CSA
Summary
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High‑Speed Rail
Authority Follow‑Up
Although the Authority Addressed Some of Our
Prior Concerns, Its Funding Situation Has Become
Increasingly Risky and the Authority’s Weak
Oversight Persists
January 2012 Report 2011‑504
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CALIFORNIA STATE AUDITOR
Elaine M. Howle
State Auditor
Doug Cordiner B u r e a u o f S t a t e A u d i t s
Chief Deputy
555 Capitol Mall, Suite 300 Sacramento, CA 95814 916.445.0255 916.327.0019 fax www.bsa.ca.gov
January 24, 2012 2011-504
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
This report presents the results of a follow-up review the Bureau of State Audits (bureau)
conducted concerning the efforts by the High-Speed Rail Authority (Authority) to implement
recommendations from an earlier audit report that we issued in April 2010. The bureau’s report
titled High-Speed Rail Authority: It Risks Delays or an Incomplete System Because of Inadequate
Planning, Weak Oversight, and Lax Contract Management, Report 2009-106, examined the
Authority’s 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. As a result of our follow-up audit, we concluded that the Authority has fully
implemented four recommendations, partially implemented five, and taken no action on the
remaining one.
Although the Authority has implemented some of the recommendations we made in our prior
report, significant problems persist. For example, the program’s overall financial situation has
become increasingly risky. This is in part because the Authority has not provided viable funding
alternatives in the event that its planned funding does not materialize. In its 2012 draft business
plan, the Authority more than doubled its previous cost estimates for phase one of the program,
to between $98.1 billion and $117.6 billion. Of this amount, the Authority has secured only
approximately $12.5 billion to date. Further, the Authority’s 2012 draft business plan still lacks key
details about the program’s costs and revenues.
In addition to our concerns related to the Authority’s 2012 draft business plan, we also identified
a number of critical, ongoing problems involving its oversight of the program. Specifically, in
part because the Authority is significantly understaffed, it has delegated significant control to its
contractors—especially the entity that manages the program (Program Manager). The Authority
relies on the Program Manager to provide accurate, consistent, and useful information in its
monthly progress reports. However, we found that these reports were often inaccurate and that
at times the Program Manager appeared to misinform the Authority about the speed with which
contractors for each region performed tasks. Finally, even though the majority of the Authority’s
role in administering the program involves its management of contracts, we discovered during the
course of our work that the Authority had engaged in inappropriate contracting practices involving
information technology services. The nature of these problems suggests that the Authority needs
to significantly improve its internal controls to ensure that it effectively manages its contracts.
Respectfully submitted,
ELAINE M. HOWLE, CPA
State Auditor
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High‑Speed Rail
Authority Follow‑Up
Although the Authority Addressed Some of Our
Prior Concerns, Its Funding Situation Has Become
Increasingly Risky and the Authority’s Weak
Oversight Persists
January 2012 Report 2011‑504
Blank page inserted for reproduction purposes only.
California State Auditor Report 2011-504 vii
January 2012
Contents
Summary 1
Introduction 7
Chapter 1
The High‑Speed Rail Authority’s Funding Situation Has Become
Increasingly Risky 15
Recommendations 25
Chapter 2
The High‑Speed Rail Authority’s Oversight of the Program
Remains Weak 27
Recommendations 46
Appendix A
Scope and Methodology 49
Appendix B
Status of Recommendations 53
Responses to the Audit
California High‑Speed Rail Authority 57
California State Auditor’s Comments on the Response From
the California High‑Speed Rail Authority 67
State and Consumer Services Agency, Department of
General Services 71
viii California State Auditor Report 2011-504
January 2012
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California State Auditor Report 2011-504 1
January 2012
Summary
Results in Brief Audit Highlights . . .
Since 1996 state law has charged the High‑Speed Rail Authority Our review of the High‑Speed Rail
(Authority) with the development and implementation of intercity, Authority’s (Authority) progress in
high‑speed rail service. As a result, when voters approved addressing issues we raised in our
the Safe, Reliable High‑Speed Passenger Train Bond Act for the April 2010 report, revealed the following:
21st Century (Proposition 1A) in November 2008, the Authority
became responsible for managing the $9 billion provided for » Although it has implemented some of our
the construction of a high‑speed rail network (program). In recommendations, the Authority has not
2009 the Joint Legislative Audit Committee asked the Bureau completely addressed others.
of State Audits to assess the Authority’s readiness to administer
these funds, resulting in our April 2010 report titled High‑Speed » The high‑speed rail network’s (program)
Rail Authority: It Risks Delays or an Incomplete System Because overall financial situation has become
of Inadequate Planning, Weak Oversight, and Lax Contract increasingly risky.
Management, Report 2009‑106.
• The cost estimates for phase one
In the nearly two years since the issuance of that report, the increased to between $98.1 billion
Authority has implemented some of our recommendations but it and $117.6 billion—of which
has still not completely addressed others. Specifically, the Authority approximately $12.5 billion has
fully implemented four recommendations, partially implemented been secured.
five, and took no action on one. Although the Authority has
secured funding for the Initial Construction Section (construction • Although the Authority identifies
section)—the first portion of the program—the program’s overall the federal government as its largest
financial situation has become increasingly risky, in part because potential funding source, the plan
the Authority has not provided viable funding alternatives provides few details about how it
in the event that its planned funding does not materialize. In its expects to secure this money.
2012 draft business plan, the Authority more than doubles its cost
estimates for phase one of the program, to between $98.1 billion • The cost estimates do not include
and $117.6 billion. Of this amount, the Authority has secured phase one’s operating and
approximately $12.5 billion to date. The success or failure of the maintenance costs, yet based on data
program consequently depends upon the Authority’s ability to in the plan these costs could total
obtain between $85.6 billion and $105.1 billion by 2033. In its approximately $96.8 billion from
2012 draft business plan, the Authority identifies the federal 2025 through 2060.
government as by far the largest potential funding source
for the program, yet the plan provides few details indicating how » The accuracy of the Authority’s estimates
the Authority expects to secure this money. Further, the plan does of the program’s profits depends upon
not present viable alternatives in the event that it does not receive its ridership projections, which are
significant federal funds. In fact, one of the funding options the fundamental to private investors’ interest.
Authority characterizes as an alternative is not yet approved for
use on high‑speed rail projects. Although it is possible that the • An independent assessment of
Authority may obtain the necessary funding to move forward with ridership projections was conducted by
the program, it risks significant delays or the inability to proceed if a handpicked group.
it does not.
• The ridership review group presented
Further, the Authority’s 2012 draft business plan still lacks some several long‑term concerns.
key details about the program’s costs and revenues. In particular,
only within the business plan’s chapter about funding—more
continued on next page . . .
2 California State Auditor Report 2011-504
January 2012
» The Authority continues to struggle to than 100 pages into the plan—does the Authority mention that
provide an appropriate level of oversight. phase one could cost as much as $117.6 billion, whereas it uses
one of its lower cost estimates of $98.5 billion throughout the plan.
• It is significantly understaffed and has Moreover, neither of these cost estimates includes phase one’s
struggled to oversee its contractors operating and maintenance costs, yet based on data included in the
and subcontractors, who outnumber 2012 draft business plan, we estimate that these costs could total
its employees by about 25 to one. approximately $96.9 billion from 2025 through 2060. The Authority
projects that the program’s revenues will cover these costs but it
• It has delegated significant control to does not include any alternatives if the program does not generate
its contractors and may not have the significant profits beginning in its first year of operation. Further,
information necessary to make critical the plan assumes, but does not explicitly articulate, that the State
decisions about the program’s future. will not receive any profits between 2024 and 2060, because private
sector investors will receive all of the program’s net operating
• It engaged in inappropriate profits during these years in return for their investment.
contracting practices involving
information technology (IT) services The accuracy of the Authority’s estimates of the program’s
by splitting IT services totalling profits depends upon its ridership projections, which are thus
$3.1 million into 13 individual fundamental to private investors’ interest. The ridership model
contracts with one vendor. the Authority presents in its 2012 draft business plan assumes
an average ticket price of $81 and projects that passengers will
take a total of 29 to 43 million annual trips by the completion of
phase one. However, when the Authority’s chief executive officer
commissioned a ridership review group to independently assess the
ridership projections, he handpicked the group’s members, which
may call into question the independent nature of their assessment.
Further, although the ridership review group determined that the
ridership model was suitable for use in the 2012 draft business
plan, the group presented several long‑term concerns, such as
potential biases in the survey data used in the model’s development.
The ridership review group’s August 2011 report implied that
if the Authority does not address these long‑term concerns, the
model may only be useful for projecting ridership for the operating
section and not for the program’s remaining sections.
In addition to our concerns related to the Authority’s 2012 draft
business plan, we also identified a number of critical, ongoing
problems involving its oversight of the program. Specifically, in
our prior report, we concluded that the Authority’s processes
for monitoring the performance and accountability of its
contractors—especially the entity that manages the program
(Program Manager)—were inadequate. During our follow‑up
review, we found that the Authority has continued to struggle
to provide an appropriate level of oversight, in part because it is
significantly understaffed. As of August 2011 the Authority had
21.5 filled positions to oversee the multibillion‑dollar program.
Without sufficient staffing, the Authority has struggled to oversee
its contractors and subcontractors, who outnumber its employees
by about 25 to one.
California State Auditor Report 2011-504 3
January 2012
Our follow‑up also revealed that the Authority has failed to
ensure that it and the public is aware of its contractors’ and
subcontractors’ potential conflicts of interest. Although the
Authority’s conflict‑of‑interest code requires its contractors to file
statements of economic interest that help to identify any potential
conflicts of interest that they may have, our review found that
some of the contractors had failed to file their statements. Further,
the Authority does not require any of its subcontractors to file
statements of economic interest. As a result, the Authority has no
way to verify that subcontractors do not have real or perceived
conflicts of interest.
In part because the Authority has so few staff, it has delegated
significant control to its contractors. As a result, it may not
have the information necessary to make critical decisions about
the program’s future. For example, when we reviewed three of the
monthly progress reports that the Program Manager submitted to
the Authority to inform it of the program’s progress, we found over
50 errors or inconsistencies of various types. Most significantly,
we noted differences between what was reported in the regional
contractors’ reports and what the Program Manager summarized
and reported to the Authority, thus demonstrating that the Program
Manager had provided the Authority with misleading information.
Additionally, the Authority has been minimally involved in the
risk‑management process, instead relying almost completely on its
Program Manager to both identify and mitigate potential problems.
According to the chief deputy director, the Program Manager is
currently more engaged than the Authority in risk management
because the Authority has not been able to hire a risk manager.
Consequently, the Authority cannot be certain that it is aware of
and addressing those risks that could significantly delay or even halt
the program.
The largest part of the Authority’s role in administering the
program is managing contracts; however, during the course
of our work, we discovered that the Authority had engaged
in inappropriate contracting practices involving information
technology (IT) services. Specifically, the Authority split its IT
services totalling $3.1 million into 13 individual contracts with
one vendor over a 15‑month period and awarded the contracts
before obtaining the proper bids. The State Contracting Manual
expressly prohibits agencies from splitting contracts to avoid
competitive bidding requirements and purchasing thresholds for
any series of related services that would normally be combined and
bid as one job. As a result of the Authority’s actions, we believe
that it violated the prohibitions set forth in the State Contracting
Manual. Further, the nature of the problems we discovered suggests
that the Authority needs to significantly improve its internal
controls to ensure that it effectively manages its contracts.
4 California State Auditor Report 2011-504
January 2012
Finally, in our April 2010 report, we concluded that the Authority
did not have a system in place to track its expenditures in order to
ensure the program’s compliance with Proposition 1A’s limitations
on administrative and preconstruction task costs. During our
follow‑up review, we found that although the Authority has made
some improvements to its process, it still has not completed
its expenditure tracking system. According to state law, the
Authority can use only 2.5 percent ($225 million) of its portion
of bond funds from Proposition 1A for administration and only
10 percent ($900 million) for planning, environmental review,
and preliminary engineering (preconstruction tasks). According
to the chief deputy director, the Authority had been developing a
system to track its expenditures but paused further development
in November 2011 due to staff vacancies as well as a lack of clarity
on how to categorize its program costs. Despite the lack of a
system, we observed that the Authority is making attempts to
categorize its expenditures; however, until it has a system in place
for tracking its expenditures, it cannot ensure compliance with
Proposition 1A and risks running out of the bond funds available for
administration and preconstruction task costs.
Recommendations
To ensure that it has adequately addressed all of the concerns
outlined in our April 2010 report, as indicated in Appendix B, the
Authority should fully implement the recommendations of that
report. We have made the following additional recommendations
based on our follow‑up review:
To ensure that the public and the Legislature are aware of the full
cost of the program, the Authority should clearly report total costs,
including projected operating and maintenance for the program.
Additionally, the Authority should clearly disclose that the 2012
draft business plan assumes that the State will only be receiving
profits for the first two years of operation in 2022 and 2023, and will
potentially not receive profits again until 2060 in exchange for the
almost $11 billion it assumes it will receive from the private sector.
To assure independence and instill public confidence in the
process regarding the Authority’s ridership model, the Legislature
should draft legislation that establishes an independent ridership
review group.
To ensure that it has adequate staff to effectively oversee the
program, the Authority should continue to fill its vacant positions.
California State Auditor Report 2011-504 5
January 2012
To comply with the Political Reform Act of 1974, the Authority
should establish written policies and procedures for tracking
whether all designated employees and consultants have completed
and filed their statements of economic interests on time, thereby
identifying any potential conflicts of interest.
To increase transparency and to ensure that it is aware of any
financial interest that a subcontractor may have in the program,
the Authority should require subcontractors to file statements of
economic interest.
To ensure that the Program Manager’s progress reports are
accurate, consistent, and useful, the Authority should conduct
monthly comparisons of the Program Manager’s and regional
contractors’ progress reports to verify consistency.
To be aware of and respond effectively to circumstances that could
significantly delay or halt the program, the Authority should hire a
risk manager as soon as possible. Until then it should designate and
require Authority staff to attend risk‑management meetings
and workshops. Finally, the Authority should monitor the Program
Manager’s risk‑management practices to ensure that either it or
the Program Manager identifies and promptly and appropriately
addresses risks.
To effectively manage its contracts, the Authority should develop
procedures to detect and prevent contract splitting.
Agency Comments
Although the Authority generally agreed with our conclusions and
stated that it will take steps to implement our recommendations,
it disagreed with our assessment that the Authority’s funding
situation is risky. The Authority also disagreed with some of
our conclusions and recommendations regarding the Program
Manager’s monthly progress reports.
6 California State Auditor Report 2011-504
January 2012
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California State Auditor Report 2011-504 7
January 2012
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. In
November 2008 voters approved the Safe, Reliable High‑Speed
Passenger Train Bond Act for the 21st Century (Proposition 1A), which
authorizes the State to sell $9 billion in general obligation bonds for
planning, engineering, and construction of a high‑speed rail network
(program) and an additional $950 million in general obligation bonds
either for capital improvements to other rail systems connecting to
it or for capacity enhancements or safety improvements to those rail
systems. The state law that placed Proposition 1A on the ballot stated
the Legislature’s intent that the entire network, from Sacramento to
San Diego, be completed no later than 2020. The law also mandated
that nonstop service between San Francisco and Los Angeles must take
no longer than two hours and 40 minutes.
In 2009 the Joint Legislative Audit Committee (audit committee) asked
the Bureau of State Audits (bureau) to assess the Authority’s readiness
to manage the Proposition 1A funds. In April 2010 we issued a report
titled High‑Speed Rail Authority: It Risks Delays or an Incomplete
System Because of Inadequate Planning, Weak Oversight, and Lax
Contract Management, Report 2009‑106. In that report, we concluded
the Authority had not adequately planned for the future development
of the program. According to our statutory authority and the audit
standards under which we operate, our long‑standing practice is to
conduct follow‑up reviews of audits when resources are available and
we determine it is prudent to do so. Additionally, state law requires
us to periodically examine the Authority’s use of the proceeds from
Proposition 1A bond funds. For these reasons, we decided to conduct
an audit of the Authority following the scope and methodology
described in Appendix A. We present the status of the Authority’s
implementation of our prior report’s recommendations in Appendix B.
The 2012 Draft Business Plan
The Authority’s business plan is a key document that describes the
Authority’s vision for the program. The Authority published its
first business plan in 2000, then released its second in November 2008,
three days after voters approved Proposition 1A. In March 2009
the Legislative Analyst’s Office stated that the November 2008 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 the Authority to submit a
8 California State Auditor Report 2011-504
January 2012
revised business plan by December 15, 2009, that included stated details
about the program. State law now requires the Authority to submit to the
Legislature a business plan every two years. To meet this requirement,
the Authority released its 2012 draft business plan on November 1, 2011,
and planned to submit the finalized plan by January 1, 2012. As of
December 2011 the Authority was accepting comments from the
public, legislative hearings, and other stakeholders and, according to
the Authority’s chief deputy director, it will likely make adjustments or
edits based on the feedback during this comment period. The Authority
anticipates finalizing the business plan by approximately February 1, 2012.
Although some elements of the 2012 draft business plan remain
unchanged from the 2009 plan, in other ways it departs significantly
from what the Authority previously proposed. The program continues
to contain multiple phases of construction. According to both the 2009
business plan and the 2012 draft business plan, phase one will run from
San Francisco in the north to Los Angeles‑Anaheim in the south, and
phase two will add sections north to Sacramento and south to San Diego.
However, in the 2012 draft business plan, the Authority has more
than doubled its estimate for the cost for phase one of the program,
from $42.6 billion to between $98.1 billion and $117.6 billion.1 Further,
according to the 2012 draft business plan, phase one will not be fully
operational until 2034—14 years later than the Authority’s 2009 estimate.
It also shifts the program’s starting point from Los Angeles‑to‑Anaheim
to approximately Fresno‑to‑Bakersfield in the Central Valley because
the Authority believes this route is the only location where it can
test the high‑speed train technology at its top speed of 220 miles per
hour. The 2012 draft business plan also states that the Authority and
the Federal Railroad Administration determined that the Central Valley
was an appropriate location in which to start construction because of
certain criteria related to the use of federal funds, such as the need for a
September 2017 completion date for the program’s first section.
The 2012 draft business plan also includes two new approaches
for constructing the program: blended operations and phased
implementation. The blended operations approach proposes that
the high‑speed rail share existing commuter rail infrastructure and
facilities. The phased implementation approach divides the program
into smaller, discrete sections that can operate independently so that
the Authority can match work to available funding. As a result of the
phased implementation approach, the Authority divided phase one of
the program into four sections, each with different costs and timelines,
as shown in Table 1. According to the 2012 draft business plan, the
Authority plans to begin construction on the Initial Construction
Section (construction section)—the first portion of the Initial Operating
1 Given the long‑term nature of the program, the Authority used the year‑of‑expenditure dollars
in its 2012 draft business plan estimates, which the Authority calculated assuming a 3 percent
inflation rate. We use these same estimates throughout this report.
