Recommendations

October 2017 Department of Water Resources The Unexpected Complexity of the California WaterFix Project Has Resulted in Significant Cost Increases and Delays Report 2016‑132 COMMITMENT INTEGRITY LEADERSHIP CALIFORNIA STATE AUDITOR 621 Capitol Mall, Suite 1200 | Sacramento | CA | 95814 916.445.0255 | TTY 916.445.0033 For complaints of state employee misconduct, contact us through the Whistleblower Hotline: 1.800.952.5665 Don’t want to miss any of our reports? Subscribe to our email list at auditor.ca.gov For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255 This report is also available online at www.auditor.ca.gov | Alternate format reports available upon request | Permission is granted to reproduce reports Elaine M. Howle State Auditor Doug Cordiner Chief Deputy October 5, 2017 2016‑132 The Governor of California President pro Tempore of the Senate Speaker of the Assembly State Capitol Sacramento, California 95814 Dear Governor and Legislative Leaders: As requested by the Joint Legislative Audit Committee, the California State Auditor presents this audit report concerning the Department of Water Resources’ (DWR) management of the planning efforts for the California WaterFix Project (WaterFix). WaterFix is intended to address environmental and water supply reliability issues related to pumping water from the Sacramento‑San Joaquin Delta (the Delta). Planning began in 2006 on the development of the Bay Delta Conservation Plan (BDCP), which consisted of several measures or activities for restoring the Delta and improving water reliability. Subsequently, in 2008 DWR initiated the Delta Habitat Conservation and Conveyance Program (conservation and conveyance program) to evaluate how to implement the BDCP and alternatives to it, including evaluating the environmental impacts and completing preliminary engineering work. Through the evaluation effort, DWR identified one of the alternatives—WaterFix—as its preferred approach. This report concludes that the planning phase experienced significant cost increases and schedule delays because of the scale and unexpected complexity of the project. For example, costs of the conservation and conveyance program’s efforts to evaluate and plan for the potential implementation of the BDCP and its alternatives, which eventually included WaterFix, increased significantly. As of June 2017, the planning costs had reached $280 million. We also found that DWR did not follow state law when it replaced the program manager for the conservation and conveyance program. Specifically, DWR selected the Hallmark Group (Hallmark) to provide program management services without advertising a request for qualifications, and DWR could not demonstrate that it ever evaluated Hallmark’s qualifications for this role. The cost of DWR’s current contract with Hallmark has tripled from $4.1 million to $13.8 million. Additionally, DWR has not completed either an economic or financial analysis to demonstrate the financial viability of WaterFix. Finally, it has not fully implemented a governance structure for the design and construction phase, and has not maintained important program management documents for WaterFix. Respectfully submitted, ELAINE M. HOWLE, CPA State Auditor 621 Capitol Mall, Suite 1200 Sacramento, CA 95814 916.445.0255 916.327.0019 fax www.auditor.ca.gov iv Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 Selected Abbreviations Used in This Report A&E architectural and engineering BDCP Bay Delta Conservation Plan DWR Department of Water Resources EIR environmental impact report EIS environmental impact statement NEPA National Environmental Policy Act URS URS Corporation CALIFORNIA STATE AUDITOR | Report 2016-132 v October 2017 CONTENTS Summary 1 Introduction 5 Because of the Unexpected Complexity of the Project, the Planning Phase Has Experienced Significant Cost Increases and Schedule Delays 17 DWR Did Not Select Appropriately Its Current Program Manager for the Conservation and Conveyance Program 23 DWR Needs to Take Certain Steps to Better Prepare for the Transition of WaterFix to the Design and Construction Phase 33 Scope and Methodology 39 Response to the Audit Department of Water Resources 43 California State Auditor’s Comments on the Response From the Department of Water Resources 87 vi Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR | Report 2016-132 1 October 2017 SUMMARY The California WaterFix Project (WaterFix) is intended to address environmental and water supply reliability issues related to pumping water from the Sacramento‑San Joaquin Delta (the Delta). The Department of Water Resources (DWR) began collaborating with state and federal entities as well as local water agencies (water contractors) in 2006 to develop an approach to restoring the Delta and improving water reliability, referred to as the Bay Delta Conservation Plan (BDCP). In conjunction with developing the BDCP, DWR also initiated the Delta Habitat Conservation and Conveyance Program (conservation and conveyance program) to evaluate how to implement the BDCP, which included considering alternatives to the BDCP, performing preliminary design, and assessing environmental impacts. Through this evaluation, DWR identified one of the alternatives— referred to as WaterFix—as its preferred approach. WaterFix focuses on the construction of a new water conveyance facility to improve water reliability and separates the large‑scale Delta restoration effort originally included in the BDCP into a separate program called California EcoRestore. Water contractors of the State Water Project and the Central Valley Project, and the U.S. Bureau of Reclamation have primarily funded the project planning efforts that began with the BDCP and that have now shifted to WaterFix. This audit report concludes the following: Because of the unexpected complexity of the project, the planning phase has experienced significant cost increases and schedule delays. Page 17 The cost and timeline for preparing the BDCP increased because of the scale and unanticipated complexity of the project. In addition, costs of the conservation and conveyance program’s efforts to evaluate and plan for the potential implementation of the BDCP and its alternatives, which eventually included WaterFix, also significantly increased. As of the end of June 2017, planning phase costs had reached approximately $280 million. DWR did not select appropriately its current program manager for the conservation and conveyance program. Page 23 DWR did not follow state law when it replaced the program manager for the conservation and conveyance program. Additionally, DWR did not accurately value its initial contract with the new program manager—the Hallmark Group (Hallmark)—or ensure that it received fair and reasonable pricing for one of Hallmark’s subcontractors. DWR needs to take certain steps to better prepare for the transition of WaterFix to the design and construction phase. Page 33 DWR has not completed either an economic or a financial analysis to demonstrate the financial viability of WaterFix. Furthermore, DWR has not fully implemented a governance structure for the design and construction phase of WaterFix. Moreover, DWR has not maintained important program management documents for WaterFix. 2 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 Other Areas We Reviewed To address the audit objectives approved by the Joint Legislative Audit Committee, we also reviewed whether the State allocated any money from its General Fund to pay for the planning and design costs of WaterFix. We reviewed budget acts from 2006 through 2016 and found that the State did not allocate any General Fund money for the planning and design of the project. We also analyzed DWR accounting data, reviewed its 2008 management plan for the project, and interviewed relevant staff, and found that DWR did not use any General Fund money to fund the planning and design for the project. Summary of Recommendations Legislature To improve management of large and complex infrastructure projects, the Legislature should enact legislation requiring agencies to publicly report significant changes in the cost or schedule of such projects if they are expected to exceed their established budgets by 10 percent or schedules by 12 months. DWR To better manage large infrastructure projects, DWR should develop and implement a project‑reporting policy requiring its management staff to document and justify decisions to proceed with such projects if they are expected to exceed their established budgets by 10 percent or schedules by 12 months. DWR should make these documented decisions and justifications publicly available and submit them to the California Natural Resources Agency for review and approval. To fully comply with state contracting law, DWR should ensure that it competitively selects architectural and engineering consultants based on demonstrated competence and professional qualifications. In addition, DWR should document in the contract file its evaluation of the competence and professional qualifications of all contractors and any subcontractors that are added to the contract subsequent to the competitive selection process. Further, DWR should ensure that it retains adequate documentation in its contract files to support that contract prices are fair and reasonable. CALIFORNIA STATE AUDITOR | Report 2016-132 3 October 2017 To ensure that DWR manages WaterFix in an effective manner, DWR should complete both the economic analysis and financial analysis for WaterFix and make them publicly available as soon as possible. To prepare for the potential approval of WaterFix and to ensure that the project is managed properly during the design and construction phase, DWR should do the following: • Develop an appropriate governance structure so that it is prepared to oversee the design and construction of WaterFix in the event it is ultimately approved. • Develop and update when necessary the associated program management plan for the design and construction phase of the project. Agency Comments DWR generally agrees with our findings and recommendations, although it disagrees with our conclusion that DWR did not follow state law in selecting the program manager. DWR also did not agree with our recommendation that it develop and implement a project reporting policy. 