
management oversight consultant ( oversight consultant). The
oversight consultant was to ensure that the Program Manager
was performing its duties with due diligence. The Authority has
experienced difficulties hiring and retaining such a contractor.
It brought on an oversight consultant in September 2007 but
terminated the contract in December 2008 after multiple
discussions. Authority staff then sought a new consultant and
recommended one that was approved in June 2009. However, this
effort fell through when the selected consultant’s firm was bought
by one of the Authority’s regional contractors, creating a conflict of
interest. In January 2010 the Authority executed a contract with a
third oversight consultant that began work immediately.
Also, Authority staff did not keep a record of their own review
of the regional contractors’ and Program Manager’s invoices.
According to the fiscal officer, staff should review each invoice
to ensure arithmetic accuracy, correct calculation of overhead
amounts based on the rates in work plans, and compliance with
state guidelines of other costs, such as those for travel. She stated
that the Authority does not, however, maintain a record of this
review. Without an adequate record of staff review, the Authority
cannot ensure that invoice controls have been implemented,
increasing the risk that it has paid for items not allowed by state
guidelines or authorized in contractors’ work plans. However,
a review of 30 invoices revealed that contractors generally have
reported and documented expenses appropriately, with minor
errors involving some business meals.
We found that Authority staff paid
the Program Manager’s invoices
without reviewing them to ensure
they reflected work performed.
California State Auditor Report 2009- 106 37
April 2010
The Authority Made Some Payments That Did Not Reflect the Terms of
Its Agreements
In several instances, the Authority paid for items or work not
included in contracts or work plans. The Authority purchased
$ 46,000 of furniture for its Program Manager’s use based on an oral
agreement. State law prohibits a state employee from permitting
others to use public resources, including equipment, for any
purposes not authorized by law. According to its fiscal officer, the
Authority currently provides office space for a number of employees
working for the Program Manager. However, the Authority’s
written contract with the Program Manager requires the Authority
to provide office space and telephone service for the program
manager, and requires the Program Manager to furnish the office
equipment and systems necessary to conduct business.
The fiscal officer stated that Program Manager staff currently
occupy desks and use equipment purchased by the Authority.
The Authority has spent at least $ 46,000 for furniture in office
space currently occupied exclusively by contract staff. The chief
deputy director explained that this arrangement resulted from
an oral agreement between the Program Manager and the
Authority. However, the written contract was executed after
the oral agreement, and this written contract expressly states
that oral agreements not incorporated in the written contract are
not binding. Therefore, the newer written agreement effectively
supersedes the oral agreement. Unlike the oral agreement, the
written contract requires the Program Manager to provide its
own furniture, equipment, and systems. Authority staff did not
incorporate the oral agreement into the written contract, so they
spent $ 46,000 in a manner that constitutes an unauthorized use
of public resources. According to the chief deputy director, the
Program Manager reduced the overhead rate it charges for staff
working in Authority facilities. Nevertheless, oral amendments
reduce the transparency of the Authority’s operations, as
persons reviewing its contracts would not necessarily know such
provisions exist.
The Authority also paid more than $ 268,000 for services outside
of contractors’ work plans. In the most significant example, a
regional contractor charged more than $ 194,000 for tasks not
included in its work plan. Specifically, the Authority asked a
regional contractor to retain a consultant to perform work on
“ Vision California,” an effort to explore the role of land use and
transportation investments in meeting environmental and fiscal
challenges facing California. According to a draft of the consultant’s
scope of work, the Authority has committed $ 1 million to this effort
over two fiscal years. However, this work was not reflected in the
regional contractor’s work plan. In another example, as discussed
The Authority purchased $ 46,000 of
furniture for its Program Manager’s
use based on an oral agreement,
but the written contract says the
Program Manager will furnish
the office equipment and systems
necessary to conduct business.
California State Auditor Report 2009- 106
April 2010
38
earlier, the Program Manager conducted work on Recovery Act
applications that was outside its work plan. In September 2009
the Program Manager charged almost $ 53,000 for work on
Recovery Act applications. According to the chief deputy director,
the Authority asked the Program Manager to perform this work.
Nevertheless, if the Authority does not amend contracts or
work plans to reflect additional tasks it wants performed, its ability
to measure performance against those contracts and plans, and thus
ensure accountability, is impaired, and established timelines may
be jeopardized.