California State Auditor Report 2011-504 9
January 2012
Section (operating section)—in 2012, at an estimated cost of
approximately $6 billion. Figure 1 on the following page depicts the
proposed routes for each section of the program and Figure 2 on
page 11 shows planned timelines. Should progress of the rest of the
operating section be substantially delayed, the Authority contends
that the construction section can become an operational railway by
allowing other passenger trains, such as Amtrak, to travel on it.
Table 1
High‑Speed Rail Authority’s Planned Sections, Costs, and Timeline
COST
WITH NORTH WITH SOUTH
OPERATING OPERATING CONSTRUCTION
PHASES OF PROGRAM SEGMENTS SECTION SECTION TIMELINE
Phase One—San Francisco Initial Construction Section (construction section):
to Los Angeles/Anaheim 130‑mile “spine” through the Central Valley, stretching
Approximately 520 miles of from just north of Fresno to approximately nine miles
high‑speed rail system north of Bakersfield. It does not include passenger stations,
$6 billion 2012–17
maintenance and support facilities, traction electrification
systems, and train control and communications systems
as well as the necessary high‑speed trains required
for services.
Initial Operating Section (operating section):
Two options have been developed for extending the
construction section:
• North operating section (Central Valley to Bay)—
Approximately 290 miles long, running from Bakersfield
$24.7 billion $27.2 billion 2015–21
to Merced and San Jose.
OR
• South operating section (Central Valley to Los Angeles
Basin)—Approximately 300 miles long, running from
Merced to the San Fernando Valley.
Bay to Basin:
Approximately 410 miles long and includes construction
of a complete high‑speed rail system from San Jose and
$24 billion $21.1 billion 2021–26
Merced extending south to the San Fernando Valley.
Provides the platform for blended high‑speed and
commuter rail operations in metropolitan areas.
Completion of Remainder of Phase One:
The cost to complete the high‑speed rail system, which
is approximately 520 miles long, from San Francisco $43.8 billion 2026–33
and Merced to the Union Station in Los Angeles and the
Regional Transportation center in Anaheim.
Total Cost of Phase One $98.5 billion $98.1 billion 2012–33
Phase Two—Sacramento and Extends the phase one system to Stockton and Sacramento
San Diego via Merced in the north and to San Diego via the Inland
Empire in the south. This will complete the approximately
Unknown Unknown
800‑mile statewide high‑speed rail project as originally
proposed. The High‑Speed Rail Authority (Authority) does
not present cost data for phase two.
Total Cost of Entire Program Unknown Unknown
Source: The Authority’s 2012 draft business plan.
Note: Although the Authority mentions in its 2012 draft business plan that the program could cost up to $117.6 billion, the plan does not break down
these additional costs by section in year‑of‑expenditure dollars. As a result, we only present the cost breakdown for the lower cost estimates.
10 California State Auditor Report 2011-504
January 2012
Figure 1
Proposed Routes for the High‑Speed Rail Network
Sacramento
Stockton
San Francisco
Modesto
Millbrae
San Jose Merced
Gilroy
Fresno
Kings/Tulare
Phase One
Bakersfield
Palmdale
San Fernando Valley
Los Angeles Riverside
Anaheim
25 0 25 50 75
Miles
San Diego
Phase One: San Francisco to Los Angeles/Anaheim Phase Two: Sacramento to San Diego
Initial Construction Section (construction section) Extensions to Sacramento and San Diego
Initial Operating Section (operating section) South Station
Bay to Basin
Remaining sections to complete phase one
Station
Source: The High‑Speed Rail Authority’s 2012 draft business plan.
Note: This map assumes the construction of Initial Operating Section South. Therefore, the Bay to Basin construction will be to the north connecting to
San Jose and Merced.
California State Auditor Report 2011-504 11
January 2012
Figure 2
Construction and Operation Timeline by Section
2102 3102 4102 5102 6102 7102 8102 9102 0202 1202 2202 3202 4202 5202 6202 7202 8202 9202 0302 1302 2302 3302 4302 5302
Initial Construction Section—Construction
Initial Operating Section—Construction
Initial Operating Section—In Operation
Bay to Basin—Construction
Bay to Basin—In Operation
Remainder of Phase One—Construction
Phase One—In Operation
Phase Two ?
Source: The High‑Speed Rail Authority’s (Authority) 2012 draft business plan.
Note: Although the 2012 draft business plan begins its financial projections in 2013, the Authority estimates that construction on the Initial
Construction Section will start in 2012.
Proposition 1A Bond Expenditures
Proposition 1A sets limits on how the Authority can request and
spend its bond funds. These include a 2.5 percent ($225 million)
cap on administrative costs associated with the program, which
the Legislature can 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 (preconstruction tasks) to 10 percent of
its total bond funds ($900 million). We discuss the Authority’s
attempts to track the program’s expenditures to ensure its
compliance with these limits in Chapter 2.
As of June 30, 2011, the State Treasurer’s Office had sold
approximately $410 million of the $9.95 billion in bonds
authorized by voters. As Table 2 on the following page shows,
the Authority spent $115 million and $88 million during fiscal
years 2009–10 and 2010–11, respectively, or about 2 percent
of the total amount of $9.95 billion. The Authority doubled
its personal services expenditures, which include staff salaries
and benefits, during the same two‑year period. This increase
in personal services expenditures occurred because it filled
vacant positions—it increased its staff from 13.5 positions in
fiscal year 2009–10 to 21.5 positions in fiscal year 2010–11. The
table also shows that during this two‑year period, the Authority
spent approximately $113 million and $80 million, respectively,
on consultant and professional services, neither of which count
12 California State Auditor Report 2011-504
January 2012
toward the administrative cap discussed earlier. The contractor that
serves as the Authority’s program manager (Program Manager)
was the largest single recipient of Authority funds, with a
$199 million contract extending more than six years. With
over 100 full‑time equivalents, the Program Manager provides
day‑to‑day management and directs the contractors working on
specific sections of the program. The Authority also contracts
with six regional contractors to build the different sections of
the program.
Table 2
High‑Speed Rail Authority Expenditures of High‑Speed Passenger Train
Bond Fund by Category for Fiscal Years 2009–10 and 2010–11
CATEGORIES FISCAL YEAR 2009–10 FISCAL YEAR 2010–11
Personal services $1,192,109 $2,264,618
Consultant and professional services—external 113,211,054 80,417,410
Other operating expenses and equipment 2,468,477 5,284,209
Subtotals 116,871,640 87,966,237
Less reimbursements 1,500,000 –
Total Expenditures $115,371,640 $87,966,237
Source: Bureau of State Audits’ analysis of unaudited California State Accounting and Reporting
System reports.
Notes: Our calculation of total expenditures excludes approximately $76 million in encumbrances
that are commitments related to unperformed contracts for goods or services.
The increase in personal services expenditures is primarily due to the High‑Speed Rail Authority
(Authority) filling open positions. The total number of filled positions increased from 13 in June 2010
to 21 in June 2011.
The $1.5 million reimbursement was related to an interagency agreement between the California
Department of Transportation and the Authority.
Oversight Activities
The Authority’s nine board members have exclusive responsibility
for the planning, construction, and implementation of a high‑speed
passenger train network. The board’s operations committee—a
small group of board members that generally meets quarterly—
receives updates from the Program Manager and the consultant
for program management oversight (oversight consultant) on the
program’s status.
State law requires the Authority to establish an independent peer
review panel for the purpose of reviewing and analyzing its
different plans, including the business plans. State law directs the
Authority to establish this panel, but it leaves appointment of
the panel’s members up to four agencies—the State Treasurer’s
Office, the State Controller’s Office, the Department of Finance,
California State Auditor Report 2011-504 13
January 2012
and the Business, Transportation and Housing Agency. In our prior
report, we concluded that the peer review panel is subject to the
Bagley‑Keene Open Meeting Act and must hold meetings that are
properly announced and open to the public when it analyzes and
evaluates the Authority’s plans.
Finally, in January 2010 the Authority entered into an $8 million,
three‑year contract with its oversight consultant. The oversight
consultant is responsible for reviewing and monitoring the
Program Manager’s work to ensure that it is on schedule and in
conformance with approved work plans. The use of one contractor
to review the work of another is not unique to the Authority. The
California Department of Transportation and the Federal Transit
Administration have used consultants to oversee other consultants.
14 California State Auditor Report 2011-504
January 2012
Blank page inserted for reproduction purposes only.
California State Auditor Report 2011-504 15
January 2012
Chapter 1
THE HIGH‑SPEED RAIL AUTHORITY’S FUNDING SITUATION
HAS BECOME INCREASINGLY RISKY
Chapter Summary
As discussed in the Introduction, in April 2010 we issued a report
titled High‑Speed Rail Authority: It Risks Delays or an Incomplete
System Because of Inadequate Planning, Weak Oversight, and Lax
Contract Management, Report 2009‑106. This report concluded that
the High‑Speed Rail Authority (Authority) had not adequately planned
for the future development of the high‑speed rail network (program).
Since our previous report, the Authority has addressed some of our
recommendations. For example, it is no longer relying on revenue
guarantees to attract private investment in the project. Further, the
Authority has made several improvements to its previous business
plan. In particular, the total cost of the first portion of the program—
the Initial Construction Section (construction section)—is secured.
Additionally, as we note in the Introduction, the Authority is now
proposing a phased implementation approach that divides the program
into smaller, discrete sections that can operate independently so that
the Authority can match work to available funding. However, we still
have significant concerns about the Authority’s 2012 draft business
plan. In particular, while the Authority did make some attempts to
present alternatives in the event that its planned funding sources do
not materialize, we do not believe viable alternatives are identified. As a
result, the program’s funding situation has become increasingly risky.
The Authority’s 2012 draft business plan does not fully address these
risks. The Authority admits that the success or failure of the program
depends on its ability to secure tens of billions of dollars of federal
funding, and yet the plan fails to present specific steps for acquiring
these or alternative funds. Further, the plan’s lack of detail in its
presentation of certain costs and revenues compromises the Authority’s
transparency. Finally, the reasonableness of the Authority’s business
plan hinges largely on the accuracy of its ridership projections, yet the
Authority could have done more to ensure the credibility of its ridership
model. In isolation, any one of these issues could pose a threat to the
program; together, they raise concerns about the program’s future.
The Authority Has Not Identified Viable Alternatives in the Event That
Its Planned Funding Does Not Materialize
As the Authority’s cost estimates for the program have risen,
the program’s success has become increasingly dependent on the
Authority’s ability to secure tens of billions of dollars of federal funds.
Our prior report concluded that the Authority’s 2009 business plan
16 California State Auditor Report 2011-504
January 2012
lacked details regarding how it proposed to finance the program and
that the program risked significant delays if the Authority did not
develop a strategy for obtaining or replacing federal funds. As the federal
government continues to be by far the largest funding source in the
Authority’s 2012 draft business plan, we expected the plan to provide
specific details indicating how the Authority intends to secure this
money, as well as viable alternatives in the event that it does not receive
federal funds in the amount envisioned. However, we found that the
2012 draft business plan continues to lack this information. Although it
is possible that the Authority may obtain the necessary funding to move
forward with the program, it risks significant delays or the inability to
proceed if it does not.
The Authority’s cost estimates for the program have increased
significantly since its last estimate; however, it has not finalized its
funding plans. State law requires the Authority to prepare a business plan
by January 1, 2012, and to submit a draft of the plan to various legislative
committees 60 days before that date. To meet this requirement, the
Authority released its 2012 draft business plan on November 1, 2011;
however, as of December 2011, according to the chief deputy director, the
Authority was taking in comments from the public, legislative hearings,
and other stakeholders, and it will likely make adjustments or edits based
on the feedback it receives during this comment period. The Authority
anticipates releasing the business plan by approximately February 1, 2012.
The Authority estimates that The Authority estimates in its 2012 draft business plan that phase
phase one of the program will one of the program will cost between $98.1 billion and $117.6 billion.2
cost between $98.1 billion and Of this amount, the Authority has secured3 about $12.5 billion to date:
$117.6 billion but has only secured $9 billion in Safe, Reliable High‑Speed Passenger Train Bond Act for
about $12.5 billion to date. the 21st Century (Proposition 1A) funds and $3.5 billion in federal funds.
The federal funds consist of $2.55 billion from the American Recovery
and Reinvestment Act of 2009 (Recovery Act) and about $930 million in
another federal appropriation that, according to the 2012 draft business
plan, includes funds redistributed from the cancellation of high‑speed
rail projects by Florida, Ohio, and Wisconsin. Therefore, to complete
phase one of the program, the Authority will need to secure between
$85.6 billion and $105.1 billion in additional funding—an amount
comparable to the State’s entire annual General Fund budget.
Although the total cost of the first portion of the operating section—the
construction section—is secured, the cost of the remainder of the Initial
Operating Section (operating section) is not. To fund the $6 billion cost
of the construction section, the Authority plans to use $3.3 billion of
2 Given the long‑term nature of the program, the Authority used the year‑of‑expenditure dollars in
its 2012 draft business plan estimates, which the Authority calculated assuming a 3 percent inflation
rate. We use these same estimates throughout this report.
3 Throughout our report we refer to the Authority’s secured funding. This includes the federal
funding authorized under the Recovery Act and Omnibus Appropriations Act of 2010, as well as the
$9.95 billion in bond funds authorized by Proposition 1A in 2008. However, the Legislature must
appropriate the Proposition 1A bond funds before the Authority can use them.
California State Auditor Report 2011-504 17
January 2012
the aforementioned $3.5 billion in federal funds as well as $2.7 billion
of Proposition 1A proceeds. The Authority estimates in its 2012 draft
business plan that the remainder of the operating section will cost
between $24.7 billion and $27.2 billion as depicted in Table 1 in the The Authority estimates that the
Introduction. After paying for administration and preconstruction tasks, operating section will cost between
only $5.3 billion of Proposition 1A funding would be left to cover the $24.7 billion and $27.2 billion, of
remaining $24.7 billion to $27.2 billion, resulting in a shortfall of at least which $5.3 billion is secured—
$19.4 billion. Figure 3 on the following page details the projected costs leaving a shortfall of at least
and planned funding sources for each of the sections of the program. $19.4 billion.
The 2012 draft business plan includes a funding plan that assumes that
federal funds must cover 80 percent of the operating section’s cost.
According to the financial consultant who assisted in preparing the
Authority’s 2012 draft business plan, the project requires that 80 percent
come from federal funding through the completion of the operating
section because of the fixed amount committed by the State and the
revenue guarantee prohibition that limits the amount of early private
participation. The 2012 draft business plan indicates that the Authority
based its estimate of federal participation in the program on the fact
that the federal government has historically provided 50 percent
to 80 percent of the funding for major transportation investments,
including highway, transit, and aviation sector‑related projects. However,
a significant portion of the funds for highway and transit programs has
typically come from the Highway Trust Fund, which has a dedicated
revenue source—the federal tax on motor fuels. As the U.S. Government
Accountability Office (GAO) noted in a March 2009 report on the future
development of high‑speed rail, the federal government has historically
provided funding for high‑speed rail from general revenues rather than
from a dedicated funding source. The GAO stated that high‑speed rail
projects must consequently compete with other kinds of demands on
federal funds such as national defense, education, and health care.
In addition to continuing to rely heavily on federal funds, as indicated in
the 2012 draft business plan, the Authority has failed to provide sufficient
detail as to how it intends to obtain those funds and did not report
viable alternative funding options if it does not receive them, despite our
prior recommendation as well as a state law requiring it to do so before
spending some of its 2011 Budget Act appropriation. The Authority
did make some attempts to present funding alternatives in its 2012
draft business plan. However, Qualified Tax Credit Bonds (QTCBs)—a
funding option the Authority described as an alternative—does not seem
to be an actual alternative because the Authority has also included it as
a critical part of its primary funding plan. In other words, the Authority
based its primary funding plan on this alternative, making it difficult to
determine how the Authority would proceed with the program should it
fail to secure these funds. Moreover, QTCBs are not yet approved for use
on high‑speed rail projects.
18 California State Auditor Report 2011-504
January 2012
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California State Auditor Report 2011-504 19
January 2012
The Authority plans to use $13.3 billion in net proceeds from issuing
QTCBs, as illustrated in Figure 4 on the following page, to construct
the program. According to the director of the public finance
division at the State Treasurer’s Office (director of public finance),
QTCBs are bonds in which the federal government subsidizes the
issuer’s—in this case, the Authority’s—borrowing costs through tax
credits or direct payments from the federal government. Further, he
explained that in its 2012 draft business plan, the Authority plans to
issue QTCBs and use a portion of the proceeds to purchase—and
therefore invest in—Proposition 1A bonds. The Authority plans to
use the principal and interest payments it would receive from the
State as the holder of Proposition 1A bonds, as well as the interest
generated from investing those payments over 30 years, to repay the
principal on the QTCBs. The director of public finance also stated
that investors would be unlikely to accept the risk that future earnings
would be sufficient to meet the debt service requirements on the
QTCBs, and they would therefore not purchase QTCBs that relied on
these types of future interest earnings for repayment. He also stated
that a number of the QTCB characteristics that are assumed in the
Authority’s 2012 draft business plan, which are necessary to generate
construction proceeds, have not been features of earlier federal
QTCB programs.
Although the QTCBs may be a potential funding source for the
program, we are concerned that they may be difficult for
the Authority to obtain. In particular, while Congress has
authorized QTCB programs for projects related to education,
energy conservation, and renewable energy, it has not authorized
QTCBs for high‑speed rail projects. Finally, according to the
director of public finance, there is no current or proposed federal
law that would authorize direct payment of QTCBs for high‑speed
rail as proposed by the Authority, and state law would need to
be amended to allow the Authority to both issue QTCBs and
to purchase Proposition 1A bonds.
One other possible source of future federal funding that the One possible source of future
Authority presents in its 2012 draft business plan also appears federal funding that the Authority
unlikely. While the plan mentions the federal Safe, Accountable, presents in its 2012 draft business
Flexible, Efficient Transportation Equity Act: A Legacy for Users plan appears unlikely.
(SAFETEA‑LU) as a potential source of funds for the program,
the plan also notes that SAFETEA‑LU is struggling to maintain
its current spending levels and may not be a viable option for
high‑speed rail.
The Authority included some nonfederal funding sources in its
2012 draft business plan, yet its lack of detail about these funding
sources makes adequately assessing the accuracy of its projections
difficult. For phase one, the Authority hopes to obtain more than
$10 billion from what it calls “other funds” that it estimates will
20 California State Auditor Report 2011-504
January 2012
come from state, local, and private development. The plan does
not give any detail as to what the other state fund sources are or
how the Authority plans to obtain them, but the plan mentions
the Authority’s strategy for obtaining local and privately generated
revenues by seeking opportunities with local and private partners,
such as targeting private revenues from parking fees. The
Authority’s financial consultant stated that it reached its estimate
of $10 billion by subtracting the federal funds it still needs and the
federal funds and Proposition 1A funds it has already secured from
the total cost of the program; however, the Authority does not offer
alternatives should it fail to receive these funds, which may further
increase its reliance on federal funds.