4 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR | Report 2016-132 5 October 2017 INTRODUCTION Background The Department of Water Resources (DWR) and other entities are developing the California WaterFix Project (WaterFix) in response to concerns about the impact of exporting water through pumps in the southern part of the Sacramento‑San Joaquin Delta (the Delta). The pumping causes reverse flows in that it essentially pulls water upstream, adversely affecting endangered fish species by pulling them toward the pumps. To reduce these adverse effects, regulators have reduced water exports, which has in turn created a negative economic impact on communities and farms that depend on water from the Delta. The water from the Delta is mainly transported by two systems of water infrastructure: the State Water Project and the Central Valley Project. DWR is responsible for the construction, maintenance, and operation of State Water Project facilities while the U.S. Bureau of Reclamation (Reclamation) is generally responsible for Central Valley Project facilities. Local water agencies (water contractors) contract for water deliveries from these two systems. Figure 1 on the following pages presents the locations of certain State Water Project and Central Valley Project facilities, and of their respective water contractors that have participated in funding the planning phase that has culminated in WaterFix. Development of the Bay Delta Conservation Plan Planning efforts to address these environmental and economic concerns about the Delta began in 2006. We refer to all of the planning efforts from 2006 to the present as the planning phase. This phase would eventually include two overlapping efforts: development of the Bay Delta Conservation Plan (BDCP) and evaluation of how to implement it and other alternatives, including the environmental impacts and preliminary engineering. This evaluation effort was called the Delta Habitat Conservation and Conveyance Program (conservation and conveyance program). Figure 2 on page 9 describes the two planning efforts and the participants. The BDCP consisted of several conservation measures or activities that were intended to accomplish two goals: helping conserve native fish and wildlife species in the Delta and improving water reliability and quality. The BDCP was also expected to reduce future risks to water supplies conveyed through the Delta from earthquakes, levee failure, and climate change. The first conservation measure was the construction of a new conveyance (or water transportation) facility with new intakes on the Sacramento River in the north Delta to reduce the use of the pumps in the south Delta so as to minimize the reverse flows. October 2017 6 Report 2016-132 | CALIFORNIA STATE AUDITOR Figure 1 Water Contractors That Contributed to the Conservation and Conveyance Program and Their Key Facilities CLEAR LAKE RESERVOIR SHASTA LAKE Central Valley Project Canal or Aqueduct Facility OTHER FACILITY Sacramento River ANTELOPE LAKE Contractor STONY GORGE RESERVOIR NORTHSIDE DIVERSION FRENCHMAN LAKE State Water Project LAKE DAVIS Canal or Aqueduct Facility LAKE OROVILLE OTHER FACILITY THERMALITO DIVERSION Tehama-Colusa Canal DAM POWER PLANT Contractor Feather River PUTAH DIVERSION Solano County Water Agency LAKE BERRYESSA SACRAMENTO FOLSOM LAKE Napa County Flood Control Auburn-Folsom South Canal and Water Conservation District SACRAMENTO-SAN JOAQUIN DELTA TERMINAL DAM NORTH BAY AQUEDUCT Byron-Bethany Irrigation District MARTINEZ RESERVOIR CONTRA LOMA RESERVOIR Banta-Carbona Irrigation District SAN FRANCISCO CLIFTON COURT Alameda County Flood Control and FOREBAY NEW MELONES RESERVOIR West Stanislaus Irrigation District Water Conservation District-Zone 7 Del Puerto Water District Alameda County Water District BETHANY RESERVOIR SOUTH BAY AQUEDUCT Central California Irrigation District Santa Clara Valley Water District* O’NEILL RESERVOIR San Luis & Delta-Mendota Water Authority SAN LUIS RESERVOIR San Luis Water District SAN JUSTO RESERVOIR Laguna Water District San Benito County Water District LOS BANOS RESERVOIR San Joaquin River Henry Miller Reclamation District No. 2131 MILLERTON LAKE LITTLE Mercy Springs Water District PANOCHE RESERVIOR Columbia Canal Company Panoche Water District Pacheco Water District Broadview Water District Eagle Field Water District Westlands Water District Firebaugh Canal Water District Friant-Kern Canal C A Reclamation District No. 1606 L IF O Tranquility Irrigation District R N IA James Irrigation District A COASTAL BRANCH AQUEDUCT Q Fresno Slough Water District U E D San Luis Obispo Flood Control U C T Tulare Lake Basin Water Storage District and Water Conservation District Kern County Water Agency Santa Barbara County Flood Control TWITCHELL RESERVOIR and Water Conservation District LAKE CACHUMA Antelope Valley-East Kern Water Agency Palmdale Water District WEST BRANCH GLEN ANNE RESERVOIR AQUEDUCT LAURO RESERVOIR Mojave Water Agency ORTEGA RESERVOIR CASTAIC EAST BRANCH CARPINTERIA RESERVOIR LAKE AQUEDUCT ROBLES DAM LAKE CASITAS LOS ANGELES SILVERWOOD LAKE Crestline-Lake Arrowhead Water Agency Castaic Lake Water Agency Metropolitan Water District of Southern California CRAFTON HILLS RESERVOIR San Gabriel Valley Municipal Water District San Bernardino Valley Municipal Water District LAKE PERRIS San Gorgonio Pass Water Agency Desert Water Agency Coachella Valley Water District Coachella Canal SAN DIEGO October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 7 CLEAR LAKE RESERVOIR SHASTA LAKE Central Valley Project Canal or Aqueduct Facility OTHER FACILITY Sacramento River ANTELOPE LAKE Contractor STONY GORGE RESERVOIR NORTHSIDE DIVERSION FRENCHMAN LAKE State Water Project LAKE DAVIS Canal or Aqueduct Facility LAKE OROVILLE OTHER FACILITY THERMALITO DIVERSION Tehama-Colusa Canal DAM POWER PLANT Contractor Feather River PUTAH DIVERSION Solano County Water Agency LAKE BERRYESSA SACRAMENTO FOLSOM LAKE Napa County Flood Control Auburn-Folsom South Canal and Water Conservation District SACRAMENTO-SAN JOAQUIN DELTA TERMINAL DAM NORTH BAY AQUEDUCT Byron-Bethany Irrigation District MARTINEZ RESERVOIR CONTRA LOMA RESERVOIR Banta-Carbona Irrigation District SAN FRANCISCO CLIFTON COURT Alameda County Flood Control and FOREBAY NEW MELONES RESERVOIR West Stanislaus Irrigation District Water Conservation District-Zone 7 Del Puerto Water District Alameda County Water District BETHANY RESERVOIR SOUTH BAY AQUEDUCT Central California Irrigation District Santa Clara Valley Water District* O’NEILL RESERVOIR San Luis and Delta Mendota Water Authority SAN LUIS RESERVOIR San Luis Water District SAN JUSTO RESERVOIR Laguna Water District San Benito County Water District LOS BANOS RESERVOIR San Joaquin River Henry Miller Reclamation District No. 2131 MILLERTON LAKE LITTLE Mercy Springs Water District PANOCHE RESERVIOR Columbia Canal Company Panoche Water District Pacheco Water District Broadview Water District Eagle Field Water District Westlands Water District Firebaugh Canal Water District Friant-Kern Canal C A Reclamation District No. 1606 L IF O Tranquility Irrigation District R N IA James Irrigation District A COASTAL BRANCH AQUEDUCT Q Fresno Slough Water District U E D San Luis Obispo Flood Control U C T Tulare Lake Basin Water Storage District and Water Conservation District Kern County Water Agency Santa Barbara County Flood Control TWITCHELL RESERVOIR and Water Conservation District LAKE CACHUMA Antelope Valley-East Kern Water Agency Palmdale Water District WEST BRANCH GLEN ANNE RESERVOIR AQUEDUCT LAURO RESERVOIR Mojave Water Agency ORTEGA RESERVOIR CASTAIC EAST BRANCH CARPINTERIA RESERVOIR LAKE AQUEDUCT ROBLES DAM LAKE CASITAS LOS ANGELES SILVERWOOD LAKE Crestline-Lake Arrowhead Water Agency Castaic Lake Water Agency Metropolitan Water District of Southern California CRAFTON HILLS RESERVOIR San Gabriel Valley Municipal Water District San Bernardino Valley Municipal Water District LAKE PERRIS San Gorgonio Pass Water Agency Desert Water Agency Coachella Valley Water District Coachella Canal SAN DIEGO Sources: California State Auditor’s analysis of DWR and Reclamation documents. * Santa Clara Valley Water District contracts with both the State Water Project and Central Valley Project. 