The Authority Lacks Adequate Written Policies and Procedures for
Invoice Review
Finally, the Authority only recently adopted written policies
and procedures related to invoice payment; however, they do
not adequately describe its controls or their implementation.
In December 2008 the Authority’s Financial Integrity and State
Manager’s Accountability Act of 1983 report14 identified its need
to ensure that contract payments are accurate and to develop
adequate control procedures. The report indicated that the
Authority would immediately start developing policy directives
and procedures, including those for controlling the review and
approval of contractor invoices, and that it would complete a
policies and procedures manual by June 2009. The Authority
completed a contract administration manual ( contract manual)
in September 2009, which includes a description of the process
for reviewing and paying invoices, but it does not reflect all the
controls Authority staff say are in place. For example, the contract
manual states that a contract manager must conduct a technical
evaluation of each invoice, based on promised goods and services,
to determine the reasonableness of charges; however, it does
not discuss the review the Program Manager is to perform on
regional contractors’ invoices or the need for Authority staff to
hold payments until they receive written notification from the
Program Manager.
The Authority’s 2009 Accountability Act report, issued
December 2009, noted that, although it had performed some work
on standardized policies and procedures, it had not yet developed
basic operational policies and procedures. Without adequate
14 The Financial Integrity and State Manager’s Accountability Act of 1983 ( Accountability
Act) requires each state agency to maintain effective systems of internal accounting and
administrative control. The Accountability Act also requires agencies to conduct internal
reviews and prepare reports on the adequacy of their systems of internal accounting and
administrative controls.
The Authority only recently
adopted written policies and
procedures related to invoice
payment; however, they do not
adequately describe its controls or
their implementation.
California State Auditor Report 2009- 106 39
April 2010
written policies and procedures, the Authority cannot ensure
that its staff understand how to implement internal controls over
payments or guarantee that they implement them consistently.
Recommendations
To ensure that it can respond adequately to funding levels that
may vary from its business plan, the Authority should develop and
publish alternative funding scenarios that reflect the possibility
of reduced or delayed funding from the planned sources. These
scenarios should detail the implications of variations in the level or
timing of funding on the program and its schedule.
In order to plan adequately for private investment, the Authority
should further specify the potential costs of planned revenue
guarantees and who would pay for them.
In order to respond effectively to circumstances that could
significantly delay or halt the program, the Authority should ensure
that it implements planned actions related to managing risk.
To avert possible legal challenges, the Authority should ensure
that the review group adheres to the Meeting Act or seek a formal
opinion from the Office of the Attorney General regarding whether
the review group is subject to this act.
To ensure that it does not run out of funds for administrative and
preconstruction tasks prematurely, the Authority should track
expenditures for these activities and develop a long‑term spending
plan for them. It also should develop procedures and systems to
ensure that it complies with Recovery Act requirements.
The Authority should participate in the development of key
policy documents, such as its business and strategic plans.
Further, Authority members should adhere to their policies and
procedures, including those outlining how they may communicate
with contractors.
In order to ensure that staff receive relevant information on
the program’s status, the Authority should amend the oversight
consultant’s work plan to include a critical review of the progress
reports for accuracy and consistency. Authority staff also should
request that the Program Manager revise its progress reports to
include information on the status of contract products and services
in relationship to what was promised.
California State Auditor Report 2009- 106
April 2010
40
To determine if it is paying invoices that accurately reflect
work performed, the Authority should ensure that staff adhere
to controls for processing invoices. For example, staff should
not pay invoices from regional contractors until they receive
written notification from the Program Manager that the work
billed has been performed, or until they have conducted an
independent verification.
To ensure that it does not misuse public funds and can hold
contractors accountable, the Authority should adhere to the
conditions of its contracts and work plans, and make any
amendments and modifications in writing.
To better determine if payment controls are implemented, the
Authority should ensure that its written policies and procedures
reflect intended controls over invoice processing and offer sufficient
detail to guide staff. These procedures should include steps for
documenting implementation of invoice controls.
We conducted this review under the authority vested in the California State Auditor by Section 8543
et seq. of the California Government Code and according to generally accepted government auditing
standards. We limited our review to those areas specified in the audit scope section of the report.