Figure 4
The High Speed Rail Authority’s Funding by Source: 2013 Through 2033
(Phase One)
(Dollars In Millions)
Federal grants—$3,316 (3%)
Secured
Funds*
State bonds (Proposition 1A)—$8,001 (8%)
Net operating profit—$351 (1%)
Other funds†—$10,099 (10%)
Federal grants—
$52,048 (53%) Private capital—$10,983 (11%)
Qualified Tax Credit Bond
proceeds—$13,289 (14%)
Source: The High‑Speed Rail Authority’s (Authority) 2012 draft business plan assumes a scenario
where extension of Initial Operating Section South occurs first.
* Secured funds include the federal funding authorized under the American Reinvestment
and Recovery Act of 2009 and Omnibus Appropriations Act of 2010, as well as the bond
funds authorized by Proposition 1A in 2008. However, the Legislature must appropriate the
Proposition 1A bond funds before the Authority can use them.
† For phase one, the Authority hopes to obtain more than $10 billion from what it calls “other
funds” that it estimates will come from state, local, and private development. The plan does
not give any detail as to what the other state fund sources are or how the Authority plans to
obtain them, but mentions its strategy for obtaining local and privately generated revenues by
seeking opportunities with local and private partners, such as targeting private revenues from
parking fees.
California State Auditor Report 2011-504 21
January 2012
Finally, to the extent the Authority does not receive the federal
funds that its 2012 draft business plan estimates it needs to
complete the operating section, the Authority will likely increase
its difficulty in attracting private investments for subsequent
sections of the program. Without private investments, it will be Without private investments, the
forced to rely even more on federal funds that it has not yet either Authority will be forced to rely even
identified or secured. According to the 2012 draft business plan, the more on federal funds that it has
operating section will begin generating profits immediately after not yet either identified or secured.
its completion in 2022. As described in the plan, the Authority
believes those profits will attract $11 billion in private investment
that the plan states can contribute significantly toward completing
the Bay‑to‑Basin section. However, the Authority includes in the
plan a scenario in which it obtains no private sector investments
until after it completes construction of the Bay‑to‑Basin section.
In this scenario, federal and state resources would need to
cover the program’s construction costs, although the Authority
believes it could offset the costs in part with the profits from the
operating section.
Many large transportation projects require significant federal
funding, and it is possible that the Authority will be able to obtain
the funds outlined in its plan. However, given that the federal
government is one of the few entities with the amount of capital
available to fund a program of this size and scope, the Authority
may find that it cannot identify any viable alternative sources
of funding. If it cannot present such viable funding alternatives,
the Authority has a responsibility to California’s taxpayers to
acknowledge that no such alternatives exist and that the program
cannot proceed if it cannot secure the amount of federal funds
it needs.
The 2012 Draft Business Plan Continues to Lack Some Key Details
Regarding Costs and Revenues
The Authority does not clearly present the full cost of the program
in its 2012 draft business plan. Only within the business plan’s
eighth chapter about funding and financing—more than 100 pages
into the plan—does the Authority mention that phase one could
cost as much as $117.6 billion. Instead, it uses one of its lower cost
estimates of $98.5 billion throughout the plan.4 In addition, state
law requires the business plan to contain, among other things, a
forecast of the anticipated operating and maintenance and capital
4 The 2012 draft business plan generally refers to $98.5 billion as the low‑capital cost scenario for
phase one. It bases this figure on the assumption that it will construct the program following
the route it has described as Initial Operating Section North. However, its cost estimate for
an alternative route, which it describes as Initial Operating Section South, is $98.1 billion. We
therefore use $98.1 billion as the lowest cost estimate for phase one.
22 California State Auditor Report 2011-504
January 2012
costs for the system; however, few of the Authority’s phase‑one cost
estimates do so sufficiently. For example, cost estimates for the
operating section, the Bay‑to‑Basin section, as well as the remaining
sections that will complete phase one, do not
include operating and maintenance costs as
Operating and maintenance costs include: described in the text box. In fact, the plan does
not present the total operating and maintenance
• Train operations including train operators, station costs, which, based on data included in the plan,
personnel, and administrative staff
we estimate could total as much as $96.9 billion
• Maintenance of infrastructure from 2025 through 2060. Moreover, the $6 billion
estimated cost for the construction section does
• System power and operator insurance
not include the cost to make that track ready for
• Capital asset renewal expenditures reflecting the need to high‑speed rail. Thus, if the Authority is not able
renew or replace assets over time to obtain the funding for the remainder of the
Source: The High‑Speed Rail Authority’s 2012 draft business plan. operating section according to its schedule, it will
only be able to use the construction section of
track for traditional rail service.
We also noted several problems with the way the Authority
presents its estimates of revenues in its 2012 draft business plan.
In the plan, the Authority projects that all costs associated with
operating and maintenance will be paid for out of revenues from
ridership. This projection is based on the Authority’s assumption
that the revenues generated by the program will yield net operating
profits beginning in 2022—the year in which the operating section
is scheduled to open for passenger service. However, the plan
does not address how the Authority will pay for operating and
maintenance costs should the program’s revenues not cover such
costs. Moreover, the Authority has not received any commitments
for funding from potential investors, but projects that it will secure
private sector investments of almost $11 billion over four years
beginning in 2023.
In addition, although the 2012 draft business plan assumes that the
State will receive all of the net operating profit generated by the
operating section during 2022 and 2023, the plan does not present
phase one’s total net operating profit projected from 2025 to 2060.
The 2012 draft business plan does not contain any information
regarding the estimated net operating profit for 2024. Using
the same methodology that we used to calculate operating and
maintenance costs, we estimated that the net operating profit would
be approximately $115 billion from 2025 through 2060. In exchange
for their nearly $11 billion investment, private investors will receive
some portion of the $115 billion net operating profit; however, the
2012 draft business plan does not explicitly articulate the number
of years or for which sections of the program that private sector
investors will receive the net operating profit. Both the Authority’s
chief deputy director and the financial consultant who prepared
the financial sections of the business plan confirmed that, while not
California State Auditor Report 2011-504 23
January 2012
specified anywhere in the 2012 draft business plan, the financial
projections are based on the concession that the private sector
would receive all the net operating profit from 2024 through 2060.
Finally, the 2012 draft business plan does not include a schedule
or cost estimate for phase two of the program. According to the
Authority’s chief deputy director, the Authority did not present
timelines or cost estimates for phase two because it is too far in the
future and planning it would be too speculative at this time.
The Authority’s Process for Overseeing the Development of Its
Ridership Model May Raise Concerns About the Credibility of
Its Projections
The program’s success relies on the accuracy of the
Authority’s ridership model, which is fundamental
Highlights From the Ridership Model
to the Authority’s revenue projections and thus to
private investors’ interest in the program. The Assumptions
ridership model the Authority presents in its
Average ticket price between
2012 draft business plan assumes an average
San Francisco and Los Angeles $81 (2010 dollars)
one‑way ticket price of $81 from San Francisco to (one way)
Los Angeles and the model projects that passengers
High‑speed rail ticket price as
will take a total of 29 to 43 million annual trips by 83 percent
percentage of airline ticket price
the completion of phase one, as noted in the
text box. The Authority used this model to estimate Population of California, in 2035 44 to 49 million
the program’s expected operating and maintenance
Projections
costs, revenues, and net operating profits as well as
to project the number of jobs the program will Annual number of trips for 28.9 to 42.9
Phase One, in 2035 million
create and the overall economic benefits that
will result. However, the Authority’s process for Annual revenue for Phase One, $1.8 to $2.6 billion
overseeing the development of the model lacked in 2035 (2010 dollars)
transparency, which may raise investor concern
Source: The High‑Speed Rail Authority’s 2012 draft business plan.
about the model’s credibility. Moreover, the
Authority has yet to fully address questions about
the accuracy of the model’s long‑term projections.
The ridership model the Authority used in its 2009 business plan
received significant criticism for being both overly optimistic and
based on unreasonable assumptions. The ridership projections in
the 2012 draft business plan offer considerably more detail than
those in the 2009 business plan. Most notably, the 2012 draft
business plan presents a range of ridership projections from
low to high, unlike the 2009 business plan, which included only
one ridership projection figure. In addition, the current model
adjusts for the price of a gallon of gas as well as projected airfare
prices. Finally, the updated model takes into account the economic
recession and the subsequent changes in population projections
and shifts in consumer behavior.
24 California State Auditor Report 2011-504
January 2012
However, the Authority may have missed an opportunity to
increase stakeholders’ confidence in the ridership model’s accuracy
once Cambridge Systematics—the subcontractor engaged to
Although the Authority’s chief develop the model—had completed it. Although the Authority’s
executive officer created a ridership chief executive officer created a ridership review group to validate
review group to validate the the ridership model, we are concerned that this group may not
ridership model, we are concerned be truly independent because he personally chose the group’s
that this group may not be truly members. According to the chief executive officer, after he arrived
independent because he personally in May 2010, he created the ridership review group to validate the
chose the group’s members. model and ensure that it did not receive the same level of public
criticism that the 2009 business plan’s ridership projections—also
developed by Cambridge Systematics—had received. To choose
the group’s members, the chief executive officer selected five of
the 20 to 30 ridership experts worldwide of whom he was aware.
From January 2011 through July 2011, the ridership review group
evaluated the ridership model and worked with Cambridge
Systematics to improve it for use in the 2012 draft business plan.
According to the chief executive officer, he wanted to create a
ridership review group to ensure that the Authority had better
oversight of the program. He further stated that although he
was not required to, he informed the Senate Transportation
Committee of his intentions to create a ridership review group
in an effort to remain as transparent as possible. While we
acknowledge the important role that the ridership review group
played in validating the ridership model and the chief executive
officer’s effort to increase transparency, the ridership projections
are critical to both the Authority’s business plan and the public’s
perception of the program’s viability; therefore, it is essential that
stakeholders have confidence in these projections. We believe it is
imperative that the Authority take any steps necessary to increase
stakeholders’ confidence that the ridership model’s projections are
both reasonable and accurate. By handpicking the ridership review
group, the chief executive officer may have inadvertently raised
concerns about the objectivity of the members. As an alternative,
the chief executive officer could have requested that the Legislature
appoint the ridership review group members using a process
similar to the one it uses to appoint members of the independent
peer review panel required by law to assess the Authority’s
business plans.
Further supporting the need for an independent review is the fact
that the ridership review group expressed concerns regarding the
model’s long‑term projections that the Authority has yet to resolve.
Specifically, although the ridership review group determined that
the ridership model was suitable for use in the 2012 draft business
plan, the group presented several long‑term concerns, such as
potential biases in the survey data Cambridge Systematics used
in the model’s development. The ridership review group stated
California State Auditor Report 2011-504 25
January 2012
in its August 2011 report on the model that the Authority must
address these long‑term issues in order for the group to determine
whether the model is suitable for future applications. In other
words, the report implies that if the Authority does not address If the Authority does not address
these long‑term concerns, the model may only be useful to project these long‑term concerns, the
ridership for the operating section and not the program’s remaining model may only be useful to
sections. The Authority failed to disclose these important concerns project ridership for the operating
in its 2012 draft business plan, and as a result, stakeholders may not section and not the program’s
be fully informed about the usefulness of the model. remaining sections.
Recommendations
The Authority should fully implement the recommendations we
made in our prior audit, which we list in Appendix B.
To add clarification to the first recommendation we made in our
prior report that stated, “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,” the Authority should also present viable alternative
funding scenarios for phase one in its entirety that do not assume
an increase in the federal funding levels already identified in the
2012 draft business plan. If the Authority does not believe that such
alternatives exist, it should publicly disclose this in its 2012 final
business plan.
To ensure that the public and the Legislature are aware of the full
cost of the program, the Authority should clearly report total costs,
including projected operating and maintenance for the program.
Additionally, the Authority should clearly disclose that the 2012
draft business plan assumes that the State will only be receiving
profits for the first two years of operation in 2022 and 2023,
and potentially not again until 2060 in exchange for the almost
$11 billion the Authority assumes it will receive from the private
sector over a four‑year period.
To assure independence and instill public confidence in the process
regarding the Authority’s ridership model, the Legislature should
draft legislation that establishes an independent ridership review
group. For example, the Legislature could use a similar process
to the one used to establish the independent peer review panel
that the law requires to assess the Authority’s business plans.
26 California State Auditor Report 2011-504
January 2012
Blank page inserted for reproduction purposes only.
California State Auditor Report 2011-504 27
January 2012
Chapter 2
THE HIGH‑SPEED RAIL AUTHORITY’S OVERSIGHT OF THE
PROGRAM REMAINS WEAK
Chapter Summary
As the state entity charged with implementing California’s
high‑speed rail network (program), the High‑Speed Rail Authority
(Authority) is responsible for administering and overseeing the
program. Nonetheless, in our April 2010 report, we expressed
concern that the Authority’s processes for monitoring the
performance and accountability of its contractors were inadequate,
and our current review suggests that these problems persist.
Despite the increased cost estimates for the program (as discussed
in Chapter 1), the Authority’s staffing levels have remained low; as
of August 1, 2011, it had fewer than two dozen employees. Without
sufficient staffing, the Authority has struggled to oversee its
contractors and subcontractors, who outnumber its employees by
about 25 to one. The potential problems inherent in this situation
are exacerbated by the fact that the Authority has not ensured that
all of its contractors and subcontractors disclose potential conflicts
of interest.
As a consequence of its staffing shortages, the Authority has ceded
significant control over the program to its Program Manager, the
primary contractor with whom it works. The Program Manager
communicates the program’s progress to the Authority through
monthly progress reports, yet we found those reports inaccurate
and misleading. We also noted a lack of detail in the reports that
regional contractors submit to the Program Manager. This lack of
detail makes it difficult to confirm that the regional contractors
have performed the work for which they are billing the Authority.
In addition, although the Authority improved the risk‑management
section of its 2012 draft business plan, it has failed to take an
active role in identifying and mitigating those factors that might
delay or halt the program, instead leaving this responsibility to the
Program Manager.
We also noted additional areas of concern in the Authority’s
administration of the program. Specifically, the Authority has
poorly managed its information technology (IT) contracts, resulting
in at least one instance in which it failed to follow the policies
outlined in the State Contracting Manual. In addition, it continues
to lack a mechanism for tracking its Safe, Reliable High‑Speed
Passenger Train Bond Act for the 21st Century (Proposition 1A)
bond expenditures.
28 California State Auditor Report 2011-504
January 2012
The Authority’s Profound Staffing Shortages Have Compromised Its
Ability to Provide Effective Oversight
The Authority’s current organizational structure places the
largest portion of the program’s planning, construction, and most
importantly, oversight in the hands of contractors who may not
have the best interests of the State as their primary motivation.
As a result, the Authority lacks assurance that the program is
implemented in a way that best serves the public.
According to the Authority’s records, as of August 1, 2011, it had
only 21.5 filled positions to oversee this statewide multibillion‑dollar
The Authority has struggled to fill program. It had an additional 32.5 authorized positions that it
positions and has experienced a has struggled to fill, which is consistent with the persistent gap
persistent gap between its filled and that has existed between its filled and authorized positions from
authorized positions from June 2010 June 2010 to August 2011, as shown in Figure 5. According to the
to August 2011. chief deputy director, a multitude of factors have contributed to this
gap. He explained that both the prior and current administrations
implemented hiring freezes. To attempt to fill some of the positions
that were subject to the hiring freeze, the Authority submitted
freeze exemption requests for 30 positions between April 2011
and August 2011 and received approval for 17 positions. Further,
according to the chief deputy director, the most recent hiring freeze
was not lifted until September 2011 and the Authority did not have
a full‑time human resources staff member to focus on the hiring
process until July 2011. Since that time, the Authority has advertised
for 23 of its vacant authorized positions, and according to the
chief deputy director, processed over 550 applications and filled
10 positions. Finally, the chief deputy director stated that positions
have been difficult to fill as candidates have expressed concern
about the stability of the program, among other concerns, and thus
have been reluctant to accept a position.
The Authority has found it particularly challenging to fill the
high‑level positions that might provide it with the leadership it
needs to oversee a program of this magnitude. The chief deputy
director stated that exempt positions have been difficult to fill
because the complexity of the program requires highly specialized
and qualified staff; thus, the hiring pool is limited. In fact, the
Authority has yet to fill six of its exempt positions. According
to the chief deputy director, the private sector generally pays
employees higher salaries than the public sector, and qualified
candidates may not be willing to accept a decrease in salary. As
an example of the salary disparity, according to the chief deputy
director, the Authority has budgeted $98,500 annually for its chief
financial officer position; however, according to the salary statistics
maintained by the Bureau of Labor Statistics, a similar position
in the private sector would receive about $205,000 annually. In
another example, the Program Manager estimated that it could
California State Auditor Report 2011-504 29
January 2012
pay between $177,000 and $250,000 annually for a chief program
director’s position, while the Authority is currently budgeted to
pay $98,500 for the same position. According to the chief deputy
director, although the Authority has some flexibility to pay its
exempt positions up to $217,000, this is not the norm and the
Authority is not able to do so in all circumstances due to budget
restrictions. Nonetheless, to effectively oversee and manage this
program, the Authority needs to make every effort to fill its vacant
positions or it risks continuing to have to rely on contractors to
perform the functions that it should perform.
Figure 5
The High‑Speed Rail Authority’s Authorized and Filled Positions
Total authorized positions
Total filled positions
60
50
40
30
20
10
0
As of As of As of
June 1, 2010 June 1, 2011 August 1, 2011
snoitisoP
Source: The High‑Speed Rail Authority’s staffing reports.
In contrast to the Authority’s 21.5 filled positions, according to
documentation provided by the Authority, the Program Manager,
oversight consultant, and regional contractors employed a
total of approximately 545 full‑time equivalents during fiscal
year 2010–11—about a 25‑to‑one ratio of consultants to state
employees. We believe that this relatively low number of staff
compared to consultants may have far‑reaching consequences for
the Authority’s ability to effectively oversee the program.
For example, as we describe later in this chapter, because of
the Authority’s lack of staff, it is not sufficiently involved in the
program’s risk‑management process.
30 California State Auditor Report 2011-504
January 2012
The Authority acknowledges in its 2012 draft business plan that
it might not have the number of experienced staff necessary to
meet the demands of the program from an internal management
perspective. In the plan, the Authority further explains that without
the additional staff to manage the financial, funding, procurement,
legal, and risk functions associated with the program, it may not
be able to adequately perform work related to these roles. The
Authority also states that it recognizes the need to build up its
management and support teams because consultants should not
establish strategy and make management decisions on behalf of
the State. However, given that consultants significantly outnumber
Authority staff and are directly involved in the day‑to‑day
operations of the program, we question how they could not be
establishing strategies and making management decisions.
Several entities tasked with Several other entities tasked with reviewing the Authority’s
reviewing the Authority’s practices practices have raised concerns about its heavy reliance on
have raised concerns about its contractors and the increased risks that such reliance poses to
heavy reliance on contractors the State. Specifically, in May 2011 the Legislative Analyst’s Office
and the increased risks that such questioned whether the current number of state employees
reliance poses to the State. at the Authority could effectively manage such a large team of
contractors. Further, the independent peer review panel that state
law established to review the Authority’s plans stated in a May 2011
letter to the Authority’s chief executive officer that the Authority’s
staff at that time was not at all adequate for the job at hand and that
the Authority was only going to fall further and further behind,
especially after construction began. The panel also stated that the
Authority could not rectify the problem by hiring more contractors
because state leadership and state oversight are paramount to the
success of the program.