8 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 The BDCP was intended to be the basis for obtaining 50‑year permits under the federal Endangered Species Act and California Endangered Species Act that would create a stable regulatory framework for operations of the State Water Project and Central Valley Project. Specifically, the permits would provide long‑term assurance that regulators would not require additional commitments of or place additional restrictions on the use of land, water, or other natural resources, nor would they require financial compensation—without the consent of the parties to the BDCP—as long as the BDCP was being implemented appropriately. The permits would also allow state and federal entities to engage in the activities included in the BDCP, which fell into the following categories: • New water facilities construction, operation, and maintenance. • Operation and maintenance of State Water Project facilities. • Nonproject diversions of water. • Habitat restoration, enhancement, and management. • Monitoring activities. • Research. Multiple entities have voluntarily participated in the planning phase. These parties entered into a planning agreement that defined goals and objectives for the planning phase. The planning agreement also established a steering committee as the principal forum for discussing policy and strategy issues pertaining to the BDCP. The California Natural Resources Agency (Resources Agency) facilitated the steering committee and Figure 2 shows the other entities that constituted the committee. The steering committee, through a finance subcommittee, also developed the funding structure and budget for developing the BDCP. October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 9 Figure 2 WaterFix Planning Efforts and Participants BDCP AND ALTERNATIVES, EVALUATION by the conservation PREFERRED ALTERNATIVE— BDCP STEERING COMMITTEE INCLUDING WATERFIX and conveyance program WATERFIX The Resources Agency facilitated the Steering The BDCP set out a conservation The conservation and conveyance program California WaterFix involves the committee proceedings to develop the BDCP. strategy for the Delta to restore and provided the means to evaluate multiple construction and operation of new protect the ecosystem, water conservation and conveyance water diversion facilities to convey Potential Regulated Entities: Entities that supply, and water quality. The alternatives—including WaterFix— that were water from the Sacramento River export, divert, or otherwise benefit from strategy is intended to result in a developed in the BDCP process and to perform through two tunnels to existing diversion of water from the Delta and that may permit decision concerning environmental review, permitting, and state and federal pumping facilities. seek permits from the regulatory entities long-term regulatory authorizations preliminary design of the alternatives. It includes habitat restoration and described below: under state and federal endangered other environmental commitments DWR species laws for the operations of DWR: Lead agency under California to mitigate construction- and Participating State Water Project the State Water Project and Central Environmental Quality Act (CEQA) responsible operation-related impacts of the water contractors Valley Project. for producing the environmental impact report new conveyance facilities. Reclamation (EIR), certifying that the EIR satisfies CEQA, Participating Central Valley Project publishing a draft EIR for public comment, and water contractors filing a Notice of Determination when the project is approved. Other Organizations: Various entities, including advocacy and public interest nonprofits, joint-powers authorities, Reclamation, U.S. Fish & Wildlife Service, and special districts. National Marine Fisheries Service: Co-lead agencies under the National Environmental Policy Regulatory Entities: Act (NEPA) responsible for producing an Entities that administer and enforce laws related environmental impact statement (EIS) that satisfies to conservation and management of wildlife and NEPA and for carrying out procedural steps natural resources and that authorize permits for leading to the issuance of a Record of Decision. various activities affecting the Delta. Other Delta Water Users: Consultants prepared the joint Mirant Corporation owns and operates two environmental report. natural gas-fired power generation plants on the Delta that use water from the Sacramento River for power. Sources: 2009 BDCP Planning Agreement, Conservation and Conveyance Program Memorandum of Agreement (MOA), Amended MOA, and www.californiawaterfix.com. 10 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 Transition From the BDCP to a New Approach Called WaterFix The next planning effort began in 2008 when the Governor directed the Resources Agency to expedite completion of the BDCP and directed DWR to proceed with the environmental analysis of four Delta conveyance alternatives. To provide the means for evaluating and planning for the possible construction and implementation of these alternative conveyance facilities and habitat restoration projects, DWR initiated the conservation and conveyance program. This program was responsible for evaluating the BDCP and many other alternatives, which eventually included WaterFix. The conservation and conveyance program was composed of a team responsible for the following activities: • Examining conveyance alternatives. • Performing cost analyses. • Formulating schedules. • Selecting preferred alternatives. • Obtaining the required environmental permitting and documentation. • Obtaining property rights. • Completing preliminary design. • Completing final design and construction. DWR initially contracted with an engineering firm to provide program management services and engineering support services for the conservation and conveyance program. Figure 3 shows a timeline of the key developments in the planning phase. However, DWR and Reclamation revised their approach to improving reliability of water deliveries and protecting the Delta based on comments they received from the public and regulatory agencies during the environmental review process. In December 2013, DWR and Reclamation published a draft environmental impact document for the BDCP. The California Environmental Quality Act requires lead agencies to create an EIR to provide public disclosure of the environmental impacts of a proposed project. The report must identify all significant environmental effects, the mitigation measures proposed to minimize those effects, and alternatives to the project. The NEPA has similar requirements for an EIS. As the lead agencies, DWR, Reclamation, U.S. Fish & Wildlife Service, and the National Marine CALIFORNIA STATE AUDITOR | Report 2016-132 11 October 2017 Fisheries Service developed the joint environmental impact report/ environmental impact statement (environmental report) presenting the environmental impacts of the BDCP and alternatives to it. Figure 3 Timeline of Key Developments in the BDCP and WaterFix Planning Process 2006 April 2006 BDCP steering committee is formed and begins meeting. October 2006 Regulatory entities, potential regulated entities—including DWR—and other organizations begin signing planning agreement for preparation of the BDCP. 2007 January 2007 Potential regulated entities agree to a $13 million budget to develop and review the BDCP. February 2008 Governor directs DWR to analyze additional conveyance alternatives. 2008 May 2008 DWR contracts for program management services for the program. June 2008 DWR initiates the conservation and conveyance program to evaluate conveyance alternatives and habitat conservation measures, including the BDCP. 2009 November 2009 Legislation—the Sacramento-San Joaquin Delta Reform Act of 2009—is enacted that includes the coequal goals of restoring the Delta and ensuring water reliability. It also requires the State Water Project and Central Valley Project water contractors to enter into contracts to pay for the costs of any new Delta water conveyance facility before construction 2010 can begin. November 2010 DWR publishes the preliminary draft BDCP for public comment. November 2010 Final steering committee meeting occurs. 2013 December 2013 Draft BDCP and environmental report is published for public comment. 2014 May 2014 DWR announces its intention to establish the Enterprise Unit to support design and construction of the Delta conveyance facility. 2015 April 2015 WaterFix is announced as the preferred alternative to the BDCP. July 2015 Revised draft environmental report is published for public comment. 2016 December 2016 Final environmental report is published. 2017 June 2017 Federal regulatory agencies issue biological opinions concluding that the construction and operation of the proposed WaterFix project will not jeopardize the continued existence of various species. July 2017 DWR issues the Notice of Determination identifying WaterFix as the approved project. Sources: DWR planning documents, state law, Governor’s letter to the Senate in February 2008. 12 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 Following its publication of the draft environmental report in December 2013, DWR reported receiving numerous comments. These comments suggested that because of the uncertainty of the effects of climate change and the long‑term effectiveness of habitat restoration in recovering fish populations, DWR should pursue a shorter permit term than the 50‑year term the BDCP sought. Other comments suggested that the proposed conveyance facilities should be separated from the habitat restoration components of the BDCP. To address these concerns, DWR and Reclamation subsequently analyzed additional alternatives that would seek shorter‑term permits and include only limited amounts of habitat restoration. They identified one of these alternatives, WaterFix, as the preferred alternative to the BDCP. WaterFix essentially separates the water conveyance effort from the large‑scale Delta conservation effort. As shown in Figure 4, WaterFix consists of three new intakes north of the Delta and other water conveyance facilities to address the reverse flow problem. However, WaterFix limits habitat restoration only to mitigating the construction‑and operations‑related impacts of the new facilities. A separate program, California EcoRestore, would provide restoration efforts for species conservation independent of the facility upgrades. Unlike the BDCP, WaterFix does not seek a permit like the 50‑year permit discussed previously, and it does not provide the assurance that regulators will not restrict water and land use. To give the public an opportunity to comment on the additional alternatives, DWR and Reclamation published in July 2015 a