Respectfully submitted,
ELAINE M. HOWLE, CPA
State Auditor
Date: April 29, 2010
Staff: Jim Sandberg‑Larsen, CPA, CPFO, Project Manager
John Lewis, MPA
Sarah Bragonje, MPA
Ryan Grossi, JD
Timothy T. Jones
Legal Counsel: Scott A. Baxter, JD
For questions regarding the contents of this report, please contact
Margarita Fernández, Chief of Public Affairs, at 916.445.0255.
California State Auditor Report 2009- 106 41
April 2010
( Agency response provided as text only.)
California High- Speed Rail Authority
925 L Street, Suite 1425
Sacramento, CA 95814
April 19, 2010
Elaine M. Howle*
State Auditor
Bureau of State Audits
555 Capitol Mall, Suite 300
Sacramento, CA 95814
Dear Ms. Howle:
Thank you for the opportunity to review and comment on the draft audit report regarding the California
High- Speed Rail Authority ( Authority).
The Authority is committed to transparency and believes strongly that additional spotlight on our operations
will ultimately make for a better high- speed train project for the state. So, the Authority appreciates the input
and recommendations from the Bureau of State Audits, and agrees with its recommendations.
We believe the audit process has identified areas where the Authority can improve its administrative
processes and project oversight. We note that many of the findings in your draft audit are similar to those
outlined earlier by the Legislative Analyst’s Office ( LAO). As a result, in many instances the Authority has
already taken action to address issues raised in your report. In particular, the Authority earlier this month
approved an addendum to its 2009 Business Plan that clarified our efforts to address funding for system
construction, risk management, and alternatives for securing the private capital investments necessary to
bring this important project to fruition. We appreciate that in many cases the draft audit takes note that the
Authority is already taking steps to improve its operations based on recommendations made earlier by the
LAO, as well as on findings in your draft audit.
We do believe, however, that the report’s inflammatory title is overly aggressive considering that the
contents of the audit’s findings are not equally scathing. While the Authority is appreciative that the report
in its entirety reflects more objectively the challenges of a state entity in transition from a planning body to
one responsible for implementing a large- scale public infrastructure project, we also appreciate that not all
Californians are able to read each and every word in the audit report and therefore may be mislead by the
title and headlines contained within.
The audit report’s detail correctly describes the enormity and complexity of the high- speed train project. It
also correctly describes the organizational structure of the Authority and the recent budget changes that
have occurred to supplement staffing. It’s important to note that staffing levels have been a concern of the
Authority Board for some time, and which it has therefore taken significant action to address. This includes
contracting out for an organizational assessment and working quickly to hire a chief executive officer.
* California State Auditor’s comments appear on page 47.
1
California State Auditor Report 2009- 106
April 2010
42
This is a historic project for California, which has the potential to bring tens of thousands of jobs to the state
in the near term and bring improved mobility, increased economic strength, and environmental benefits in
the long- term. The Authority is committed to building the high- speed train system in a responsible way that
reflects the will of the people of the state, and in that task, we are grateful for the partnership and additional
oversight of entities such as the Bureau of State Audits.
Our response to the draft audit report follows the recommendations presented at the end of the report. Our
responses are contained in the attached document.
With appreciation,
( Signed by: Curt Pringle)
Curt Pringle, Chairman
California High- Speed Rail Authority
Attachment
California State Auditor Report 2009- 106 43
April 2010
Attachment
General Response
• The Authority is committed to transparency and believes strongly that additional spotlight on our
operations will ultimately make for a better high- speed train project for the state. The Authority
appreciates the input and recommendations from the Bureau of State Audits, and agrees with
its recommendations.
• We believe the audit process has identified areas where the Authority can improve its administrative
processes and project oversight. We appreciate that in many cases the draft audit takes note that the
Authority is already taking steps to improve its operations based on recommendations made earlier by
the LAO, as well as on findings in your draft audit.
• We do believe, however, that the report’s inflammatory title is overly aggressive considering that the
contents of the audit’s findings are not equally scathing.
• The draft audit report correctly describes the enormity and complexity of the high- speed train project. It
also correctly describes the organizational structure of the Authority and the recent budget changes that
have occurred to supplement staffing.