Finally, the Authority is not maximizing the value of its contractors
because it uses their staff to perform duties that state employees
could perform. In fact, we reviewed three of the oversight
consultant’s recent invoices and found that nearly half of its
charges were related to its staff performing supplemental support
services at the Authority’s request. For example, one of the
oversight consultant’s transportation engineers worked with staff
at the Department of General Services (General Services)—the
Authority’s accounting contractor—regarding the Authority’s
internal accounting issues. Because this transportation engineer
spent time performing an administrative function, he had less time
to spend performing his other functions, including oversight of the
Program Manager.
The chief deputy director acknowledged that both the Program
Manager and oversight consultant’s staff perform work that state
employees could perform. He provided an example in which the
oversight consultant entered into a subcontract with a temporary
California State Auditor Report 2011-504 31
January 2012
agency for staff to help build the Authority’s new expenditure
tracking database. He stated that he was not familiar with any
workload analyses that the Authority might have performed before
his arrival in May 2011 that would have determined which functions
contractors were currently performing that state employees could
perform or whether the 54 positions that the Legislature has
currently authorized the Authority to fill will be adequate. He
explained that once the Authority fills all its vacant positions, it
will evaluate contractors’ staff activities to determine whether state
employees can perform the same functions. He also acknowledged
that replacing contracted employees with state employees could
result in significant savings to the State in many instances. Until
the Authority can determine the number and type of staff it needs
to meet its current workload, it risks compromising its contractors’
efficiency and productivity.
The Authority Did Not Ensure That Its Contractors and Subcontractors
Disclosed Potential Conflicts of Interest
The Authority has failed to ensure that it and the public are
aware of the potential conflicts of interest of its contractors and
subcontractors. The Political Reform Act of 1974 (political reform
act) requires specified state and local officials and employees
with decision‑making authority to file with its designated filing
officer statements of economic interests that identify any financial
interests that these individuals might have. The political reform
act also requires that every agency adopt a conflict‑of‑interest
code that specifies any additional individuals who are required to
file statements of economic interests. Although the Authority’s Although the Authority’s
conflict‑of‑interest code specifically states that contractors must conflict‑of‑interest code specifically
provide statements of economic interest, we found that six out states that contractors must provide
of 58 contractors failed to do so for the filing period covering 2010. statements of economic interest, we
After we notified Authority staff that six statements were missing, found that six out of 58 contractors
they located one of the six; however, the Authority’s failure to failed to do so for the filing period
accurately track and collect these statements of economic interests covering 2010.
is troubling for several reasons. When designated individuals do not
file statements of economic interests, the public may not be aware
of potential conflicts. In addition, if the Authority cannot identify
potential conflicts, it increases the risk that it will make ill‑informed
decisions that leave it open to criticism.
When we asked the Authority how it ensures that it meets the
requirements of the political reform act, such as ensuring that
employees and contractors submit statements of economic
interests, we found that the Authority has no written policies
and procedures regarding collecting or tracking the statements
of economic interests; this likely contributed to its inconsistent
tracking of these statements. For example, when the Authority
32 California State Auditor Report 2011-504
January 2012
provided the spreadsheet it asserted it uses to track filings of
statements of economic interests, we noted that the spreadsheet
had only been used sporadically for the filing period covering
2010 and did not include all of the designated employees and
contractors required to file such statements of economic interests.
By not effectively tracking and By not effectively tracking and collecting the statements of
collecting the statements of economic interests, the Authority may be unaware of potential
economic interests, the Authority conflicts of interest. For example, one board member disclosed
may be unaware of potential on his statement of economic interests that he was a consultant
conflicts of interest. for Parsons Transportation Company—the regional contractor
responsible for the San Jose‑to‑Merced portion of the program—
and was paid between $10,000 and $100,000 annually. Although
this board member appropriately reported this economic interest,
if he were to take part in a decision involving the Authority and
Parsons Transportation Company while he had this financial
interest, and if certain other conditions were met, he could be in
violation of the political reform act, which bars public officials from
using their positions to influence government decisions in which
they have a financial interest.
Further, although the Authority’s conflict‑of‑interest code does
not address the issue of subcontractors filing statements of
economic interests, the Authority’s contract with the Program
Manager specifically requires all of its subcontractors to follow
the Authority’s conflict‑of‑interest code. However, the Authority
has not required or collected statements of economic interests
from any of the Program Manager’s subcontractors, including
Cambridge Systematics, the company that performed the ridership
projections for the Authority’s 2012 draft business plan. As a
result, the Authority has no way to verify whether subcontractors
have real or perceived conflicts of interest. Further, the political
reform act requires agencies to amend their conflict‑of‑interest
codes whenever significant changes to those agencies occur, yet
we found the Authority has not updated its conflict‑of‑interest
code since 2001. Although the Authority finally amended its
conflict‑of‑interest code in 2010, the Fair Political Practices
Commission has not yet approved it, which is required to make the
amended code effective. This is particularly problematic because
the Authority changed significantly as a result of the passage of
Proposition 1A in 2008. For example, between fiscal years 2000–01
and 2006–07, the Authority operated with only three to five staff
members, but as mentioned previously, as of August 1, 2011, it
employed 21.5.
California State Auditor Report 2011-504 33
January 2012
By Relinquishing Significant Control to the Program Manager,
the Authority May Be Jeopardizing Its Ability to Make Informed,
Thoughtful Decisions
In part because of the staffing shortages that we discussed earlier in
this chapter, the Authority has relinquished a significant amount
of control to the Program Manager. As a result, the Authority
may not be receiving the information it needs to make thoughtful
decisions about the program’s future. Specifically, the Authority
relies on the Program Manager to provide accurate, consistent,
and useful information in its monthly progress reports. However,
we found that these reports were often inaccurate and that at
times the Program Manager misinformed the Authority about
the speed with which contractors for each region—called regional
contractors—performed tasks. In addition, the Authority assumes
that the Program Manager ensures the accuracy of the regional
contractors’ reports, yet the Program Manager has not consistently
done so. Finally, the Authority depends on the Program Manager
to effectively identify and manage all of the risks related to the
program. Consequently, the Authority may not be aware of or
have addressed areas of significant concern that could impact
the program.
The Program Manager’s Monthly Progress Reports Lack Usefulness
Because They Contain Some Inaccurate and Misleading Information
The Authority’s contract with the Program Manager requires
it to submit to the Authority at least once a month progress
reports that are sufficiently detailed for the Authority’s chief
executive officer to determine, among other things, if the Program
Manager and regional contractors are on schedule and have
performed to expectations. According to the Program Manager’s
director, these reports are a valuable tool for the Program Manager
to formally manage the program’s progress. To create the progress
reports, the Program Manager is supposed to compile the status of
each regional contractor’s current work, scheduled and actual work
progress, budgeted and actual costs, and budgeted and actual labor
hours. The Program Manager is to also include any critical issues
that the regional contractors have identified that might affect the
program’s progress and any remediation measures the contractors
have taken to address such areas of concern. After consolidating
this information, the Program Manager adds a summary of its own
activities and submits the report to the Authority.
In our April 2010 audit we noted problems involving the accuracy
and consistency of these reports. During our follow‑up audit,
we determined that these problems persist. Specifically, we
34 California State Auditor Report 2011-504
January 2012
We found over 50 errors and found over 50 errors and inconsistencies of various types in three
inconsistencies of various types in of the Program Manager’s monthly progress reports we reviewed—
three of the Program Manager’s December 2010, June 2011, and July 2011. Additionally, we chose
monthly progress reports progress reports for three regional contractors from June 2011 and
we reviewed. used them to compare to the information included in the June 2011
Program Manager’s monthly progress reports. Some of the errors
were fairly minor and involved issues such as transpositions and
typos; however, we also found several significant discrepancies
between the regional contractors’ reports and those of the Program
Manager. In some cases, the Program Manager altered dates
to make it appear that the regional contractors would perform
work either more or less quickly than they estimated they could
in their progress reports. Specifically, we found that the Program
Manager had changed completion dates and the progress status of
important environmental milestones from those reported by the
respective regional contractors. For example, a regional contractor
listed the delivery date of a particular task as December 2010 and
the Program Manager listed the date as September 2010. In
another example, we traced one critical environmental task for
the Merced‑to‑Fresno portion of the construction section—
preparation of final environmental impact studies—and
found that the Program Manager had changed the regional
contractor’s estimated milestones 30 times—18 date changes
and 12 percentage‑of‑progress changes—between July 2010 and
August 2011. Of the 12 percentages the Program Manager changed,
three made it appear that the regional contractor had completed
more than it reported and nine made it appear that the regional
contractor completed less than it reported in its progress report.
When we asked the Authority’s chief executive officer about these
changes, he stated that while he discusses these types of changes
with the Program Manager and there are some valid reasons that
the Program Manager’s reported information might not correspond
to the regional contractors’ reports, this should not be the norm.
Nevertheless, the number and frequency of the changes that
we noted suggest that the Program Manager misinformed the
Authority about the actual status and progress of the construction
section. When we asked the Program Manager’s operations
manager about the inconsistencies in dates, he stated that the
Program Manager may purposefully include a date in its monthly
progress report that does not match the regional contractor’s date
because the Program Manager maintains its own schedule as to
when certain tasks and duties must be completed. He also stated
that sometimes the regional contractors do not agree with the
target dates the Program Manager has established in conjunction
with the Authority and that this may be a reason that the regional
contractors reported different dates. The Authority’s chief deputy
director stated that the Authority currently has no process in place
to compare the Program Manager’s reports for accuracy against
California State Auditor Report 2011-504 35
January 2012
the regional contractors’ reports and conceded that this procedural
gap is a potential problem because the Authority may not be fully
informed about possible delays.
We also found that the Program Manager’s progress reports lack
usefulness because they are not always complete. For example, in
response to a recommendation in our prior report, the Authority
stated that the Program Manager revised its progress report
format to ensure that its reports accurately reflect the program’s
status. Specifically, the Program Manager had begun including in
its monthly progress reports a list summarizing the status of all of
its promised goods and services—in other words, its deliverables.
However, we found that the Program Manager has not consistently
included this list in its reports. For fiscal year 2010–11, the Program
Manager only included deliverables status reports for five of the
12 months. As a result, the Authority was not kept consistently
informed of the status of the Program Manager’s deliverables.
Finally, the Program Manager often submits its reports late, thus
making their content less useful to the Authority because the
information may be outdated. According to the Program Manager’s
guidelines, once it receives the regional contractors’ monthly
reports, it must submit its progress report between the 20th and 22nd
of the following month. Our review of the reports for August 2010 In our review of the reports
through September 2011 found that the Program Manager for August 2010 through
submitted all of its progress reports late. The reports were late by September 2011, we found that
an average of 13 days, resulting in the Authority receiving them an the Program Manager submitted
average of more than 34 days after the last day of the previous all progress reports late—the
month. The fact that we found the progress reports to be inaccurate Authority received them an average
and frequently misleading combined with such delays, limits the of more than 34 days after the last
usefulness of the information the Program Manager submits to day of the previous month.
the Authority.
Despite the critical nature of the Program Manager’s progress
reports, the Authority has not effectively ensured their accuracy,
consistency, and timeliness. To address the deficiencies we found
in our previous audit, we recommended that the Authority
engage its oversight consultant to perform a critical review of
the progress reports for accuracy and consistency. Soon after our
audit, the Authority followed our recommendation and amended
the oversight consultant’s scope of work to include performing
reviews of the progress reports and summarizing its findings in
monthly memos. However, in December 2011 the Authority’s
chief executive officer stated that he had reconsidered the value of
the oversight consultant performing these monthly reviews and
decided to instead have the oversight consultant concentrate on
monitoring the formal progress the Program Manager achieved
each quarter. We are very concerned by this decision because in
our review of the oversight consultant’s memos—covering issues
36 California State Auditor Report 2011-504
January 2012
such as budget and schedule—from May 2010 through June 2011,
we found that the Program Manager did not address some of the
oversight consultant’s concerns, even though the memos raised the
same issues month after month. For example, in 11 of the 14 memos
we reviewed, the oversight consultant cited the Program Manager’s
lack of explanation for variations in the budget or schedule.
The chief executive officer’s decision regarding the oversight
consultant’s role is of further concern because it may deprive
the Authority’s operations committee (operations committee) of
valuable information regarding the program’s progress and the
Program Manager’s performance. Even prior to the chief executive
officer’s decision, we noted significant problems in the oversight
consultant’s communication with the operations committee.
Although the oversight consultant made quarterly presentations
to the operations committee, we found that it did not present to
the committee all of the key issues it identified in its memos
regarding the Program Manager’s progress reports. For example,
in its May 2011 memo, the oversight consultant mentioned for
the third month in a row that the Program Manager continued
to omit a key detail from its monthly progress report. However,
the oversight consultant did not present this information to the
operations committee. In addition, the oversight consultant did not
present detailed comments about the Program Manager’s reporting
practices or failure to correct issues the oversight consultant
identified as needing to be addressed.
Although the oversight consultant also submitted quarterly reports
to the operations committee in addition to its oral presentation,
it did not include all the errors it found in the Program Manager’s
monthly progress reports or mention the Program Manager’s failure
to follow the recommendations the oversight consultant made in its
previous monthly memos. Therefore, even before this decision, the
oversight consultant did not fully inform the operations committee
about potentially important issues related to the program and its
progress and about aspects of the Program Manager’s performance.
In light of the chief executive officer’s decision, the operations
committee risks having even less information because the oversight
consultant will no longer prepare memos to serve as a written
record of its critical review.
If the Authority staff cannot ensure
that its key means for monitoring If the Authority staff cannot ensure that its key means for
the program provides accurate and monitoring the program provides accurate and consistent
consistent information, it may not information, it may not have the information it needs to make
have the information it needs to well‑informed and thoughtful decisions about the future of the
make well‑informed and thoughtful program. The Program Manager’s failure to consistently provide
decisions about the future of complete, timely, and accurate monthly progress reports has
the program. compromised the quality of the information the Authority relies on.
California State Auditor Report 2011-504 37
January 2012
The Program Manager Did Not Appropriately Identify Differences
Between the Regional Contractors’ Monthly Progress Reports When
Approving Their Corresponding Invoices
In our prior audit, we concluded that the Authority had not
implemented effective controls over invoice processing, and in
some cases it had paid for work that was not part of its contracts
or work plans. In response to our recommendation to strengthen
its controls, the Authority amended its Contract Administration
Manual (contract manual) to include detailed procedures for both
Authority staff and the Program Manager to follow when reviewing,
verifying, and approving invoices. One of those procedures requires
review and written approval from the Program Manager that the
regional contractors have performed the work specified in their
invoices before Authority staff can approve payment. Our review
of 10 monthly invoices the Authority received from regional
contractors indicated that the Authority had followed its new
procedures by performing a detailed review and by not processing
the invoices until after it received the Program Manager’s
confirmation indicating its review and approval of each invoice.
The contract manual also requires the Program Manager to ensure
the work billed by the regional contractors matches the work they
performed. We therefore expected that the monthly progress
reports the regional contractors submitted would provide sufficient
detail to support the charges included in their corresponding
monthly invoices; however, this was not always the case. In fact, in The Program Manager had
three instances, we noted that the Program Manager had approved approved some invoices from
invoices from regional contractors even though the corresponding regional contractors even though
regional progress reports indicated the contractors had performed the corresponding progress reports
no work in the billed areas during those periods. For example, the indicated the contractors had not
Program Manager approved an invoice for roughly $280,000 by performed work in the billed areas
stating that the expenses fairly represented the work the contractor during those periods.
performed during December 2010. However, the invoice included
nearly $12,000 for right‑of‑way preservation and acquisition
services even though the regional contractor reported in its
December 2010 progress report that it had not performed any work
in this area. According to the Program Manager, the contractor
performed this work during the period of November 16 through
December 15. While we confirmed that the regional contractor had
included this work in its November 2010 progress report, it should
have also been included in the December 2010 report; however, the
Program Manager did not identify this inconsistency.
The employee of the Program Manager who reviews the regional
contractors’ invoices explained that he bases his determination
that the expenses invoiced fairly represent the work performed on
several factors besides the monthly progress reports. In particular,
he explained that his daily contact with the regional contractors
38 California State Auditor Report 2011-504
January 2012
allows him to understand the detail of the work being performed
while the progress reports indicate a higher‑level description of the
activities performed. He told us that greater detail should be, and
will be, provided in future progress reports to ensure better linkage
between the work accomplished and invoices. Without accurate or
sufficiently detailed monthly regional progress reports and invoices,
the Authority may be misinformed about the status of the program
or whether contractors have actually performed the work for which
they have billed the Authority.
The Authority Has Not Been Actively Engaged in the Process of
Identifying and Mitigating the Many Risks Confronting the Program
In our prior report, we concluded that the Authority’s 2009
business plan identified a number of risks associated with the
program but provided little detail on how the Authority would
manage those risks. During our follow‑up review, we found that
although the Authority improved the risk section of the 2012 draft
business plan by including risk mitigation and allocation strategies
as well as a risk‑management plan and processes, significant
weaknesses remain. Most importantly, the Authority continues to
be only minimally involved in the risk‑management process and
instead relies almost completely on its Program Manager to both
identify and mitigate risks.
According to the chief deputy director, the Program Manager is
currently more engaged than the Authority in risk management
because the Authority has not been able to hire a risk manager.
In response to our prior audit report’s recommendation that
it implement planned actions relating to managing risk, the
Authority stated that on July 7, 2010, the Legislature approved a
request for an additional management position for the Authority—
designated as a deputy director, risk management. The Authority
is currently advertising for this position and, according to the chief
deputy director, had received six applications and interviewed
two candidates as of November 2011 but has been unable to
fill the position because finding a candidate with the right
level of experience who has compatible salary expectations has
been difficult.
In the absence of an individual to fill In the absence of an individual to fill this position, the Authority
the position for the risk manager, has done little to ensure that it is aware of and actively engaged
the Authority has done little to in mitigating the risks confronting the program. The 2012 draft
ensure that it is aware of and business plan states that the Authority will regularly attend the risk
actively engaged in mitigating the workshops conducted by the Program Manager to assess identified
risks confronting the program. risks and develop mitigation strategies and management plans.
However, according to the Program Manager’s risk manager and
the Authority’s chief deputy director, no Authority representative
California State Auditor Report 2011-504 39
January 2012
attends the risk‑management meetings or workshops the
Program Manager holds. Instead, the Program Manager provides
a high‑level summary of risk issues to the Authority through
its monthly progress reports and, according to the Authority’s
chief deputy director, during regular meetings between the
Authority’s chief executive officer and the Program Manager’s
project manager. Because the Program Manager generally handles
the risk identification and management process exclusively, it
could potentially filter critical information regarding risks to the
program’s progress from the information it ultimately shares with
the Authority.