revised draft environmental report that presents WaterFix as the preferred alternative. Again, the public provided numerous comments. In December 2016, DWR and Reclamation published the final environmental report, which incorporates changes from the additional public comments. DWR initially estimated that in spring 2017, Reclamation would issue its Record of Decision stating which alternative it had chosen to pursue, the alternatives it had considered, and whether all practicable means to avoid or minimize environmental harm had been adopted. However, Reclamation has not issued the Record of Decision. The director of DWR nevertheless stated that in the meantime DWR will continue moving forward with WaterFix planning efforts, including permitting and regulatory efforts. On July 21, 2017, DWR issued a Notice of Determination that identified WaterFix as the approved project and indicated that the project will have a significant effect on the environment, an EIR was prepared, and a mitigation monitoring plan was adopted. In addition to these approvals, several regulatory and permitting processes are ongoing and must be completed before construction of WaterFix can move forward, including hearings by the State Water Resources Control Board CALIFORNIA STATE AUDITOR | Report 2016-132 13 October 2017 regarding water rights and water quality that are expected to last until sometime in 2018. We refer to the overall activities that span the BDCP and WaterFix as the project. Figure 4 WaterFix Proposed Project Location SACRAMENTO 80 50 Intake 99 80 Intake VACAVILLE Intake 5 Statutory Delta Boundary 5 ANTIOCH STOCKTON 99 TRACY 580 580 580 Source: DWR’s final EIR, figures 1‑1, 3‑9, and 3‑10. Funding for the Planning Phase Has Come From a Number of Sources Generally, the State Water Project’s water contractors pay the costs for its construction, replacement, and maintenance and operations. However, because the planning phase for the BDCP and WaterFix has been a voluntary collaboration among several state and federal entities to improve water supply reliability and to restore ecosystem health in the Delta, Reclamation and some Central Valley Project water contractors also contributed funding. As we stated in the Summary, DWR did not use any General Fund money to fund 14 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 the planning of the project. DWR did not fully track the various contributions made toward the costs of preparing the BDCP, as we explain more fully later. These costs consisted of two categories— the costs attributable to fishery agencies1 for their work related to the development and review of the BDCP, and other costs related to preparing the BDCP, including contracted consultant costs. The $6 million cost for the first category was split evenly between DWR and Reclamation over two years. For the second category, three entities agreed to share the consultant costs and other related costs: DWR; San Luis & Delta Mendota Water Authority (the Authority)—a joint‑powers authority that represents certain Central Valley Project water contractors; and Mirant—a corporation that owns and operates power generation plants on the Delta.2 The costs for the second category have reached approximately $54 million. Although documentation is limited, DWR explained that it included charges for its share of the BDCP costs in the State Water Project water contractors’ annual statements. The Authority collected funds for its portion of the costs from its member agencies. Participating State Water Project and Central Valley Project water contractors agreed to share the planning costs for the conservation and conveyance program equally between the two groups. DWR established a specific account to track these contributions. As noted previously, participation in the funding was voluntary, and any participating water contractor could withdraw upon 30‑days notice; however, doing so would require the remaining participating water contractors to make up for the lost contributions. Figure 5 shows the amounts and proportional share each entity contributed. Figure 5 also shows that Reclamation, Metropolitan Water District of Southern California (Metropolitan), the Authority, and Kern County Water Agency (Kern) together contributed roughly 82 percent of the total planning funds through June 2017. To collect the State Water Project share, DWR entered individual funding agreements with the 20 State Water Project contractors that decided to participate. Contributions were proportionate to each participating contractor’s water allocation from the State Water Project. For example, Metropolitan and Kern receive the two largest allocations of water from the State Water Project; therefore, they contributed the largest portions of the State Water 1 Fishery agencies refers to the California Department of Fish and Game, the U.S. Fish & Wildlife Service, and the National Marine Fisheries Service. 2 Initially in January 2007, Mirant Corporation agreed to contribute 10 percent of the approved consultant costs and DWR and the Authority agreed to split the remainder equally. Two years later, the parties agreed to cap Mirant Corporation’s contributions at the lesser of 10 percent or $300,000 per 12‑month period. CALIFORNIA STATE AUDITOR | Report 2016-132 15 October 2017 Project’s share of costs. Their contributions generally came from their revenues, which are largely composed of proceeds from water sales, user charges, and property taxes. Figure 5 Four Entities Contributed Most of the Funding for the Conservation and Conveyance Program January 2008 Through June 2017 CONTRIBUTORS FUNDING SOURCES $300 250 $81.2—31% 200 150 $58.7—22% 100 $45.4—17% $30.8—12% 50 $30.3—12% $15.0—6% 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year snoilliM ni sralloD Reclamation Federal appropriations, American Recovery and Reinvestment Act funds, in-kind services Metropolitan Revenues from water sales, operations charges, and property taxes The Authority Debt financing and direct contributions from participating member agencies* Other State Water Project contractors Revenues of 18 water contractors Kern Revenues from water sales, operations charges, and property taxes DWR Surplus revenue from State Water Project contractors total 82% Source: California State Auditor’s analysis of DWR accounting data. * The Authority contributed a total of $47.1 million in funds from debt financing and direct contributions from participating member agencies toward the planning phase, $2.1 million of which was used to meet its BDCP funding obligations. In June 2017, it contributed another approximately $400,000. 16 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 The Authority and Reclamation contributed the Central Valley Project share of costs for the conservation and conveyance program. The Authority contributed $45.4 million and used debt financing for 95 percent of its contribution, with the principal and interest required to be paid from water system revenues generated by 17 Central Valley Project water contractors that decided to participate.3 The remaining 5 percent, or roughly $2.3 million, was contributed directly by another five water contractors. Reclamation contributed $81.2 million in federal funds and in‑kind services, such as program management, legal services, and preliminary engineering. 3 Westlands Water District agreed to pay 100 percent of the principal and interest on the debt. The Authority reimburses Westlands Water District for a portion of such debt service payments from amounts the Authority receives from the 16 other participating Central Valley Project water contractors. CALIFORNIA STATE AUDITOR | Report 2016-132 17 October 2017 Because of the Unexpected Complexity of the Project, the Planning Phase Has Experienced Significant Cost Increases and Schedule Delays Key Points • The costs and timeline for preparing the BDCP increased because of the scale and unexpected complexity of the project. • The costs to evaluate and plan for the potential implementation of the BDCP and its alternatives, which eventually included WaterFix, also increased. The Costs and the Timeline for Preparing the BDCP Increased Because of the Unexpected Complexity of the Project In a June 2006 steering committee meeting, the finance subcommittee presented a $13 million budget for preparation of the BDCP, which included budgeted consultant costs for completing all tasks except public outreach. The budget consisted of $6 million to provide for the participation of fishery agencies and $7 million for consultant costs and other costs related to the BDCP. As stated in the Introduction, fishery agency costs were to be split evenly between DWR and Reclamation and the consultant and other costs were to be split among DWR, the Authority, and Mirant Corporation. Following the establishment of the budget, DWR entered into a $1.6 million contract with Alameda County Flood Control and Water Conservation District Zone 7 (Zone 7) to cover its share of consultant costs for December 2006 through June 2008. The contract states that Zone 7 possessed special expertise related to the unique environmental compliance process that would guide the BDCP process. The scope of work in the contract included engaging the services of a BDCP consultant, the preparation of the BDCP, and the services of Zone 7 to manage the contract with the BDCP consultant. However, the parties subsequently discovered that the $1.6 million budgeted over the 19‑month term of the contract was insufficient to allow the consultant to successfully complete the BDCP. The parties first amended the contract in June 2008 to add an additional year, extending the term through June 30, 2009. In the spring of 2009, the parties agreed to amend the contract a second time, increasing the contract by $3.5 million and the term by another two years, thus extending the contract through June 30, 2011. The parties amended the contract a third time in March 2010 to increase the contract by another $2.6 million. These three amendments collectively increased the cost of this contract from $1.6 million to $7.7 million, nearly five times the original amount, and they extended its term by three years. DWR’s financial records indicate that it spent $7.5 million on this contract, and according to the chief of its enterprise accounting branch, the funding for these payments came from State Water Project contractors. However, DWR did not fully track BDCP funding or spending. Documentation provided by the Authority indicates that it contributed $5.2 million toward these costs, but we do not have any data on Mirant Corporation’s share of BDCP costs. 