• This is a historic project for California, which has the potential to bring tens of thousands of jobs to the
state in the near term and bring improved mobility, increased economic strength, and environmental
benefits in the long- term. The Authority is committed to building the high- speed train system in a
responsible way that reflects the will of the people of the state.
BSA Recommendations and Authority Responses
Recommendation: The Authority should develop and publish alternative funding scenarios that reflect the
possibility of reduced or delayed funding from planned sources . . . should detail the implications of variations in
the level or timing of funding for the program and its schedule.
Response: The Authority agrees that it is important to be aware and plan for funding scenarios that
differ from the scenario we feel is most likely and have therefore presented those in our
December 2009 Report to the Legislature. It is important to note that alternate scenarios
would not vary in terms of the ratio of state to federal to private funding. Instead, alternate
scenarios would be presented as lengthened timelines for construction and for bringing online
revenue‑based passenger service, which in turn would mean an increased project cost as
inflation affects the cost of materials and labor.
Recommendation: Authority should further specify the potential cost of revenue guarantees and who would pay
for them.
Response: The Authority agrees that, as we move from the environmental planning phase to an
implementation phase, it will be important to further detail the concept of a minimum revenue
guarantee, its cost and the entity we would propose to be responsible for such a guarantee. The
Authority has already asked its financial consultant to address these issues within the context of
the overall proposed procurement and risk- transfer strategy, which is scheduled to commence
Elaine M. Howle
April 19, 2010
1
California State Auditor Report 2009- 106
April 2010
44
with a Request for Qualifications process late this year and with a Request for Proposals process
in 2011. Additionally, we have been working with our legal counsel on this issue and will ask for
a written opinion on the matter prior to bringing such a proposal before the Legislature.
Recommendation: Authority should assure that it implements planned actions related to managing risk.
Response: The Authority agrees that risk management is a top priority. Your report correctly notes that, to
that end, the Authority in February 2010 hired a risk insurance manager, and that in March 2010
the Program Management Team revised its risk and mitigation development protocol.
Additionally, in 2009, the Authority contracted for an independent organizational assessment,
which was conducted by the firm KPMG. This assessment recommended an organizational
structure that includes an office for “ Project Controls & Risk Management,” which would report
directly to the Authority’s chief executive officer. The Authority in November 2009 approved
the recommended organizational chart and has been working, within the state hiring process,
toward putting the staffing plan in place. One element of that is establishing an auditing office,
which is an element of the Authority’s 2010- 11 annual budget request.
Recommendation: Authority should ensure that the review group adheres to the Meeting Act of seek a formal
opinion from the Office of the Attorney General regarding whether the review group is subject to this act.
Response: The report correctly states that the Authority has received legal advice suggesting that the
Independent Peer Review Group was not intended to be set up as a public entity operating
within the structure required by Bagley- Keene. But we agree that this is a topic that merits
clarity. To that end, the Authority will continue to work on this issue with its lead legal counsel
( a deputy attorney general from the Office of the Attorney General). Additionally, the Authority
will approach the Legislature with the Bureau of State Audits’ question pertaining to its intent,
in that the Independent Peer Review Group is a legislatively created entity. The Authority
welcomes working with the Peer Review Group, and respects its independence.
Recommendation: Authority should track expenditures for [ administrative and preconstruction] activities and
develop a long- term spending plan for them. It should also develop procedures and systems to ensure it complies
with Recovery Act requirements.
Response: The Authority thanks the Bureau of State Audits for its recommendation to develop a long- term
spending plan for preconstruction activities and will do so. The Authority has already begun
to bring online a database for tracking expenditures, which will include detailed provisions
for monitoring expenditures by source and mechanisms to alert staff to potential problems.
This database system is scheduled to be in place in May 2010. Regarding the Recovery Act, the
Authority has already reached out to and begun working in cooperation with the Governor’s
Recovery Act Task Force, and will review all Recovery Act requirements and implement
procedures to track compliance.
Recommendation: Should amend the program management oversight consultant’s work plan to include a
critical review of progress reports for accuracy and consistency. Authority staff should also assure that the Program
Manager revises its progress reports to include information on the status of promised products and services.
Elaine M. Howle
April 19, 2010
California State Auditor Report 2009- 106 45
April 2010
Response: We agree that critical review of the Program Manager’s monthly progress reports should be