Moreover, although we acknowledged in our prior report that the
Authority had taken steps toward improving its risk‑management
approach by having the Program Manager complete a major
revision to its risk‑management process in March of 2010, we The Authority’s current
found that its current risk‑management plan is incomplete, risk‑management plan is
does not fully reflect the Program Manager’s risk‑management incomplete, does not fully
practices, and does not adequately identify the Authority’s role in reflect the Program Manager’s
addressing risk. For example, the plan does not define the roles of risk‑management practices, and
any Authority staff in assessing or managing risks but instead states does not adequately identify the
that addressing these risks is the responsibility of a team composed Authority’s role in addressing risk.
solely of the Program Manager’s staff and regional contractors.
Further, the plan is missing a number of details related to issues like
the Program Manager’s risk‑mitigation approach. According to the
Program Manager’s risk manager, the Program Manager is working
on an update to the March 2010 version of the risk‑management
plan; the Program Manager’s operations manager was reviewing
this update as of December 2011.
In our review of the Program Manager’s risk registers for July
through October 2011, we also found several causes of concern.
Specifically, the Program Manager has not followed its practices or
those in the risk‑management plan. We identified numerous action
items that were past due, instances where no one was designated
as responsible for addressing a risk, and delays in addressing newly
identified risks. For example, the Program Manager identified
the absence of a finalized agreement with Union Pacific Railroad
(Union Pacific) as a very high risk. When we asked the Program
Manager’s risk manager about this issue, he explained that areas
of the program may be affected by Union Pacific or are dependent
on having at least temporary access to Union Pacific’s right of way.
He stated that the Authority has had to make certain assumptions
about what, how, and where it will build based on what it believes
Union Pacific will agree to; if Union Pacific does not agree, it
may impact the program’s cost and schedule. In the risk register,
the Program Manager has identified several actions that it and the
Authority must take to mitigate this risk; however, the Authority
and the Program Manager are more than a year late in completing
40 California State Auditor Report 2011-504
January 2012
these actions. The Program Manager’s risk manager attributes
these delays, in part, to the Authority’s absence of staff devoted to
risk management. These deficiencies indicate that the Authority
and Program Manager are not consistently addressing risks to the
program promptly and effectively.
While the oversight consultant does some monitoring of the
risk‑management process, its role in this area is limited per its
scope of work. According to the oversight consultant’s senior
vice president, in January 2010 the oversight consultant began
working with the Program Manager to develop and establish its
risk‑management practices, including developing risk registers.
However, the senior vice president acknowledged that he was
neither aware of nor involved in the Program Manager’s revisions
to the March 2010 risk‑management plan. Further, the oversight
consultant does not attend risk meetings and workshops.
Therefore, the oversight consultant does not comprehensively
monitor the Program Manager’s risk‑management practices, nor
does the oversight consultant’s work plan require it to do so.
By relying almost entirely on the
Program Manager for information By relying almost entirely on the Program Manager for information
about risks to the program’s about risks to the program’s progress, the Authority has failed to
progress, the Authority may not ensure that it can respond effectively to circumstances that could
respond effectively to circumstances significantly delay or even halt the program. Further, without its
that could significantly delay or own risk manager, the Authority lacks objective insights into the
even halt the program. risks that could threaten the program.
The Authority Poorly Managed Its IT Contracts
The primary role of the Authority in administering the program
involves managing contracts. Nonetheless, during the course
of our work, we discovered that the Authority had engaged in
inappropriate contracting practices involving IT services. The
nature of the problems we discovered suggests that the Authority
needs to significantly improve its internal controls to ensure that it
manages its contracts in ways that comply with state laws.
The Authority may not be promoting open, fair, and equal
competition among prospective suppliers for its IT services and,
as a result, it cannot ensure the State is getting the best value for
these services. In particular, the Authority split its IT services into
multiple contracts when it renewed its IT services beginning in
March 2010 and then in May 2011.5 The State Contracting Manual
prohibits agencies from splitting contracts to avoid competitive
5 The most recent renewal of IT services includes contracts covering the period from June 2011
through June 2013.
California State Auditor Report 2011-504 41
January 2012
bidding requirements and purchasing thresholds for any series
of related services that would normally be combined and bid
as one job. Nonetheless, in addition to the initial contract, the In addition to the initial
Authority used 13 individual contracts for IT services over a contract, the Authority used
roughly 15‑month period that ranged from $105,655 to $249,999.99 13 noncompetitively bid individual
for similar services with one vendor, as shown in Table 3 on the contracts for IT services over
following page. Instead of executing multiple contracts generally a roughly 15‑month period
having aggregate values of just under $250,000 with one vendor for that ranged from $105,655 to
similar services, the Authority should have combined the services $249,999.99 for similar services
into one contract and solicited competitive bids or obtained with one vendor.
approval to noncompetitively bid the contract.
The Authority also failed to satisfy a statutory requirement to
obtain two price quotations when using the small business/disabled
veteran business enterprise option. According to state law, a
state agency may award a contract for IT services that has an
estimated value of less than $250,000 to a certified small business
or to a disabled veteran business enterprise, as long as the agency
obtains price quotations from two or more businesses of this
type. As shown in Table 3, in addition to the initial contract, the
Authority entered into four contracts for IT services during 2010
and another three contracts for IT services in February 2011.
According to the documentation provided by the Authority, each
of these contracts was awarded using the small business/disabled
veteran business enterprise option. As such, state law required the
Authority to obtain at least two price quotations from other small
business/disabled veteran business enterprises, which it failed
to do. According to an analyst within the Authority’s contracts
and finance unit, four of the contracts were extensions of a prior
contract with the supplier. She explained that the Authority did
not obtain two price quotations from other suppliers because a
General Services’ contract manager stated it was unnecessary since
the cost was below the $250,000 threshold and the supplier was
a small business/disabled veteran business enterprise. However,
the Authority could not provide compelling evidence that the
four contracts were extensions of prior contracts, nor could
it provide support for the statements from General Services’
contract manager.
Regardless, the Authority failed to comply with state law by not
obtaining at least two price quotations from other small businesses
or disabled veteran business enterprises. Further, according to the
analyst within the Authority’s contracts and finance unit, two of
the remaining contracts were related to proprietary software.
Although the State Contracting Manual allows departments
to noncompetitively bid a purchase of proprietary software by
requiring that they obtain a signed letter from the supplier stating
that the product or service being provided is not available from any
other source, the Authority could provide no such evidence that
42 California State Auditor Report 2011-504
January 2012
these letters were obtained. Finally, the Authority entered into the
third contract in early 2011 for the relocation of office headquarters,
but did not provide an explanation for why it did not obtain
two price quotations for the relocation services.
Table 3
The High‑Speed Rail Authority’s Past and Current Information Technology Contracts
CONTRACTED SERVICES AMOUNT SUPPLIER DATE AUTHORIZED CONTRACT START DATE CONTRACT END DATE
Initial Contract‑Information technology Paperless
$406,041.25 December 16, 2008 December 16, 2008 June 30, 2010
(IT) services and consulting Knowledge
Past Contracts
IT technology consulting services Paperless
249,999.99 March 15, 2010 March 15, 2010 June 30, 2011
Knowledge
IT maintenance and technical services Paperless
249,999.99 March 15, 2010 March 26, 2010 June 30, 2011
Knowledge
Monthly IT expenditures, including Paperless
105,655.00 June 1, 2010 June 1, 2010 Not Specified
one‑time database set up and training Knowledge
IT maintenance and technical services Paperless
249,999.99 February 15, 2011 February 15, 2011 June, 30 2011
Knowledge
Relocation of office headquarters Paperless
249,999.99 February 15, 2011 February 15, 2011 End of Relocation
Knowledge
IT technology consulting services Paperless
249,999.99 February 15, 2011 February 15, 2011 June 30, 2011
Knowledge
Current Contracts
Development electronic document Paperless
249,999.99 May 3, 2010 June 1, 2010 May 31, 2012
management solution Knowledge
Operate the High‑Speed Rail Authority Paperless
249,600.00 May 18, 2011 June 28, 2011 June 28, 2013
(Authority) IT intranet Knowledge
Host the Authority IT servers Paperless
249,270.00 May 18, 2011 June 28, 2011 June 28, 2013
Knowledge
All IT maintenance and technical Paperless
245,440.00 May 18, 2011 June 28, 2011 June 28, 2013
services desktop for the authority Knowledge
IT Web maintenance Paperless
245,440.00 May 18, 2011 June 28, 2011 June 28, 2013
Knowledge
IT database administration Paperless
243,360.00 May 18, 2011 June 28, 2011 June 28, 2013
Knowledge
IT network administration Paperless
249,600.00 May 18, 2011 June 28, 2011 June 28, 2013
Knowledge
Total IT contracts, excluding the
$3,088,364.94
initial contract
Source: The Authority’s past and current IT services contracts.
General Services allowed the Authority to noncompetitively bid
the six IT services contracts authorized in May 2011 rather than
working with the Authority to ensure that competitive bidding
requirements were satisfied. Near the end of March 2011,
three months before some of its IT contracts were set to expire, the
California State Auditor Report 2011-504 43
January 2012
Authority submitted six requests to General Services to contract
with one IT service provider without soliciting competitive bids
for IT services. On May 31, 2011, General Services approved the
Authority’s six requests and cited the rationale supporting its
decision to authorize the Authority to contract with the IT service
provider. According to the chief procurement officer at General
Services, the IT supplier was the only supplier that could meet
the needs of the Authority given its time constraints and lack of
staffing. He further stated that had the request not been granted,
the Authority’s previous contracts with the supplier would have
lapsed and the Authority’s IT systems would have risked being shut
down. However, based on our review of the relevant documents,
we disagree with this approach. Although General Services helps
to better serve the public by providing a variety of services to
state agencies through innovative procurement and acquisition
solutions, in this circumstance, we believe General Services could
have done more to assist the Authority. Given the time constraints
and lack of staffing at the Authority, we believe it would have
been more appropriate for General Services to have approved a
noncompetitive bid contract for an additional six‑month period.
During that six months, General Services could have worked
directly with staff at the Authority to use a competitive bidding
process for future IT services.
As indicated in Table 3, the Authority entered into multiple
contracts for similar IT services, each with the same service
provider. When we expressed our concern to the chief procurement
officer at General Services that the Authority appeared to be
splitting these contracts to avoid the purchasing thresholds that
would have required using the competitive bidding process,
the chief procurement officer stated that the six contracts did
not constitute contract splitting. He told us our concerns were
unfounded because these were separate and distinct services.
Additionally, he explained that there are also certain advantages
to separating contracts, such as being able to terminate services
more easily than in large contracts. However, we believe that the We believe that the Authority was
Authority was attempting to split the contracts. Based on our attempting to split the contracts
review of the contracts, the services do not all appear to be separate because the services do not all
and distinct. Additionally, we would expect that the provisions appear to be separate and distinct.
within a contract would provide the circumstances for terminating
it and that its size would not dictate the ease with which such a
contract could be terminated.
Even though the Authority eventually received approval to
noncompetitively award its six contracts for IT services to the
same provider, thus relieving it of the duty to at least obtain
two bids, the Authority entered into these contracts before it
received approval from General Services and it agreed to terms
longer than were approved by General Services. On May 18, 2011,
44 California State Auditor Report 2011-504
January 2012
the Authority’s chief executive officer signed six purchase orders
with the same IT service provider even though it had not yet
obtained General Services’ approval. Nearly two weeks after the
Authority signed the six contracts, the chief procurement officer
with General Services made a one‑time exception to approve the
requests with the requirement that the Authority use a competitive
procurement process to acquire those same IT services within
12 months following General Services’ approval. Despite this
one‑year stipulation as the term for each of the six contracts, all
the Authority’s IT contracts are for a two‑year period. When we
informed General Services, its chief procurement officer told us the
contracts would be void after one year because General Services
only approved the noncompetitive bid requests for one year.
Although the Authority provided a draft of its request for proposal
for IT services, because six months have already elapsed on the
terms for these contracts, we question whether it can acquire IT
services by General Services’ one‑year deadline.
The Authority Lacks a System to Track Bond Fund Expenditures
In our April 2010 report, we concluded that the Authority did
not have a system in place to track expenditures funded by
Although the Authority has Proposition 1A that would ensure compliance with statutory
made some improvements in its limitations on administrative and preconstruction task costs.
process, it still has not completed During our follow‑up review, we found that although the Authority
its expenditure‑tracking system as has made some improvements in its process, it still has not
noted in our April 2010 report. completed its expenditure‑tracking system.
As noted in the Introduction, the Authority can use only
2.5 percent ($225 million) of its portion of Proposition 1A bond
funds for administration (the Legislature can increase this up to
5 percent) and only 10 percent ($900 million) for preconstruction
tasks. We previously reported that until the Authority had an
expenditure‑tracking system in place, it 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. In our prior report, we also explained
that this was of particular concern because at that time the
Authority anticipated spending about $168 million in bond
proceeds by the end of fiscal year 2009–10, and the proposed
2010–11 Governor’s Budget estimated spending an additional
$583 million on the program, for a total of about $751 million. We
cautioned that 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. However, during our follow‑up review,
we noted that the Authority received a smaller appropriation
California State Auditor Report 2011-504 45
January 2012
for fiscal year 2010–11 and, as of June 30, 2011, ultimately
spent $237 million, or 21 percent, of all the money authorized
by Proposition 1A for administration and preconstruction—
substantially less than what we previously estimated in our
April 2010 report.
According to the chief deputy director, the Authority had been
developing a system to track its expenditures but it halted
further development in November 2011 because of current staff
vacancies as well as a lack of clarity as to how to categorize its
program costs. He stated that although the Authority does not
currently have clearly documented definitions of how expenditures
should be classified by cost category, such as administration and
preconstruction tasks, it is working to develop a process and
database to track its expenditures. Despite the lack of a system, we
observed that the Authority is making attempts to categorize its
expenditures. Specifically, the Authority worked with the Program
Manager and the oversight consultant to develop a rough draft
of a forecasted spending plan through June 30, 2018, that shows
how expenditures would be categorized. Nevertheless, without an Without an expenditure‑tracking
expenditure‑tracking system in place, the concerns we raised in our system in place, the Authority risks
previous report persist, including that the Authority risks not being not being able to create an accurate
able to create an accurate long‑term spending plan. long‑term spending plan.
The Authority Has Not Determined Whether the Independent Peer
Review Panel Is Subject to the Bagley‑Keene Open Meeting Act
As mentioned in the Introduction, state law required the Authority
to establish an independent peer review panel to perform a variety
of review‑related tasks, including assessing the different plans the
Authority may develop and reporting its analysis to the Legislature.
The Bagley‑Keene Open Meeting Act (Meeting Act)6 prohibits a
majority of members of a state body from discussing, deliberating,
or taking action on items of business outside of an open meeting
and allows courts to void actions taken by a state body that violates
this prohibition. Thus, according to our legal counsel, when the
peer review panel analyzes and evaluates the Authority’s plans, it
must properly announce its meetings and open them to the public.
In our earlier report, we recommended that to avert possible legal
challenges, the Authority should either ensure that the peer review
panel adheres to the Meeting Act or seek a formal opinion from the
Office of the Attorney General (attorney general) regarding whether
the review panel is subject to this act.
6 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.
46 California State Auditor Report 2011-504
January 2012
Although we made our recommendation nearly two years ago, the
Authority did not request a formal opinion until January 5, 2012. At
the time of our prior report, the Authority had not sought a formal
opinion from the attorney general because it received informal
advice from its own former legal counsel, an attorney with the
attorney general, stating that the peer review panel was not subject
to the Meeting Act. In its six‑month and one‑year responses to our
audit, the Authority stated that it agreed that this topic merited
further clarity and that it would continue to work on the issue.
Although the Authority sought formal guidance from the attorney
general, the results of the opinion are not yet known. Without
clarity on whether it is subject to the Meeting Act, the Authority
continues to risk having the peer review panel violate state law and
potentially having its analyses voided.
Recommendations
The Authority should fully implement the recommendations we
made in our prior audit, which we list in Appendix B.
To ensure that it has adequate staff to effectively oversee the
program, the Authority should continue to fill its vacant positions.
Additionally, the Authority should conduct a workload analysis to
determine the total number of staff it needs as well as the functions
those staff should perform.
To comply with the political reform act, the Authority should
establish written policies and procedures for tracking whether all
designated employees and consultants have completed and filed
their statements of economic interests on time, thereby identifying
any potential conflicts of interest.
To increase transparency and to ensure that it is aware of any
financial interest that a subcontractor may have in the program,
the Authority should require subcontractors to file statements of
economic interest.
To ensure that the Program Manager’s monthly progress reports
are accurate, consistent, and useful, the Authority should do
the following:
• Reinstate the oversight consultant’s review of the progress
reports. Once it does so, the Authority should hold the
Program Manager accountable for implementing the oversight
consultant’s recommendations. For example, the Authority could
withhold partial payment of invoices to the Program Manager
until it fully addresses these recommendations.
California State Auditor Report 2011-504 47
January 2012
• Conduct monthly comparisons of the Program Manager’s and
the regional contractors’ progress reports to verify that they
are consistent with one another and to ensure that the reports
include an accurate status of promised deliverables.
To ensure that the regional contractors’ monthly progress reports
provide sufficient detail to support the monthly invoices, the
Authority should perform a monthly comparison of the regional
contractors’ invoices with the corresponding progress reports.
Specifically, the Authority should ensure that the regional
contractors’ monthly progress reports describe the work they
performed in those areas for which they claimed costs in the
corresponding invoices. The Authority should discuss with
the Program Manager any areas that lack sufficient detail in the
progress reports to make such determinations.
To be aware of and respond effectively to circumstances that could
significantly delay or halt the program, the Authority should hire a
risk manager as soon as possible. Until then, it should designate and
require Authority staff to attend risk‑management meetings and
workshops. Further, it needs to be involved in the development
and implementation of the Program Manager’s risk‑management
plan and ensure that Authority staff have roles and responsibilities
defined in the plan, such as identifying and mitigating risks in the
risk register. Finally, the Authority should monitor the Program
Manager’s risk‑management practices to ensure that either it or
the Program Manager identifies and promptly and appropriately
addresses risks.
To effectively manage its contracts, the Authority should do
the following:
• Develop procedures to detect and prevent contract splitting.
• Begin awarding contracts with a sufficient amount of lead time.
• Immediately begin the process of soliciting competitive bids for
its IT services.
To ensure that the Authority is complying with state contracting
rules and is following the guidelines of the State Contracting
Manual, General Services should conduct a procurement audit of
the Authority by January 1, 2013.
48 California State Auditor Report 2011-504
January 2012
We conducted this audit 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. Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives
specified in the scope section of the report. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit objectives.