18 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 According to contract documents justifying the amendments, the BDCP was being developed with a greater level of stakeholder involvement than was customary in most conservation plans; consequently, development of the plan was proving to be more complicated, time‑consuming, and expensive than originally anticipated. For example, the justification included in DWR’s second amendment to its contract with Zone 7 states that the BDCP process called for a more extensive independent science advisory effort—the process of including independent scientific input to assist with plan development—than is typically the case with conservation plans, and this effort increased the cost of preparing the conservation strategy beyond the original estimate. Development of the plan was proving to be more complicated, time‑consuming, and expensive than originally anticipated. The science advisors for the project also recommended expanding the scope of the plan to include a larger share of terrestrial species and habitat, and this recommendation further increased projected costs. The cost increase contained in the third contract amendment was primarily due to the decision to have the BDCP consultant take on portions of the EIR that were not originally included in the scope of work. Specifically, according to the contract documents justifying this amendment, the parties decided that part of the environmental impact evaluation could be conducted most efficiently by the same consultants that were preparing the BDCP. The organizational and decision‑making structure of the BDCP effort presented another challenge to the timely and efficient completion of the plan. In particular, the documented justifications for the second and third contract amendments explained that the time and cost of preparing the BDCP increased substantially because the BDCP consultant, while designing the plan, engaged directly with the steering committee, which consisted of several dozen members representing state and federal water and resource agencies, water contractors, and other organizations—a unique departure from the customary process in which a consultant team primarily develops the conservation plan elements that are then endorsed by a single advisory committee. For example, according to the justification for the second amendment, the consultant spent a significant amount of time and resources developing a report that evaluated conservation strategy options, but it subsequently CALIFORNIA STATE AUDITOR | Report 2016-132 19 October 2017 received requests from members of the steering committee that required the consultant to develop and model various operational scenarios repeatedly, and these efforts were costly and time‑consuming. However, the justification for the contract amendment also defended the time‑consuming stakeholder process, stating that it would help ensure the plan’s stability and likelihood of implementation. Nevertheless, the project’s costs increased significantly. Although Zone 7 stopped managing the BDCP consultant in July 2010, costs for preparing the BDCP continued to increase when DWR entered into a direct contract with the consultant to continue preparing the BDCP. This new contract ultimately increased the BDCP costs by $41.4 million. Specifically, in June 2010, DWR and the consultant signed a two‑year, $11 million contract for tasks such as completing working drafts of the BDCP chapters, obtaining public feedback on the BDCP, and finalizing the BDCP. By the time DWR and Reclamation released the draft BDCP for public review and comment in December 2013, the contract had been amended several times increasing the maximum amount payable under the contract by a total of $20 million, in part because of unanticipated modifications to the project that resulted in the need for multiple revisions to the plan. After publishing the draft BDCP in December 2013, DWR further amended the contract three more times, increasing the contract amount by an additional $10.4 million. The cost of preparing the BDCP rose to approximately $60 million. These amendments cited the need for additional time and funds because of changes in the public draft of the BDCP resulting from a new permitting approach; the addition of three new alternatives to be analyzed, reviewed, and incorporated into the BDCP; and an extended public comment period. Notwithstanding, we estimate that the cost of preparing the BDCP rose to approximately $60 million. Costs to Evaluate and Plan for the Potential Implementation of the BDCP and Other Alternatives Also Significantly Increased DWR has so far spent roughly $260 million to evaluate and plan for the possible construction of alternative conveyance facilities and habitat restoration projects, including those that constitute 20 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 the BDCP and, subsequently, WaterFix. In March 2009, DWR estimated the initial budget for these activities to be $140 million, Purposes and Priorities for Using State Water Project Revenue as Described in State Law including the costs of management, planning, administration, preliminary engineering, and environmental services. The budget All revenues the State derives from the State Water was to cover the conservation and conveyance program’s evaluation Resources Development System (also known as the and planning efforts starting in 2008 until its expected completion State Water Project)—including those from the sale, in 2010. Conservation and conveyance program funds were also delivery, or use of water or power—shall be used annually used to pay for the $41.4 million direct contract that DWR entered only for the following purposes and in the following order: into with the BDCP consultant, as mentioned previously. 1. The payment of the reasonable costs of annual maintenance and operation of the State Water Resources However, DWR subsequently reassessed the scope, technical needs, Development System and the replacement of any of and schedule for the conservation and conveyance program’s its parts. evaluation and planning efforts, which led to a substantial cost 2. The annual payment of the principal and interest on the increase. Consequently, in October 2010, the steering committee bonds issued in accordance with the Water Code. discussed the need for an additional $100 million—a 71 percent increase to the initial budget of $140 million—to continue the 3. Reimbursement to the California Water Fund for planning process. In 2012 DWR signed agreements with water funds used for State Water Resources Development contractors for the supplemental funding of $100 million to pay the System construction.* “actual” remaining costs of the planning phase. These supplemental 4. Any surplus revenues in each year not required for funding agreements extended the term of the planning process the purposes specified in this chapter of the law shall through December 2014. A document prepared by the former chief be appropriated to the department for acquisition of DWR’s division of engineering indicates that the $100 million and construction of the State Water Resources was intended to fund remaining environmental and engineering Development System. activities as well as a contingency reserve. With the $100 million Source: Water Code, Section 12937 (b). in supplemental funding, the total budget for the conservation * Priority 3 is no longer active because DWR has reimbursed all and conveyance program’s evaluation and planning efforts had funds it used from the California Water Fund. increased to $240 million. DWR ultimately exhausted the $240 million budget and contributed $15 million in surplus revenue in 2015 and 2016 to fund additional planning costs. Reclamation and the Authority also together contributed an additional $6.8 million. Through June 2017, total contributions exceeded the planning phase budget by more than $21 million. Moreover, as of June 2017, DWR had spent 99 percent of the $261 million contributed to fund the conservation and conveyance program. As described previously, although DWR officials filed the Notice of Determination in July 2017, Reclamation has not filed the Record of Decision. Nevertheless, DWR officials stated that no additional funds would be needed to complete the planning phase for WaterFix, as approved. As discussed in the Introduction, DWR has entered into water supply contracts with State Water Project contractors. Pursuant to these contracts, DWR collects payments from the contractors to recover all water supply‑related costs. DWR deposits this revenue in a special account. The text box shows the purposes for which this revenue can be used. According to DWR, surplus revenue is available to DWR to fund the acquisition and construction of the State Water Project, including WaterFix planning activities that are CALIFORNIA STATE AUDITOR | Report 2016-132 21 October 2017 the BDCP and, subsequently, WaterFix. In