Respectfully submitted,
ELAINE M. HOWLE, CPA
State Auditor
Date: January 24, 2012
Staff: Laura G. Boll, Project Manager
Kathleen Klein Fullerton, MPA
Vance W. Cable
Scilla Outcault, MBA
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 2011-504 49
January 2012
Appendix A
SCOPE AND METHODOLOGY
The Bureau of State Audits (bureau) conducted an audit of the
High‑Speed Rail Authority (Authority) and, in April 2010, publicly
reported the results in High‑Speed Rail Authority: It Risks Delays
or an Incomplete System Because of Inadequate Planning, Weak
Oversight, and Lax Contract Management, Report 2009‑106. Under
the bureau’s authority to conduct follow‑up audits, we examined
the Authority and its efforts to implement our recommendations. In
addition, the bureau is responsible for conducting audits as directed
by statute. Therefore, in accordance with Streets and Highways
Code, Section 2704.04 (e), we examined the Authority’s expenditure
of the bond funds authorized by the Safe, Reliable High‑Speed
Passenger Train Bond Act for the 21st Century (Proposition 1A).
Specifically, we set out to do the following:
• Determine whether the Authority has met the requirement
in Chapter 38, Statutes of 2011, that it develop and publish
alternative funding scenarios that reflect the possibility that the
high‑speed rail network (program) might receive reduced or
delayed funding from the planned sources.
• Review the Authority’s funding, business plans, and other
documents to assess whether it adequately discussed revenue
guarantees, their potential costs, and who would pay for them.
• Determine whether the Authority has implemented its planned
actions related to managing risk to ensure that it identifies and
addresses circumstances that could significantly delay or halt
the program.
• Determine whether the Authority has requested a legal opinion
from the Attorney General’s Office (attorney general) and
assess whether the Authority’s peer review group adheres to the
Bagley‑Keene Open Meeting Act (Meeting Act).7
• Evaluate if the Authority tracks expenditures for certain cost
categories including administrative and preconstruction tasks
and if it has developed a long‑term spending plan.
7 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 act to meet in closed session.
50 California State Auditor Report 2011-504
January 2012
• Determine the Authority’s level of participation in the
development of its key policy documents, such as its business
and strategic plans. Further, assess whether the Authority’s
board members adhere to policies and procedures regarding
communication with contractors.
• Verify that the Authority amended the oversight consultant’s
work plan to include a critical review of the Program Manager’s
progress reports for accuracy and consistency. Further, assess the
Program Manager’s monthly progress reports to ensure that they
include information on the status of promised deliverables.
• Determine whether the Authority has implemented and follows
procedures for invoice processing and payment control.
• Determine if the Authority adheres to the conditions of its
contracts and work plans and that it makes any amendments and
modifications to contracts and work plans in writing.
To determine whether the Authority developed and published
alternative funding scenarios that reflect the possibility that it
could receive reduced or delayed funding from its planned sources
as required by Chapter 38, Statutes of 2011, we reviewed the
Authority’s 2012 draft business plan. We interviewed the Authority’s
chief deputy director to discuss the business plan and how the
Authority developed it. Further, we interviewed the financial
consultant who contributed to the financial sections of the business
plan. In addition, to assess the operating and maintenance costs
of the program, we used the data in the Authority’s 2012 draft
business plan to estimate these total costs. Similarly, to assess the
net operating profit generated from phase one, we used data from
the 2012 draft business plan to estimate this total figure. Finally, as
it relates to the 2012 draft business plan, we reviewed the ridership
model’s projections as well as the ridership review group’s reports.
We also interviewed the Authority’s chief executive officer to
discuss the ridership model and the ridership review group.
To examine the potential costs of the Authority’s planned revenue
guarantees and assess who would pay for them, we reviewed
the 2012 draft business plan and interviewed the Authority’s
chief deputy director. To determine whether the Authority has
implemented its planned actions related to managing risk, we
assessed the Program Manager’s risk‑management plan as of
March 2010 and the risk register on which it identifies and tracks
all program risks. Further, to evaluate other risk‑management
practices associated with the program, we interviewed the Program
Manager’s risk manager, the oversight consultant’s senior vice
president, and the Authority’s chief deputy director.
California State Auditor Report 2011-504 51
January 2012
To assess whether the Authority implemented our recommendation to
either ensure that the independent peer review panel adheres to
the Meeting Act or seek a formal opinion from the attorney general
regarding whether that group is subject to that act, we reviewed the
Authority’s responses to our prior audit, interviewed key staff at
the Authority, and examined the peer review panel’s Web site.
To evaluate whether the Authority established systems to comply
with state law and federal grant requirements, we interviewed
Authority staff and the chief deputy director of the Authority.
The chief deputy director stated that the Authority had placed the
development of such systems on hold but that it was developing
a draft of a long‑term spending plan. During our review of this
draft spending plan, we noted the Authority did not include the
consultant costs for its Program Manager or any of its oversight
consultant’s costs as part of the administration category. To verify
whether other state entities classify such expenditures in a similar
manner, we contacted a chief in the Office of Capital and Finance
at the California Department of Transportation (chief). According
to the chief, her agency classifies both project management and
project oversight costs as part of the capital outlay support program
budget and therefore does not classify these costs as administrative
expenditures. Thus, we believe the Authority’s categorization of
its project management and oversight costs appears reasonable.
Further, based on interviews with the Authority’s interim grant
administrator and our review of some federal reports, the Authority
appears to be satisfying its federal reporting requirements; however,
because the Authority does not have an expenditure‑tracking
system, as we describe in Chapter 2, we did not verify the accuracy
of these reports.
To determine the Authority’s level of participation in the development
of key policy documents and to assess whether the Authority’s
board adheres to communication policies and procedures, including
those outlining how the board members may communicate with
contractors, we reviewed the Authority’s policies and procedures.
In addition, we interviewed the Authority’s chief deputy director,
the Program Manager, and the Authority’s financial consultant to
evaluate whether the Authority has implemented these procedures.
To verify that the Authority amended the oversight consultant’s
work plan to include a critical review of the Program Manager’s
monthly progress reports for accuracy and consistency, we
reviewed the oversight consultant’s annual work plans for fiscal
years 2010–11 and 2011–12. Further, to assess whether the Program
Manager’s progress reports include the status of promised
deliverables, we reviewed the available progress reports.
52 California State Auditor Report 2011-504
January 2012
In our prior report, we recommended that the Authority ensure
that its written policies and procedures reflect its intended controls
over invoice processing, that they offer sufficient detail to guide
staff, and that they include steps for documenting staff’s compliance
with the controls. To assess the Authority’s implementation of
these recommendations, we reviewed its Contract Administration
Manual to determine whether it included sufficient controls over
invoice processing. Subsequently, to ensure that the Authority’s
staff adhered to these controls, we examined documentation of
its reviews for 10 monthly invoices from regional contractors for
fiscal year 2010–11. Specifically, we verified that the Authority had
received written notification from the Program Manager that the
amounts that the regional contractors had billed were appropriate
for the work they performed. Additionally, using the regional
contractors’ corresponding monthly progress reports, we verified
that the regional contractors actually performed work in areas for
which they had invoiced amounts to the Authority and that those
areas were included in their annual work plans. We also looked
at one invoice each from the Program Manager and the oversight
consultant and interviewed key staff charged with invoice review
to determine whether their procedures and controls seemed
reasonable and whether they are being followed.
To evaluate whether the Authority adhered to the conditions of its
contracts and work plans and that amendments and modifications
were in writing, we examined the two contracts we had previously
identified as problematic—one with a regional contractor and
one with the Program Manager—to verify whether the Authority
had corrected them. In addition, we interviewed the Authority’s
chief deputy director and reviewed the Authority’s proposed change
control process, which it has not yet formally implemented.
To ensure the Authority engaged in appropriate contracting
practices for its information technology (IT) contracts and adhered
to the requirements outlined in the State Contracting Manual,
we examined the Authority’s contracts with its IT supplier,
Paperless Knowledge. In addition, we interviewed the Authority’s
chief deputy director, an analyst within the Authority’s contracts
and finance unit, as well as the chief procurement officer at the
Department of General Services.
To determine the total amount of bond proceeds the Authority
has spent, we reviewed and reconciled its accounting records with
the accounting records the State Controller’s Office maintains. We
used the State Treasurer’s Authorized and Outstanding General
Obligation Bonds report as of June 30, 2011, to determine the total
amount of bonds issued.
California State Auditor Report 2011-504 53
January 2012
Appendix B
STATUS OF RECOMMENDATIONS
In 2009 the Joint Legislative Audit Committee (audit committee)
asked the Bureau of State Audits (bureau) to assess the High‑Speed
Rail Authority’s (Authority) readiness to manage the funds that the
Safe, Reliable High‑Speed Passenger Train Bond Act for the 21st
Century had authorized for building the high‑speed rail network
(program) in California. In April 2010 we issued a report titled
High‑Speed Rail Authority: It Risks Delays or an Incomplete System
Because of Inadequate Planning, Weak Oversight, and Lax Contract
Management, Report 2009‑106. This report concluded that the
Authority had not adequately planned for the future development
of the program.
In that report, we made 10 recommendations to the Authority.
Before our current follow‑up audit, we used the information the
Authority provided to us in response to our April 2010 audit
to assess its implementation of these recommendations. We
presented these assessments in our March 2011 report titled
Implementation of State Auditor’s Recommendations, Audits
Released in January 2009 Through December 2010, Report 2011‑406
(subcommittee report). Table B on the following pages depicts
our determinations regarding the Authority’s implementation
of our recommendations indicated in our subcommittee report as
well as our current findings. We concluded that the Authority has
fully implemented four recommendations, partially implemented
five, and taken no action on one.
54 California State Auditor Report 2011-504
January 2012
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ylluF
on
nalp ssenisub
tfard 2102
ehT
krow ot deunitnoc ti taht detats ytirohtuA ehT
gnidneP
eht ,tnemtsevni etavirp rof yletauqeda nalp ot redro
nI
2
detnemelpmI
.seetnaraug
eunever
sedulcni regnol
sserdda ot stnatlusnoc lagel dna laicnanfi htiw
fo stsoc laitnetop eht yficeps rehtruf dluohs ytirohtuA
.seetnaraug eunever
.meht rof yap dluow ohw dna seetnaraug eunever dennalp
83
yllaitraP
sniatnoc
nalp ssenisub
tfard 2102
ehT
a erih ot dennalp ti taht detats ytirohtuA ehT
gnidneP
dluoc taht secnatsmucric ot ylevitceffe dnopser ot redro
nI
3
detnemelpmI
eht
naht ksir gnidrager
liated erom
.snoitisop ffats tidua owt llfi dna reganam ksir
ytirohtuA eht ,margorp eht tlah ro yaled yltnacfiingis
eht
,revewoH
.nalp ssenisub 9002
ecalp ni ezeerf gnirih eht ot eud ,revewoH
ot detaler snoitca dennalp stnemelpmi ti taht erusne dluohs
yletelpmoc
ton
seod nalp ssenisub
dellfi tey ton dah ytirohtuA eht ,emit eht ta
.ksir gniganam
fo
sa ,dna syaled
gnidnuf sserdda
.snoitisop eht
ton
sah
ytirohtuA
eht ,1102 rebmeceD
.noitisop
reganam
ksir eht dellfi
tey
54
yllaitraP
ytirohtuA
eht
,2102 ,5 yraunaJ
nO
htiw gnikrow saw ti taht detats ytirohtuA ehT
gnidneP
dluohs ytirohtuA eht ,segnellahc lagel elbissop treva
oT
4
detnemelpmI
eht
morf noinipo
lamrof a thguos
fo noitacfiiralc niatbo ot stcatnoc evitalsigel
serehda lenap weiver reep tnednepedni eht taht erusne
fo stluser
eht tub
,lareneg yenrotta
etauqeda niatbo lliw ti taht detressa tI .wal eht
lamrof a kees ro tcA gniteeM nepO eneeK‑yelgaB eht
ot
.nwonk
tey
ton era noinipo
siht
.esnopser lanfi eht rof emit ni noitacfiiralc
yenrotta( lareneG yenrottA eht fo ecffiO eht morf noinipo .tca siht ot tcejbus si lenap eht rehtehw gnidrager )lareneg
44
yllaitraP
a depoleved
sah ti hguohtlA
sti decnahne ti taht detats ytirohtuA ehT
gnidneP
evitartsinimda rof sdnuf fo tuo nur ton seod ti taht erusne
oT
5
detnemelpmI
,nalp
gnidneps
mret‑gnol tfard
evitartsinimda gnikcart rof metsys retupmoc
ytirohtuA eht ,ylerutamerp sksat noitcurtsnocerp
dna
ot woh denimreted
ton sah
ti
detcepxe ti taht dna serutidnepxe tcejorp susrev
poleved dna seitivitca eseht rof serutidnepxe kcart dluohs
dna
serutidnepxe
sti ezirogetac
enilno eb dluow stnemecnahne metsys eht
dluohs osla tI .meht rof nalp gnidneps mret‑gnol
a
erutidnepxe
sti
detelpmoc ton
sah
ti detats ytirohtuA eht ,revewoH .0102 yaM yb
seilpmoc ti taht erusne ot smetsys dna serudecorp poleved
.metsys gnikcart
evloser ot rotcartnoc eht htiw krow ot seunitnoc
9002 fo tcA tnemtsevnieR dna yrevoceR naciremA
htiw
lluf stcepxe ti taht dna metsys eht htiw seussi
.stnemeriuqer
.1102 lirpA yb ytilibarepo metsys
15
ylluF
ytirohtuA
eht ,0102 gnirps
nI
seicilop sti ot egaugnal dedda ytirohtuA ehT
etelpmoC
yek fo tnempoleved eht ni etapicitrap dluohs ytirohtuA
ehT
6
detnemelpmI
hcihw
,nalp cigetarts
a detelpmoc
rof elbisnopser si ti taht gnitats serudecorp dna
.snalp cigetarts dna ssenisub sti sa hcus ,stnemucod ycilop
nI .detpoda
yllamrof draob
sti
gnidulcni ,stnemucod ycilop yek gnipoleved
seicilop rieht ot erehda dluohs srebmem ytirohtuA ,rehtruF
,seicilop
wen
sti htiw ecnailpmoc
osla ytirohtuA ehT .nalp ssenisub eht gnivorppa
yam yeht woh gniniltuo esoht gnidulcni ,serudecorp
dna
ylevitca
saw ytirohtuA
eht
serudecorp dna seicilop sti ot egaugnal dedda
.srotcartnoc htiw etacinummoc
tfard
2102 sti
gnitaerc ni devlovni
etacinummoc srebmem sti taht gniriuqer
.nalp ssenisub
feihc s’ytirohtuA eht hguorht srotcartnoc htiw .recffio evitucexe
California State Auditor Report 2011-504 55
January 2012
TXET
DETALER
FO
SUTATS
EHT
NO
DESAB
TNERRUC
NI
NOITADNEMMOCER
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53
yllaitraP
nalp krow
s’tnatlusnoc
thgisrevo
ehT
margorP eht taht
detats ytirohtuA
ehT
yllaitraP
noitamrofni
tnaveler
eviecer ffats taht erusne ot
redro nI
7
detnemelpmI
eht fo
weiver lacitirc
a sedulcni
won
erusne
ot stroper ssergorp
sti desiver
reganaM
detnemelpmI
eht dnema
dluohs
ytirohtuA eht ,sutats s’margorp
eht no
srorre
,revewoh
;stroper ssergorp
.sutats
tcejorp detcefler
yletarucca
yeht
taht
weiver lacitirc
a edulcni
ot nalp krow s’tnatlusnoc thgisrevo
eht
esuaceb tsisrep
stroper eht
ni
ti
taht
dias tnatlusnoc thgisrevo
eht
,revewoH
.ycnetsisnoc
dna ycarucca rof stroper ssergorp
eht fo
ssecorp
a evah
ton seod ytirohtuA
ssessa
ot noitamrofni tneicffius
evah
ton
did
taht
ytitne
eht
taht tseuqer osla dluohs ffats ytirohtuA
smelborp
eht
erusne ot ecalp
ni
ehT
.stroper ssergorp eht
ni sesylana
niatrec
ssergorp sti
esiver
)reganaM
margorP( margorp eht seganam
eht
,yllanoitiddA
.desserdda
era
sucof
ot referp dluow ti
taht dias
tnatlusnoc
tcartnoc
fo sutats
eht no noitamrofni edulcni ot
stroper
ecudorp
ton seod
reganaM margorP
level
lautca rieht dna selbareviled
lacisyhp
no
.desimorp
saw
tahw
ot pihsnoitaler ni secivres dna stcudorp
.sisab ylemit
a no
stroper elbareviled
.noitelpmoc
fo
73
ylluF
ssecorp
ton
seod ytirohtuA
ehT
na
depoleved ti taht detressa
ytirohtuA
ehT
detnemelpmI
ylluF
tcefler
yletarucca
taht seciovni gniyap si ti fi enimreted
oT
8
detnemelpmI
seviecer
ti erofeb stnemyap
lavorppa dna ,noitacfiirev
,weiver
eciovni
ffats
taht
erusne
dluohs ytirohtuA eht ,demrofrep
krow
eht morf
noitacfiiton nettirw
htob
morf lavorppa sedulcni
hcihw
,ssecorp
,elpmaxe
roF .seciovni
gnissecorp rof slortnoc ot
erehda
.reganaM margorP
.ffats reganaM margorP
dna
ytirohtuA
litnu srotcartnoc
lanoiger
morf seciovni yap ton dluohs
ffats
reganaM
margorP
eht
morf noitacfiiton nettirw eviecer
yeht
evah yeht
litnu
ro ,demrofrep
neeb sah dellib krow
eht taht
.noitacfiirev tnednepedni na detcudnoc
25
yllaitraP
detcerroc
ytirohtuA
eht hguohtlA
htiw tcartnoc sti dednema
ytirohtuA
ehT
detnemelpmI
ylluF
dloh nac
dna
sdnuf
cilbup esusim ton seod ti taht erusne
oT
9
detnemelpmI
ni defiitnedi
ew
seussi cfiiceps
owt
fo
esu eht eriuqer ot reganaM
margorP
eht
eht ot erehda
dluohs
ytirohtuA eht ,elbatnuocca srotcartnoc
ezilanfi
ot tey sah
ti ,troper roirp
ruo
detnuocsid
a—etar dlefi
detsujda‑tidua
na
yna ekam
dna ,snalp
krow dna stcartnoc sti fo snoitidnoc
.ssecorp
lortnoc egnahc
sti
esu stnatlusnoc nehw
desu etar
daehrevo
.gnitirw
ni snoitacfiidom dna stnemdnema
dednema
ytirohtuA eht ,rehtruF
.seitilicaf
tneilc
rotcartnoc lanoiger
a htiw
tcartnoc
sti
eht fo trap ton saw
taht krow
edulcni
ot
.tcartnoc
lanigiro
73
ylluF
tcartnoC
sti detadpu
ytirohtuA
ehT
tcartnoc sti dednema
ytirohtuA
ehT
detnemelpmI
ylluF
,detnemelpmi
era
slortnoc tnemyap fi enimreted retteb
oT
01
detnemelpmI
edulcni
ot launaM
noitartsinimdA
serudecorp deliated
edulcni
ot launam
dna seicilop
nettirw
sti taht erusne dluohs ytirohtuA
eht
.serudecorp
gnissecorp eciovni
dna weiver eciovni fo
noitatnemelpmi
rof
gnissecorp
eciovni
revo
slortnoc dednetni tcefler serudecorp
eht
fo erawa
era ffats tnaveleR
.slortnoc eciovni
fo noitatnemucod
serudecorp
esehT
.ffats ediug ot liated tneicffius reffo
dna
eht
ot gnirehda
era dna segnahc
fo noitatnemelpmi
gnitnemucod rof spets edulcni
dluohs
.ssecorp
wen
.slortnoc
eciovni
.)604‑1102
tropeR(
0102
rebmeceD
hguorhT 9002
yraunaJ
ni
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stiduA ,snoitadnemmoceR
s’rotiduA
etatS
fo
noitatnemelpmI
:deltit troper
1102
hcraM
ruo ni dehsilbup saw noitanimreted
ruO
*
56 California State Auditor Report 2011-504
January 2012
Blank page inserted for reproduction purposes only.
California State Auditor Report 2011-504 57
January 2012
(Agency response provided as text only.)
California High‑Speed Rail Authority
770 L Street Suite 800
Sacramento, CA 95814
January 11, 2012
Elaine M. Howle*
State Auditor
Bureau of State Audits
555 Capitol Mall, Suite 300
Sacramento, CA 95814
Dear Ms. Howle:
Attached please find the Authority’s response to the Bureau of State Audits report 2011‑504, dated
January 2012, titled: High‑Speed Rail Authority Follow‑Up: Although the Authority Addressed Some of Our Prior
Concerns, its Funding Situation Has Become Risky and The Authority’s Weak Oversight Persists,
To ensure full disclosure, I would like you to understand that the task of managing, controlling and oversight of
this project remain a huge challenge for the Authority due to a lack of sufficient qualified staff. As the project
continues to evolve, the ability to hire additional competent and experienced staff must remain a priority for
the Authority and the Governor.
You will notice that the Authority has respectfully pointed out various areas of disagreement concerning 1
comments made in the audit report. These fall mainly into two categories, namely the Draft Business Plan and
project reports. Our comments to these two categories are the following:
• We believe that the comments on the Draft Business Plan which lead to the conclusion that 2
“The High Speed Rail’s Funding Situation Has Become Increasingly Risky” are purely speculative and
should not form part of an audit response.
• Regarding project reporting, we believe the BSA has not understood the role of the Program Management 3
Team [PMT] on this project. The PMT are Program Managers, working together with, and on behalf of
the Authority. Therefore during this planning and environmental phase of the program, it is obvious and
necessary that the PMT manage and challenge the Regional Consultant’s [RC’s] reports and inputs.
If you have any questions about the actions noted in the response, please contact Chris Ryan, Chief Deputy
Director, at 324‑1541.
Sincerely,
(Signed by: Thomas Umberg)
Thomas Umberg
Chairman
* California State Auditor’s comments begin on page 67.
Note: The Authority also provided us copies of documents relating to the independent peer review panel and the Bagley‑Keene Open
Meeting Act that we did not include with the Authority’s response. These documents are available for inspection at our office during business
hours upon request.
58 California State Auditor Report 2011-504
January 2012
Elaine M. Howle (Final)
January 11, 2012
ATTACHMENT
General Response
BSA Recommendations and Authority Responses
Appendix B
Recommendation: The Authority should fully implement the recommendations we made in our prior audit, which
we list in Appendix B.
Response: The Authority has taken significant steps in recent months to address the findings reported in the
last audit. Specifically, this audit report indicates four of the previous audit findings have been implemented,
four findings as partially implemented, one pending implementation and one no action.
Of the four partially implemented findings, two (filling risk manager position and change control process)
are being implemented and two (completing expenditure tracking system and discrepancies between
the oversight consultant and program manager are reconciled by Authority staff) are being prioritized and
implemented to fit within existing staff resources.
The recommendation indicated as pending relates to a legal interpretation whether of the Legislative Peer
4 Review Group is subject to the Bagley‑Keene Act as it relates to the Legislative Peer Review Group and
should be changed as having been implemented since and the Authority has requested a formal legal
opinion from the Attorney General as recommended in the audit report.
1 2 Regarding the finding which the Bureau of State Audits (BSA) indicates the Authority has taken no action
as it relates to “…presenting viable alternative funding scenarios for Phase One…” the Authority disagrees
with this conclusion as it has presented what it believes to be viable funding options throughout the Draft
Business Plan.
The Draft Business Plan Continues to Lack Some Key Details Regarding Costs and Revenues
Recommendation: To ensure the public and the Legislature are aware of the full costs of the program, the
Authority should clearly report total costs, including projected maintenance and operations for the program.
Additionally, the authority should clearly disclose that the 2012 draft business plan assumes that the State will only
be receiving profits for the first two years of operation in 2022 and 2023, and potentially not again until 2060.
Response: The Draft Business Plan includes projected maintenance and operation costs in Chapters 7 and 8
(between pages 7‑3 and 7‑5 and again on 8‑19 and 8‑20) in a table format and illustrates such costs for
5 the period of 2025 to 2060. The tables in the Draft Business Plan do not sum the information as the costs
are for illustrative purposes only and would not be borne by the state but would be the responsibility of
the concessionaire operating the system. The costs are included for the purpose of being transparent. In
addition, the costs associated with maintenance and operation would be offset by revenues associated with
6 the concessionaire commitment agreement associated with operating the high‑speed train system. The
period of this concession is provided in the Draft Business Plan on page 8‑31 and graphically Exhibit 8‑27 on
the same page and indicates the period from 2022 to 2060.
Operation and maintenance costs are the subject of a detailed discussion in chapter 7 of the Draft Business
Plan. Operations and maintenance cost assumptions are described and projections are shown in tables and
in line graphs through 2060 in 2010 dollars. The Draft Business Plan also indicates on page 7‑1 the support
1 | Page
California State Auditor Report 2011-504 59
January 2012
Elaine M. Howle (Final)
January 11, 2012
document at following link: www.cahighspeedrail.ca.gov/business plan reports.aspx. This attachment is part 7
of the Draft Business Plan and provides the detail the auditors appear to be seeking.
We have also provided tables in Chapter 8 that illustrate revenues, operating and maintenance costs and
net operating profits in the same format. Net operating profits are projected under each of the revenue
scenarios analyzed (high, medium and low) beginning with IOS operations. The project also illustrates
positive net cash flow in each year (net operating profits less amounts required for capital maintenance). The 8
choice of what to do with net cash flows will be made by the State of California as the owner of the system.
To date, the intent and direction of the Authority and legislature has been to use net cash flows generated
by the project to attract private capital to assist with reducing government funds required to build the
system. The Draft Business Plan illustrates how the project’s positive cash flows can both cover its operating
commitments and contribute to fund capital development.
The Authority believes that it has been transparent in the presentation of its Draft Business Plan with respect 9
to costs and revenues. The Draft Business Plan has been structured into well‑defined chapters and the
Authority has clearly described all its assumptions, which it believes are rather conservative but realistic. It
went to great extremes to reduce the possibility of confusion with regard to figures as had happened in the
past, and in particular as the aspects such as escalation have a large impact on the costs.
Consistent with standard project financing analysis, the Draft Business Plan assesses the net cash flows that 10
would be generated by the project and estimates the amount of financing that would support. Page 8‑32 of
the Draft Business Plan discusses the assumptions and a range of discount factors which illustrate that the
State could raise a projected $8.1 billion to $15.7 billion in funds based on the future cash flows two years
after an IOS begins operations. Were the State to commit the future net cash flows of the project to raise
capital for the project, such future net cash flows (e.g. net operating profits less capital replacement) would
not also be available as a reimbursement to the State. We will review the language in the Draft Business Plan
to further clarify that funds from net operating profits cannot be used twice.
In regards to the statement that “The High‑Speed Rail’s Funding Situation Has Become Increasingly Risky,” 2
we have significant concerns. While the report accurately notes that the Authority has been awarded
approximately $3.5 billion in federal funds, it should also be noted that these funds were secured since
the prior audit was conducted in April 2010. Since that time, the Authority signed the following funding /
cooperative agreements with the federal governments/FRA:
FR‑HSR‑009‑10‑01 signed 09/22/2010 for $194,000,000‑
Amendment 1 signed 12/22/2010 for $2,272,176,231‑
Amendment 2 signed 08/01/2011 for $86,380,000‑
FR‑HSR‑0037‑11‑01 signed 06/17/2011 for $16,000,000‑
FR‑HSR‑0118‑12‑01 signed 11/18/2011 for $928,620,000‑
Thus in the past 20 months the Authority has received a total of $3.5 billion in grant fund commitments from
the Federal Railroad Authority for the high‑speed rail project in California, while the Transbay Terminal in
San Francisco received an additional $400 million in HSR funding commitments with the FRA.
The report states that “…the Authority has failed to provide sufficient detail on how it intends to obtain
those funds and to report alternative funding options if it does not receive them, despite our previous
recommendation as well as state law requiring it to do so prior to spending some of its 2011 budget act
appropriations.” In so stating, the BSA appears to set a standard that is not used for other transportation 11
programs. No project in our experience has fully identified funding sources for the entire project at
2 | Page
60 California State Auditor Report 2011-504
January 2012
Elaine M. Howle (Final)
January 11, 2012
this stage. Furthermore, the mere existence of a dedicated funding stream is no guarantee that any specific
project or program will ultimately be funded. By this metric, Interstate 5 would not have commenced
construction, despite the presence of the Highway Trust Fund. Nowhere in the Act is there a requirement
that any particular amount of non‑state matching funds be committed prior to the initiation of the start of
the high‑speed rail project.
Moreover, although Proposition 1A requires the Authority in its funding plan request for eligible capital
costs on each usable segment to identify all sources of funds to be invested in the usable segment and the
anticipated time of receipt of those funds based upon expected commitments, authorizations, agreements,
allocations, or other means, it does not require that the usable segment be fully funded prior to the initiation
of the start of the usable segment using those eligible capital costs. In fact, Proposition 1A only requires the
identification of funds based upon expected commitments or other means.
The Authority has been frank about which commitments have been made and which have not. At this
point the commitments are for those funds adequate to construct the Initial Construction Section. Other
means beyond the funding for the Initial Construction Section include various funding mechanisms
addressed in the Draft Business Plan.
12 The report ignores the fact that the High Speed Rail project has funding in hand for the Initial Construction
Segment, which will have independent utility if constructed. Thus the statement “The Authority has not
identified viable alternatives in the event that its planned funding does not materialize” is unclear to us,
as the complete phasing concept discussed throughout the Draft Business Plan addresses this issue, and
reduces the risk to the state.
Most importantly, the report does not discuss the clear mandate of the Legislature and the people of the
State of California pursuant to the provisions in the Act. Under the Act, $9 billion of bond proceeds were
approved to initiate the construction of a high‑speed rail system using these state bond monies as matching
13 funds with other private or public funds, including federal funds. Nowhere in the Act is there a requirement
that the project must be funded using a “dedicated funding source.” Future non‑state match funding will be
pursued by the CHSRA to progress the project beyond the Initial Construction Section in the Central Valley.
Any delay in proceeding with the Initial Construction Section at this time will result in the loss of the existing
$3.5 billion in federal funding and will likely jeopardize the possibility of any future federal funding for a
California high‑speed rail system.
14 The report does not assess the risks of not proceeding with the program at this juncture. Those risks
include the irretrievable loss of $3.5 billion of federal funds, the potential elimination of state funds, the
impact on regional rail systems of the loss of $950 million in funding for “interconnectivity” which are tied
to progress on the high speed rail development, the inevitable increase in costs of eventual high speed
rail connection through California as a result of inflation, population growth, the potential requirement for
rework of preliminary engineering and environmental work already completed by the Authority and the loss
of economic opportunity and technology development. These risks are present and real and represent lost
opportunity of enormous cost and lasting consequence.
As a matter of clarification, the Business Plan indicates that private investment will be used to support
the construction from the “IOS segment” to ensure completion of the “Bay to Basin”, thus private sector
investments will be available just after the first IOS is completed.
3 | Page
California State Auditor Report 2011-504 61
January 2012
Elaine M. Howle (Final)
January 11, 2012
The Authority’s Process for Overseeing the Development of Its Ridership Model May Raise Concerns About the
Credibility of Its Projections
Response: The Authority’s Ridership Peer Review Group will in future report directly to the Authority
Board. The Ridership Peer Review Panel members include a variety of areas of expertise so they can review
all aspects of the project. These areas of expertise include model development, demand forecasting at
statewide and regional levels, ridership forecasting of new modes of travel, travel survey design and analysis,
railroad operations (especially for high‑speed or near high‑speed rail systems), revenue forecasting, demand
for air travel, and socio‑economic forecasting. During this selection process it is important to:
• Ensure identification of scientific expertise necessary to address key issues;
• Search for appropriate candidates, evaluate credentials;
• Contact the most promising candidates for interest and availability and query them on conflicts of
interest and biases; and
• Select a panel of independent experts that is balanced with regard to necessary disciplines and has a
diversity of perspectives.
Instead of waiting for the ridership peer review group to be formed by others outside the Authority or by
some Legislative Act, the Authority was proactive and transparent in forming such a group itself in an effort
to obtain expert advice, ensure validity of the modeling work conducted and welcome critique.
It is not clear what the BSA means to express with the statement “In other words, the report implies that 15
if the Authority does not address these long‑term concerns, the model may only be useful to project
ridership for the operating section and not the program’s remaining sections.” Further clarification would
be appreciated and as the Authority fully intends to implement the recommendations made by the Peer
Review Group, this comment would not be necessary.
The Authority’s Profound Staffing Shortages Have Compromised Its Ability to Provide Effective Oversight
Recommendation: To ensure it has adequate staff to effectively oversee the program, the Authority should
continue trying to fill its vacant positions. Additionally, the Authority should conduct a workload analysis to
determine the total number of staff it needs as well as the functions those staff should perform.
Response: Without doubt the shortage of staff and in particular skilled staff in various positions at the
Authority is compromising the Authority’s ability to offer the necessary oversight it would like to have on this
project, however the following points need to be noted:
• The PMT has been hired in a Program Management role on this project and thus is responsible for
such activities as development of a project implementation strategy, master plan, management
of the project level environmental work through a series of Regional Consultants, as well as
development and management of the technical aspects of the program.
• The Authority hired a Program Management Oversight (PMO) organization to work on the Authority’s
behalf, to offer program oversight and in particular oversight of the PMT activities.
Neither the PMT nor the PMO are making any strategic management decisions without the participation 16
of the Authority, and policies and procedures generated by the PMT are approved by the PMO and
the Authority.
4 | Page
62 California State Auditor Report 2011-504
January 2012
Elaine M. Howle (Final)
January 11, 2012
The Authority understands the importance and concerns related to its vacant positions. As of June 30, 2011
the Authority had 19.5 of 39 positions filled (50 percent filled). On July 1st the Authority received 15 more
positions through the Budget Act. As of July 2011 the Authority had filled 19.5 of the 54 (36 percent
filled) positions authorized. Since then the Authority has taken a proactive approach to fill the remaining
vacant positions. Specifically, the Authority has processed 596 applications, conducted 67 interviews and
hired 12 candidates since July 2011. Although there have been several new hires the Authority has lost
6 staff members since July for various reasons. As of January 1, 2012 the Authority has hired 3 additional staff
for a total of 15 new hires within the last 6 months. Given the new hires and departures discussed above,
the Authority currently stands at 28.5 out of 54 filled (53 percent filled) or an increase of 17 percent since
July 1, 2011.
The Authority continues to recruit and hire additional staff to support the project and address the issue
of vacancies. In addition, workload analyses will be conducted to ensure the sufficient staffing and
classifications are appropriate for this project.
The Authority Has Failed to Ensure That Its Contractors and Subcontractors Disclose Potential Conflicts
of Interest
Recommendation: To comply with the political reform act, the Authority should establish written policies and
procedures for tracking whether all designated employees and consultants have completed and filed their
statements of economic interests on time, thereby identifying any potential conflicts of interest.
Response: As the Authority has noted to the Bureau of State Audits, the chief executive officer, via Internal
Instruction No 2010/13 dated November 8, 2010, has established the policy regarding the coordination
17 and filing of Form 700’s. This has been communicated with the FPPC and was found to be acceptable.
This instruction was updated by means of Internal Instruction No 2011/18 dated December 19, 2011
(updating the list of staff and consultants needing to file). Via Internal Instruction No. 2011/21, dated
December 20, 2011, the Authority has designated a filing officer who will have responsibility for accurately
tracking Form 700 filings from Authority staff and consultants. The chief deputy director will ensure that staff
develops procedures for tracking filings and the Authority will provide a copy of the procedures in follow‑up
responses to the audit.
The Authority Has Failed to Ensure That Its Contractors and Subcontractors Disclose Potential Conflicts
of Interest
Recommendation: To increase transparency and to ensure that it is aware of any financial interest that a
subcontractor may have in the program, the Authority should require subcontractors to file statements of interest.
Response: The Authority agrees that it is critically important that the Authority and the public be aware
of any conflicts or potential conflicts of interest that its contractors or subcontractors may have. To
18 ensure sufficient transparency regarding subcontractors, the Authority confirms that it did identify those
subcontractors, who meet the criteria of consultants under the provisions of the Political Reform Act of 1974
and the Fair Political Practices Commission rules and regulations and require them to file Form 700 and such
sub‑contractors are required to file. The Authority will however again review its conflict‑of‑interest code and,
if it determines it is necessary, will amend it. The Authority will apprise the BSA of the results of its process
of identifying any additional subcontractors who are required to file and the results of its review of the
Authority’s conflict of interest code as part of the 60 day follow‑up reporting to the BSA.
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California State Auditor Report 2011-504 63
January 2012
Elaine M. Howle (Final)
January 11, 2012
By Relinquishing Significant Control to the Program Manager, the Authority May Be Jeopardized Its Ability to
Make Informed, Thoughtful Decisions.
Response: Although the Authority is negatively affected by a shortage of skilled management and staff all
strategic direction on this project is given by the Authority’s management team.
The Program Manager’s Monthly Progress Reports Lack Usefulness Because They Contain Some Inaccurate
and Misleading Information
Recommendation: To ensure that the Program Manager’s monthly progress reports are accurate, consistent, and
useful, the Authority should do the following:
• Reinstate the oversight consultant’s review of the progress reports. Once it does so, the Authority should
hold the Program Manager accountable for implementing the oversight consultant’s recommendations.
For example, the Authority could withhold partial payment of invoices to the Program Manager until if fully
addresses these recommendations.
• Conduct monthly comparisons of the Program Manager’s and the regional contractors’ progress reports
to verify they are consistent with one another and to ensure the reports include an accurate status of the
promised deliverables.
Response: The Authority will reinstate the oversight consultant’s review of the progress reports and establish
a monthly meeting to coordinate reconciliation of issues between the oversight consultant (PMO) and the
Program Manager (PMT). In addition, the authority will establish a process for reviewing monthly progress
reports between the Program Manager and the regional contractors using Authority staff from internal
audits and contract managers.