March 2009, DWR a necessary precursor to construction. When we estimated the initial budget for these activities to be $140 million, researched the $15 million of surplus revenues that Purposes and Priorities for Using State Water Project Revenue as Described in State Law including the costs of management, planning, administration, DWR used to fund project planning costs in 2015 preliminary engineering, and environmental services. The budget and 2016, we discovered that the account in which All revenues the State derives from the State Water was to cover the conservation and conveyance program’s evaluation DWR collects the revenues had an available cash Resources Development System (also known as the and planning efforts starting in 2008 until its expected completion balance that had grown from $10.7 million in State Water Project)—including those from the sale, in 2010. Conservation and conveyance program funds were also December 2013 to $286 million by the end of delivery, or use of water or power—shall be used annually used to pay for the $41.4 million direct contract that DWR entered April 2017. Furthermore, DWR projects the balance only for the following purposes and in the following order: into with the BDCP consultant, as mentioned previously. will increase to $293 million by the end of 1. The payment of the reasonable costs of annual December 2017. According to DWRs’ chief of the maintenance and operation of the State Water Resources However, DWR subsequently reassessed the scope, technical needs, State Water Project Analysis Office, a major factor Development System and the replacement of any of and schedule for the conservation and conveyance program’s contributing to the increase in the balance of this its parts. evaluation and planning efforts, which led to a substantial cost fund has been the decrease in outstanding debt 2. The annual payment of the principal and interest on the increase. Consequently, in October 2010, the steering committee resulting from the repayment of a California Water bonds issued in accordance with the Water Code. discussed the need for an additional $100 million—a 71 percent Fund loan and general obligation bonds initially increase to the initial budget of $140 million—to continue the used to finance the State Water Project. He further 3. Reimbursement to the California Water Fund for planning process. In 2012 DWR signed agreements with water stated that DWR holds monthly meetings with the funds used for State Water Resources Development contractors for the supplemental funding of $100 million to pay the state water contractors, at their request, to provide System construction.* “actual” remaining costs of the planning phase. These supplemental transparency of State Water Project activities and 4. Any surplus revenues in each year not required for funding agreements extended the term of the planning process financial information regarding State Water Project the purposes specified in this chapter of the law shall through December 2014. A document prepared by the former chief costs and revenues, including the surplus revenue be appropriated to the department for acquisition of DWR’s division of engineering indicates that the $100 million balance. We reviewed the agenda and minutes for and construction of the State Water Resources was intended to fund remaining environmental and engineering the June 2017 meeting and found that DWR Development System. activities as well as a contingency reserve. With the $100 million disclosed the $286 million surplus to the state water Source: Water Code, Section 12937 (b). in supplemental funding, the total budget for the conservation contractors. Finally, the chief stated that these funds * Priority 3 is no longer active because DWR has reimbursed all and conveyance program’s evaluation and planning efforts had are available to pay for new State Water Project funds it used from the California Water Fund. increased to $240 million. facilities, including WaterFix. However, DWR has not developed any concrete plans for how it will use DWR ultimately exhausted the $240 million budget and this growing surplus revenue balance. contributed $15 million in surplus revenue in 2015 and 2016 to fund additional planning costs. Reclamation and the Authority also together contributed an additional $6.8 million. Through June 2017, Recommendations total contributions exceeded the planning phase budget by more than $21 million. Moreover, as of June 2017, DWR had spent 99 percent of the $261 million contributed to fund the conservation Legislature and conveyance program. As described previously, although DWR officials filed the Notice of Determination in July 2017, Reclamation To improve management of large and complex infrastructure has not filed the Record of Decision. Nevertheless, DWR officials projects, the Legislature should enact legislation requiring agencies stated that no additional funds would be needed to complete the to publicly report significant changes in the cost or schedule of such planning phase for WaterFix, as approved. projects if they are expected to exceed their established budgets by 10 percent or schedules by 12 months. As discussed in the Introduction, DWR has entered into water supply contracts with State Water Project contractors. Pursuant to these contracts, DWR collects payments from the contractors to DWR recover all water supply‑related costs. DWR deposits this revenue in a special account. The text box shows the purposes for which this To better manage large infrastructure projects, DWR should revenue can be used. According to DWR, surplus revenue is develop and implement a project‑reporting policy requiring its available to DWR to fund the acquisition and construction of the management staff to document and justify decisions to proceed State Water Project, including WaterFix planning activities that are with such projects if they are expected to exceed their established 22 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 budgets by 10 percent or schedules by 12 months. DWR should make these documented decisions and justifications publicly available and submit them to the Resources Agency for review and approval. To ensure it makes appropriate use of its growing surplus revenue balance, DWR should develop a detailed plan describing how it intends to use these funds. CALIFORNIA STATE AUDITOR | Report 2016-132 23 October 2017 DWR Did Not Select Appropriately Its Current Program Manager for the Conservation and Conveyance Program Key Points • DWR did not follow state law when it replaced the program manager for the conservation and conveyance program. • DWR did not accurately value its initial contract with the new program manager—the Hallmark Group (Hallmark)—or ensure that it received fair and reasonable pricing for one of Hallmark’s subcontractors. DWR Did Not Follow Proper Procedures in Replacing the Program Manager for the Conservation and DWR’s Process for Selecting Its Initial Conveyance Program Program Manager Although DWR initially used a robust selection process • Developed a request for qualifications that established that was in line with both the letter and spirit of state the criteria for selecting the program manager, including contracting law to select its first program manager, relevant education; possession of a valid California professional engineer license; experience in the planning, it later used other methods to select a replacement managing, and overseeing of large water resources program manager, and these methods did not follow infrastructure; strategic program development; project the competitive process required under the law. management; and experience in environmental State law requires state agencies that are contracting compliance and engineering and construction. for architectural and engineering services to select contractors based on demonstrated competence and • Published the request for qualifications in the State Contracts Registry and a relevant professional publication. professional qualifications. The architectural and engineering (A&E) contract process seeks the most • Held a mandatory meeting attended by approximately highly qualified contractor; the agency then negotiates 55 individuals representing numerous interested firms. with that contractor a price that is fair and reasonable The meeting included a detailed question‑and‑answer although not necessarily the lowest price. Additionally, session to clarify requirements and expectations. based on the services DWR identified in the Scope of • Received statements of qualifications from Work section of its request for qualifications and its two interested firms. contract with URS Corporation (URS)—its original • Interviewed the two responding firms. choice to provide program management services— DWR was contracting for specific services that are • Used a defined scoring rubric to score the qualifications consistent with construction project management, which and interview responses of the two responding firms based on criteria defined in the request for qualifications. a licensed engineer or general contractor must perform, as state law requires. • Negotiated with the highest‑scoring firm for a cost that was deemed fair and reasonable. In May 2008, DWR used a competitive process to • Awarded the contract to the most highly qualified engage a consultant to provide program management responding firm. services and engineering support services, as required by state contracting law and its own regulations. Sources: DWR’s request for qualifications and various other DWR documents. DWR followed the process detailed in the text box to select URS as the most qualified firm to support the 24 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 conservation and conveyance program team’s