Progress reports are prepared and submitted by all parties on a regular monthly basis to ensure a proactive
cycle of project control and to communicate project status and existing/or potential problems to all
concerned parties as well as the actions either being taken or planned to be taken to maintain the project
according to its planned schedule and budget. Further, these documents serve as record of the evolution
of the work, particularly with respect to trends in both costs and schedule. While time consuming, these
reports are necessary to communicate the status/progress of the work to all stakeholders.
With respect to the PMT Monthly Progress Reports and the PMT Invoice submittals, it was established that
the PMO’s comments had been submitted to the Authority and were not regularly forwarded to the PMT for
their information and comment. A process change has been implemented, so that from the October 2011
reports onwards, the PMO has been instructed to send their comments to the PMT directly, with a copy
to the Authority, thereby ensuring that the PMT can consider the PMO’s comments during finalization of
their reports.
With respect we would like to clarify that there are many reasons why discrepancies between the RC and
PMT reports are to be expected and should not to be interpreted as being errors:
1. Initially (and at the time the April 2010 audit was conducted) the HSR project had 4 pre‑qualified
ARRA sections. These 4 sections were all being developed to an accelerated schedule with the
aim to meet the ARRA deadlines (completion of construction by September 2017). Once the FRA
and the Authority decided that the Initial Construction Section would be in the Central Valley
(November 2010) the overall program had to be re‑scheduled, to ensure that the Central Valley
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64 California State Auditor Report 2011-504
January 2012
Elaine M. Howle (Final)
January 11, 2012
sections would get priority, the sections adjacent to the Central Valley sections were accelerated and
the remaining sections (particularly the previously pre‑qualified, but not selected, end sections) were
slowed down [referred to a phasing, and later incorporated into the Draft Business Plan]. This resulted
in discrepancies between what the RC’s had been accustomed to plan, and the top down (Authority
prescribed/PMT implemented) schedules. Thus some PMT schedules would clearly overrule the
RC schedules.
2. Just after the above mentioned decision, the Authority decided to implement phasing into the
“bookends” [later referred to as “Blended solutions” and also included into the Business Plan]. Once
again the PMT had to overrule the RC’s (on request of the Authority) to adjust their schedules/reports
so as to accommodate these changes.
3. Furthermore it is the responsibility of the PMT to manage the RC’s (on behalf of the Authority) and
thus in some instances the PMT would challenge dates which are submitted by the RC’s, thereby
aligning the RC program development to the overall goals. This is standard practice in such large
projects, and is not necessarily a modification to the performance of the RC’s but a request to the
RC to adjust their staffing to meet new dates.
4. In some instances budget restrictions necessitated the Authority, through the PMT, to modify the
delivery dates/schedules.
It is therefore not unexpected, especially in a project in this relatively early environmental clearance phase,
to have such changes. For projects on a firm delivery schedule, such as construction contracts, such changes
19 would not be acceptable. The PMT was always in consultation with the Authority when the aforementioned
changes were made, and such changes should not be referred to as errors.
Chapter 2‑ The Program Manager Did Not Appropriately Identify Differences Between the Regional
Contractor’s Monthly Progress Reports When Approving Their Corresponding Invoices
Recommendation: To ensure the regional contractor’s monthly progress reports provide sufficient detail to
support the monthly invoices, the Authority should perform a monthly comparison of the regional contractors’
invoices to the corresponding progress reports. Specifically, the Authority should ensure that the regional
contractors’ monthly progress reports describe the work they performed in areas in which they claimed costs in
the corresponding invoices. The Authority should discuss with the Program Manager any areas that lack sufficient
detail in the progress reports to make such determinations.
Response: The Authority will develop procedures to ensure that review and oversight activities include
a monthly comparison of the regional contractors’ invoices to the corresponding progress reports.
These procedures will include a reconciliation and discussion of areas that lack sufficient detail in the
progress reports.
Chapter 2‑ The Authority Has Not Been Actively Engaged in the Process of Identifying and Mitigating the
Many Risks Confronting the Program
Recommendation: To be aware of and respond effectively to circumstances that could significantly delay or halt
the program, the Authority should hire a risk manager as soon as possible. Until it hires a risk manager, it should
designate and require Authority staff to attend risk management meetings and workshops. Further, it needs to be
involved in the development and implementation of the Program Manager’s risk management plan and ensure
that Authority staff have roles and responsibilities defined in the plan, such as identifying and mitigating risks in the
risk register. Finally, the Authority should monitor the Program Manager’s risk management practices to ensure that
either it or the Program Manager identifies and promptly and appropriately addresses risks.
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California State Auditor Report 2011-504 65
January 2012
Elaine M. Howle (Final)
January 11, 2012
Response: The Authority agrees with the importance and immediate need to fill the risk manager position
and has made an offer of employment to a risk manager candidate. The risk manager will be responsible
for addressing the recommendation and implementing strategies to mitigate the risk as discussed in the
audit report.
In addition, the PMT has developed and is implementing a Risk Management Plan (RMP) for the program.
This is being done in accordance with the Draft RMP document which is being finalized. The basic premises
of the risk management program have been reviewed by the FRA.
Several risk workshops have already been conducted with focus on the Central Valley sections, and 20
a Program‑wide session is being planned for February to include Authority staff. Each MPR includes
information on the risk management status with more detailed information posted on ProjectSolve2.
Chapter 2‑ The Authority Poorly Managed Its Information Technology Contracts
Recommendation: To effectively manage its contracts, the Authority should do the following:
• Develop procedures to detect and prevent contract splitting.
• Begin its process of awarding contracts with a sufficient amount of lead time.
• Immediately begin the process of soliciting competitive bids for its IT services.
Response: The Authority agrees with the recommendations and will develop procedures to detect
and prevent contract splitting. Since the prior audit, Authority staff has significantly revised
the contract administration manual to ensure more effective management of the contract
management process. Authority staff is working on policies and procedures to specify
that contract managers will track the contract development and execution from initiation
of the draft contract through implementation of the contract. The contract manual will
also be amended to specify that sufficient lead time is built into the contract draft and
approval processes.
To ensure sufficient lead time in developing, renewing and executing contracts, the contracts
unit will maintain a listing of critical contract dates and notify contract managers at 90, 60 and
30 days prior to the expiration of contracts.
The Authority has drafted statements of work associated with needed information
technology services and is in discussion with California Technology Agency representatives
regarding service options. To the extent that services cannot be obtained through the
California Technology Agency the Authority will obtain needed services through the
appropriate procurement process. In addition, the Authority is reviewing current IT agreements
to determine what if any can be canceled immediately.
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66 California State Auditor Report 2011-504
January 2012
Blank page inserted for reproduction purposes only.
California State Auditor Report 2011-504 67
January 2012
Comments
CALIFORNIA STATE AUDITOR’S COMMENTS ON THE
RESPONSE FROM THE CALIFORNIA HIGH‑SPEED
RAIL AUTHORITY
1
We stand by our audit conclusions and recommendations. We
conducted our follow‑up audit of the High‑Speed Rail Authority
(Authority) in accordance with generally accepted government
auditing standards, which require that we obtain sufficient and
appropriate evidence to support our audit conclusions.
2
As we discuss on pages 15 and 16 of the report, because the
program’s total cost has risen significantly since the Authority’s
2009 business plan and because the Authority failed to provide
viable alternatives in the event that its planned funding does not
materialize, we believe our conclusion that the Authority’s funding
situation has become increasingly risky is accurate.
3
Contrary to the Authority’s assertion, we do understand the
role of the program management team on this project. We
interviewed several key members of the program management
team (Program Manager), including the Program Manager’s
program director and principal project manager, to ensure we had
sufficient understanding of the various roles. While we agree that
the Program Manager should manage or challenge the regional
contractors’ reports and inputs, the program management team has
not been forthcoming in communicating these changes, and fails to
provide sufficient explanation for doing so in the related monthly
progress reports. Further, as we state on page 28, the Authority’s
current organizational structure places the largest portion of the
program’s planning, construction and, most importantly, oversight
in the hands of contractors who may not have the best interests of
the State as their primary motivation. As a result, the Authority
lacks assurance that the program is implemented in a way that best
serves the public.
4
Although we initially assessed the status of this recommendation as
pending because the Authority had not sent the request letter to the
Office of the Attorney General (attorney general), we changed our
assessment to partially implemented after the Authority submitted
its request to the attorney general for a formal legal opinion on
January 5, 2012. We believe the recommendation should remain
partially implemented until the Authority receives a formal opinion
from the attorney general.
5
State law requires the Authority to include operating and
maintenance costs in its business plan, and we do not believe
that the Authority should be absolved from its responsibility to
68 California State Auditor Report 2011-504
January 2012
present total costs because it believes operating and maintenance
costs are presented for illustrative purposes only. If the Authority
truly wants to increase transparency and comply with state law, it
should take the additional step to present the total operating and
maintenance costs.
6 We are perplexed as to how the text in the 2012 draft business plan
as well as the exhibit the Authority refers to in its response provide
the period of the concession as 2022 to 2060. While we agree that
the exhibit shows the net operating profit by section for 2022 to
2060, it does not state that this is the period of the concession; in
other words, the agreement that delineates what the private sector
would receive in exchange for its investments. Further, the text
in the plan to which the Authority refers in its response provides
different information that states “the analysis was based on the
assumption that private investment occurs close to the end of 2023.”
The financial consultant who helped prepare the 2012 draft business
plan confirmed that our understanding regarding concessions and
private investment was correct. He stated that “after the private
sector invests upfront capital in 2023, beginning in 2024, the private
sector investors will receive all of the net operating profit for the
30‑year term of the arrangement.” As a result of these conflicting
pieces of information, we believe that our conclusion is correct that
the term of the private sector concession is not clear within the
2012 draft business plan. If the Authority believes that its financial
consultant is incorrect and that the concessions begin in 2022, then
it should more clearly state the terms of the arrangement in its
business plan, as we recommend.
7 The Authority is incorrect that the attachment to the 2012 draft
business plan provides the detail that we are seeking—the total
amount of operating and maintenance costs of the program.
8 We agree that as the owner of the program it is up to the State to
decide what to do with the net cash flows resulting from operations.
Further, while we understand that no concession has yet been made
and thus the exact terms regarding net cash flows have not yet been
decided, it is unclear what terms the Authority is assuming within
the 2012 draft business plan regarding its financial projections.
For example, the business plan does not explicitly state whether
the private sector investment valuation is based on the cash flows
for the Initial Operating Section (operating section) only or the
operating section and Bay‑to‑Basin.
9 While the Authority has stated its desire to be transparent in the
presentation of its business plan, we disagree that the Authority has
clearly described all of its assumptions. For example, as we state on
pages 22 and 23, the plan assumes, but does not explicitly articulate,
that the State will not receive profits between 2024 and 2060.
California State Auditor Report 2011-504 69
January 2012
10
Although the Authority’s projections may be “consistent with
standard project financing analysis,” the Authority does not clearly
disclose the period of its proposed private sector investment nor
does it state the sections of the program for which the investors
will be receiving the net operating cash flows. While we realize that
such an agreement with a private sector investor has not yet been
made, we believe that it is critical to clearly outline the assumptions
on which the projections were made in the spirit of transparency.
11
The Authority is mischaracterizing our conclusion and reacting
to its mischaracterization. We do not suggest that the Authority
should secure all the funds necessary to complete the program
before it begins construction. Further, contrary to the Authority’s
assertion, this standard is not ours, but rather it is one established
by the Legislature through Chapter 38, Statutes of 2011. This law
requires the Authority to report on alternative funding options
if no significant federal funds are received. In addition, our prior
audit report recommended that the authority identify funding
alternatives. While the Authority lists some potential funding
sources, as we describe on pages 17 through 19, these alternatives
do not appear to be viable solutions. For example, as we state on
page 17, Qualified Tax Credit Bonds (QTCBs)—a funding option
the Authority described as an alternative—are not yet approved
for use on high‑speed rail projects, and is not really an alternative
as it represents a substantial portion of its primary funding plan as
shown in Figure 4 on page 20.
12
The Authority is incorrect that our report ignores the fact that the
program has funding in hand for the Initial Construction Section
(construction section). We describe on page 16 that although
the total cost of the first portion of the operating section—the
construction section—is secured, the cost of the remainder of the
operating section is not. However, to ensure we clearly and fairly
present this information, we added information to the Results in
Brief and the summary for Chapter 1.
13
It is unclear to us why the Authority thought it necessary to
explain that Proposition 1A does not include a requirement that
the program be funded using a dedicated funding source, because
we do not suggest in our report that a dedicated funding source is
required to complete the program.
14
The Authority misunderstands the scope of our audit. We did not
assess, nor were we asked to assess, the risks associated with not
pursuing the program. Further, nowhere in our report do we state
that the Authority should take any action that would jeopardize
these federal funds.
70 California State Auditor Report 2011-504
January 2012
15 As we state on pages 24 and 25 in our report, the ridership review
group raised some long‑term concerns about the model that remain
unaddressed and noted that these issues need to be addressed to
determine whether the model is suitable for future applications
beyond construction of the operating section. Our statements are
based on text within the ridership review group’s reports dated
August 1, 2011 and July 22, 2011.
16 As we state on page 30, given that consultants significantly
outnumber Authority staff and are directly involved in the
day‑to‑day operations of the program, we question how they could
not be establishing strategies and making management decisions.
For example, on page 38, we state that the Authority continues to
be only minimally involved in the risk‑management process and
instead relies almost completely on its Program Manager to both
identify and mitigate risks.
17 We are not clear as to which document the Authority refers. We
state on page 32 that although the Authority finally amended
its conflict‑of‑interest code in 2010, the Fair Political Practices
Commission has not yet approved it, which is required to
make the amended code effective. We asked the Authority for
evidence that it received approval from the Fair Political Practices
Commission for its amended conflict‑of‑interest code; however,
as of December 1, 2011, the Authority’s chief counsel was still
attempting to locate the approval.
18 The Authority did not use the word “subcontractor” in either its
January 20, 2011 list or its January 2, 2012 list that contains the
individuals required to file statements of economic interests.
Therefore, we do not believe that the Authority has adequately
demonstrated its inclusion of relevant subcontractors in its
conflict‑of‑interest practices. Further, we believe the Authority
should require all of its subcontractors to file statements of
economic interests. Our recommendation would increase
transparency and provide awareness to the Authority of any
potential conflicts of interests among its subcontractors.
19 While we acknowledge that informal meetings may take place
to discuss such matters, the Authority was unable to provide
documentation that the Program Manager was always in
consultation with the Authority about the schedule changes. As a
result, we have no assurance that the Authority is fully informed
about the status of the program.
20 Although we acknowledge the Program Manager has held several
risk workshops, as we state on pages 38 and 39, the Authority stated
that it has not attended any of them.
California State Auditor Report 2011-504 71
January 2012
(Agency response provided as text only.)
State and Consumer Services Agency
915 Capitol Mall, Suite 200
Sacramento, CA 95814
January 9, 2012
Elaine Howle
California State Auditor
Bureau of State Audits
555 Capitol Mall, Suite 300
Sacramento, CA 95814
Re: Bureau of State Audit’s Report No. 2011‑504
Pursuant to the Bureau of State Audit’s (BSA) Report No. 2011‑504, enclosed are the Department of General
Services’ comments pertaining to the results of the audit.
The State and Consumer Services Agency would like to thank the BSA for its comprehensive review. The
results provide us with the opportunity to better serve our clients and protect the public.
(Signed by: Anna M. Caballero)
Anna M. Caballero, Secretary
State and Consumer Services Agency
72 California State Auditor Report 2011-504
January 2012
Date: January 9, 2012
To: Anna M. Caballero, Secretary
State and Consumer Services Agency
915 Capitol Mall, Suite 200
Sacramento, CA 95814
From: Fred Klass, Director
Department of General Services
Subject: RESPONSE TO BUREAU OF STATE AUDITS’ REPORT NO. 2011‑504
Thank you for the opportunity to respond to the Bureau of State Audits’ (BSA) Report No. 2011‑504 which
addresses a recommendation to the Department of General Services’ (DGS) resulting from the BSA’s audit of
the High‑Speed Rail Authority (Authority). The BSA’s current audit is a follow‑up to its previous audit of the
Authority’s operations that was completed in April 2010.
During its current audit of the Authority, the BSA developed concerns with the adequacy of the Authority’s
systems of internal control over contracting for information technology (IT) services. Consequently, due
to the DGS having oversight responsibilities for IT procurements, the BSA is recommending that the DGS
conduct an audit of the Authority’s procurement program.
In its report, the BSA concludes that the Authority over the period March 2010 through February 2011
entered into six contracts for IT services through the use of the small business/disabled veteran business
enterprise option. However, the Authority failed to satisfy a statutory requirement to obtain two price
quotations from those types of businesses. The appropriate use of the small business/disabled veteran
business enterprise option program will be included in the DGS’ audit referenced below.
The BSA also expresses concerns that in May 2011 the DGS allowed the Authority to non‑competitively bid
(NCB) six IT service contracts rather than working with the Authority to ensure that competitive bidding
requirements were satisfied. In brief, the BSA concluded that the DGS should have approved one NCB
contract for an additional six month period rather than the six NCB contracts for a twelve‑month period. As
noted in the report, the DGS approved the Authority’s NCB’s with the provision that the services be put out
to competitive bid and that additional NCB’s would not be granted for the services. The DGS will contact the
Authority to confirm that appropriate actions are being taken to competitively bid the services. As part of
this process, the DGS will ensure that all services that cannot be fully justified as separate and distinct will be
combined into one contract.
RECOMMENDATION
RECOMMENDATION: To ensure the Authority is complying with state contracting rules
and is following the guidelines of the State Contracting Manual, the
Department of General Services (General Services) should conduct a
procurement audit of the Authority by January 1, 2013.
DGS RESPONSE:
The DGS’ Office of Audit Services will conduct the requested audit by January 1, 2013. The audit’s scope will
include a review of the Authority’s systems of internal control for the procurement of non‑IT goods and IT
California State Auditor Report 2011-504 73
January 2012
Anna M. Caballero ‑2‑ January 9, 2012
goods and services. The objective will be to determine that procurement transactions are being conducted
in accordance with the terms and conditions of the Authority’s purchasing authority delegation agreements
with the DGS. The State’s delegated purchasing requirements are primarily contained in State Contracting
Manual Volumes 2 (non‑IT) and 3 (IT).
The DGS is firmly committed to effectively and efficiently overseeing the State’s procurement program. As
part of its continuing efforts to improve this process, the DGS will take appropriate actions to address the
recommendation presented in the report.
If you need further information or assistance on this issue, please contact me at (916) 376‑5012.
(Signed by: Fred Klass)
Fred Klass
Director
74 California State Auditor Report 2011-504
January 2012
cc: Members of the Legislature
Office of the Lieutenant Governor
Milton Marks Commission on California State
Government Organization and Economy
Department of Finance
Attorney General
State Controller
State Treasurer
Legislative Analyst
Senate Office of Research
California Research Bureau
Capitol Press