efforts. In its response to the request for qualifications, URS identified the individual who would serve as program manager and presented his qualifications, detailed in Table 1, as part of the larger competitive process. DWR then negotiated with URS for a contract worth up to $60 million and with a term from May 2008 through December 2015. Table 1 Hallmark’s Program Manager Does Not Appear to Possess the Qualifications That DWR Required When It Selected URS REQUIREMENTS AND SELECTION CRITERIA FROM DWR’S REQUEST FOR QUALIFICATIONS URS – PROGRAM MANAGER HALLMARK – PROGRAM MANAGER Possession of a valid professional Yes No engineering license Relevant education M.S./B.S. Civil Engineering Rutgers University B.S. Economics North Carolina State University Demonstrated competence and relevant • Project Director, MWD Isolated Facility, None included in information provided to DWR experience of the program manager in Metropolitan Water District of Southern California, or on Hallmark’s website. the planning of large water resources Sacramento County, California infrastructure projects • Project Manager and Sponsor, Lake Perris Dam Seismic Evaluation and Dam Replacement Options, State of California Department of Water Resources, 2006 • Senior Reviewer, Swift No. 2 Hydroelectric Project, Cowlitz County PUD, Cougar, Washington, 2006 Demonstrated competence and relevant Managed programs ranging from those costing hundreds Managed construction for several experience of the firm in the planning of millions of dollars to those costing more than projects including the following: of large water resources infrastructure $19 billion in construction value, including the following: • $500 million UC Merced Campus projects, strategic program • $3.4 billion San Francisco Transbay Terminal Program • $33 million UC Davis MIND Institute development, project management, environmental compliance, • $5.5 billion California Prison Health Care • $120 million Bay Area Housing Project Receivership Program engineering, and construction • $3.5 million Silicon Laboratories facility Developed and implemented public and stakeholder coordination strategies to address the outreach issues associated with these complex programs. Sources: DWR’s request for qualifications (RFQ NO. 10023878), URS’s statement of qualifications, Hallmark’s website (http://hgcpm.com/), and contract documentation. However, not long after awarding the contract, DWR directed URS to replace its program manager with the president of Hallmark without DWR’s demonstrating that Hallmark was qualified to provide these services or had the required professional license. Specifically, 13 months after awarding the contract to URS, DWR issued a notice of disapproval that removed the individual URS had designated as the program manager apparently because he was not working full‑time on the project. A clause in DWR’s contract with URS allowed DWR to disapprove “the assignments or the continuing assignment of specific contractor personnel, subcontractors and subcontractor personnel.” However, the contract did not indicate a specific process by which the disapproved personnel should be replaced. Because of the size, cost, CALIFORNIA STATE AUDITOR | Report 2016-132 25 October 2017 complexity, and significance to the State of WaterFix, we expected DWR to require URS to provide an equally qualified replacement; alternatively, DWR could have used a competitive process to select a replacement program manager based on the criteria it had established in the original request for qualifications. Instead, in an August 2009 amendment to its contract with URS, DWR replaced the program manager by directing URS to engage Hallmark as a subcontractor to provide the program management services. The contract did not indicate a specific process by which the disapproved personnel should be replaced. By directing URS to engage Hallmark as a subcontractor in this manner, DWR did not select a firm that met the requirements of the request for qualifications, DWR’s regulations, or state law. Our review of the Hallmark contract file found no indication of how DWR identified Hallmark as the replacement program manager nor any evidence that DWR evaluated Hallmark’s qualifications for this role. DWR asserted that Metropolitan recommended Hallmark based on Metropolitan’s previous experience working with the firm. However, the general manager of Metropolitan told us that although he did recommend Hallmark, Metropolitan had not previously worked with the firm. Furthermore, when we asked him why he recommended Hallmark, he indicated that he was given the name by a third party but could not recall who that third party was. He also said that Metropolitan and other water contractors interviewed other individuals but determined Hallmark was the firm it would recommend to DWR; however, he was unable to provide us with any documentation of those interviews or how the water contractors arrived at their conclusion to recommend Hallmark. We were also unable to ascertain why Metropolitan was interviewing candidates on behalf of DWR. DWR officials stated that DWR made its own independent assessment of Hallmark’s qualifications, and it based its selection on Hallmark’s successful program management experience in other programs. We subsequently talked to the former director of DWR who was involved in the selection of Hallmark. He recalled that Hallmark’s efforts on the University of California, Merced campus project brought Hallmark to the attention of the water contractors because Hallmark was largely given credit for managing the engineering contractors on that project. He also indicated that he thought the initial recommendation for Hallmark came from the 26 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 general managers of Metropolitan and Westlands Water District. He stated that the water contractors believed that Hallmark could Excerpts From Allegations Against DWR About Selection of Hallmark as Program Manager provide additional cost controls over the project. Nonetheless, DWR was unable to provide us with documentation of any “The first activity that I believe violates the code and assessments or with any other records supporting the selection one that we routinely allow is letting contract managers of Hallmark. direct contractors to add a specific sub to an existing contract. Put simply, the contract manager wants a specific Therefore, we performed a high‑level comparison of the contractor not currently under contract to perform some qualifications of Hallmark and URS and found that Hallmark does type of work allowed under the existing contract. Direct not appear to possess the technical credentials or experience on the prime to add the firm you want and have them do the relevant projects that DWR required when it engaged URS. In the work. No pesky RFQ, no SOQ review, no silly determining if initial request for qualifications, DWR identified the following as the new folks are actually the most qualified, no allowing other firms to apply for the work, no following the code. The necessary qualifications of the program manager: practice has become so prevalent, we’re actually starting to address it in our additional payment provisions where we • Relevant education. allow a higher markup on subs we direct the contractor to add. This looks surprisingly like a bribe to keep them quiet.” • Possession of a valid professional engineering license. “Possibly the most egregious example of this [letting contract managers direct contractors to add a specific sub • Experience in the planning, managing, and oversight of large to an existing contract] is when a former DOE Division Chief, water resources infrastructure. directed the Washington Division of URS (‘URS‑WD’) to engage the president of Hallmark Group, Inc. (‘Hallmark’), • Experience in strategic program development. to fill the position of Program Manager by subcontracting with Hallmark for this purpose” (46‑8104, Amendment 1). • Experience in project management and environmental Subsequently the PM services were removed entirely from compliance. the 8104 scope of work (Amendment 6) and Hallmark Group was issued its own contract (46‑9986). No RFQ • Experience in engineering and construction. was issued; the new contract’s scope of work says simply that 8104 ‘was being administratively separated into In selecting Hallmark, DWR disregarded many of the qualifications two contracts.’ According to his LinkedIn profile, Hallmark Group, provides ‘[m]anagement of large capital programs required for the original program manager. Table 1 on page 24 on behalf of government and institutional entities.’ No shows that Hallmark lacked a licensed engineer required by law architecture, no engineering, no environmental services. He for construction project managers and had no demonstrable has a degree in economics. The ‘E’ in A&E does not stand for experience planning large water resources infrastructure projects. economics. The new contract was later tripled in size.” Further, DWR was unable to provide some of the information listed in Table 1 regarding Hallmark’s qualifications. Instead, we searched Source: DWR employee emails. Hallmark’s website and other public sources to obtain more information about the firm’s qualifications. DWR explained that after one year working with URS, it became clear that demonstrated program management skills were needed rather than a strict focus on engineering. Although DWR officials cited Hallmark’s successful program management experience in other programs as a reason for the selection, staff members in its A&E contracting unit (contracting unit) raised concerns over Hallmark’s apparent lack of qualifications. Additionally, an employee at DWR with knowledge of the A&E contracting process also raised concerns over Hallmark’s qualifications. The employee indicated that Hallmark’s president, CALIFORNIA STATE AUDITOR | Report 2016-132 27 October 2017 general managers of Metropolitan and Westlands Water District. who is the program manager, had no architecture, He stated that the water contractors believed that Hallmark could engineering, or environmental services experience— Excerpts From Allegations Against DWR About Selection of Hallmark as Program Manager provide additional cost controls over the project. Nonetheless, only a degree in economics—as the allegations in the DWR was unable to provide us with documentation of any text box indicates. DWR’s internal auditors “The first activity that I believe violates the code and assessments or with any other records supporting the selection conducted an investigation into these allegations and one that we routinely allow is letting contract managers of Hallmark. concluded that DWR entered into the contract with direct contractors to add a specific sub to an existing Hallmark without using a request for qualifications. contract. Put simply, the contract manager wants a specific Therefore, we performed a high‑level comparison of the However, the internal auditors also stated that contractor not currently under contract to perform some qualifications of Hallmark and URS and found that Hallmark does determining whether DWR’s entering into type of work allowed under the existing contract. Direct not appear to possess the technical credentials or experience on that contract without such a request violated state the prime to add the firm you want and have them do the relevant projects that DWR required when it engaged URS. In the contracting law was a legal question that the work. No pesky RFQ, no SOQ review, no silly determining if initial request for qualifications, DWR identified the following as investigation could not answer. DWR’s legal counsel the new folks are actually the most qualified, no allowing other firms to apply for the work, no following the code. The necessary qualifications of the program manager: subsequently reviewed the issues and found that practice has become so prevalent, we’re actually starting to DWR’s approach was legal; however, DWR’s counsel address it in our additional payment provisions where we • Relevant education. based its opinion in part on an unsupported assertion allow a higher markup on subs we direct the contractor to that DWR had determined that Hallmark add. This looks surprisingly like a bribe to keep them quiet.” • Possession of a valid professional engineering license. was qualified. “Possibly the most egregious example of this [letting contract managers direct contractors to add a specific sub • Experience in the planning, managing, and oversight of large In directing URS to subcontract with Hallmark, DWR to an existing contract] is when a former DOE Division Chief, water resources infrastructure. also failed to follow the selection process that state directed the Washington Division of URS (‘URS‑WD’) to law and DWR’s own regulations require, potentially engage the president of Hallmark Group, Inc. (‘Hallmark’), • Experience in strategic program development. resulting in DWR not receiving the best value for the to fill the position of Program Manager by subcontracting contracted services. Although DWR asserted that with Hallmark for this purpose” (46‑8104, Amendment 1). • Experience in project management and environmental subcontracting the program management services Subsequently the PM services were removed entirely from compliance. was appropriate and legal, the relationship established the 8104 scope of work (Amendment 6) and Hallmark between URS and Hallmark does not appear to Group was issued its own contract (46‑9986). No RFQ • Experience in engineering and construction. be a contractor‑subcontractor arrangement. In a was issued; the new contract’s scope of work says simply traditional contractor‑subcontractor relationship, that 8104 ‘was being administratively separated into In selecting Hallmark, DWR disregarded many of the qualifications we would expect to see several conditions, including two contracts.’ According to his LinkedIn profile, Hallmark Group, provides ‘[m]anagement of large capital programs required for the original program manager. Table 1 on page 24 the following: the contractor is responsible for on behalf of government and institutional entities.’ No shows that Hallmark lacked a licensed engineer required by law the subcontractor’s work products, the contractor architecture, no engineering, no environmental services. He for construction project managers and had no demonstrable determines payment to the subcontractor, and has a degree in economics. The ‘E’ in A&E does not stand for experience planning large water resources infrastructure projects. the contractor is legally responsible for the work of economics. The new contract was later tripled in size.” Further, DWR was unable to provide some of the information listed the subcontractor. However, the provisions DWR in Table 1 regarding Hallmark’s qualifications. Instead, we searched added to the contract with URS in the amendment Source: DWR employee emails. Hallmark’s website and other public sources to obtain more to bring Hallmark on as a subcontractor clearly information about the firm’s qualifications. demonstrate that URS was not overseeing Hallmark’s work products, it was not determining payment to DWR explained that after one year working with URS, it became Hallmark, and it was not legally responsible for Hallmark’s work. clear that demonstrated program management skills were needed Specifically, the language in the contract amendment that added rather than a strict focus on engineering. Although DWR officials Hallmark stated the following: cited Hallmark’s successful program management experience in other programs as a reason for the selection, staff members in • “Hallmark will be reporting directly to and receive direction its A&E contracting unit (contracting unit) raised concerns over from DWR.” Hallmark’s apparent lack of qualifications. • “DWR shall make the sole and final determination as to Additionally, an employee at DWR with knowledge of the A&E the payment to Hallmark of any and all amounts invoiced contracting process also raised concerns over Hallmark’s by Hallmark.” qualifications. The employee indicated that Hallmark’s president, 28 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 • “DWR shall provide written notice to URS of those portions of Hallmark’s invoice that are approved for payment.” • “URS’s liability to DWR in any manner arising out of or in connection with any act, omission, negligence or any other aspect of [Hallmark’s program manager] or Hallmark’s performance that is the subject of the amendment shall be strictly limited to whatever damages or other relief URS actually obtains from [Hallmark’s program manager] or Hallmark.” In summary, the process DWR used to award the “subcontract” without demonstrating that Hallmark had the required qualifications and professional license is contrary to the letter and spirit of the law, which is intended to create competition to ensure that the State obtains a competent and qualified contractor at a fair and reasonable price. The ultimate result of this subcontract is that DWR later awarded Hallmark its own contract, also without a competitive process. Specifically, in 2013 DWR removed the program management services component from the URS contract and entered into a new direct contract with Hallmark through what DWR termed an administrative separation, known also as an assignment. 4 The contract documentation justified DWR’s choice not to use a competitive process by referencing the fact that URS had been selected through a request for qualifications. However, this justification is inapplicable given that Hallmark was never identified nor included in URS’s response to the request for qualifications. DWR officials told us that Hallmark had been functioning as program manager for three years and thus had demonstrated its qualifications. Nevertheless, as shown in Table 1 on page 24, Hallmark did not have the necessary qualifications to fill the program manager role in the first place based on DWR’s original request for qualifications. DWR later awarded Hallmark its own contract, also without a competitive process. We question DWR’s rationale for assigning the contract to Hallmark. When we asked DWR about the administrative separation and assignment of the program management services to Hallmark, DWR officials stated that it did so to increase workflow efficiencies. They also stated that its staff had experienced frustration going through URS to 4 Assignment is the legal term for transferring the rights and obligations of a contract from one entity to another. CALIFORNIA STATE AUDITOR | Report 2016-132 29 October 2017 work with Hallmark, because of the additional layer of administrative processes. They did not believe paying URS the 5 percent subcontractor markup for work Hallmark performed was cost‑effective. According to DWR officials, the assignment provided its staff with direct access to the program manager while simultaneously saving the program significant costs. However, we question that reasoning because DWR created the difficulties in the first place by not awarding competitively a new contract for program management services, which would have provided its staff direct access to the selected program manager, following its notice of disapproval of URS’s program manager in July 2009. In addition, we are not convinced that DWR is saving money through the assignment because Hallmark has had to subcontract many of the program management functions, and DWR is generally paying a markup of 5 percent for invoices to Hallmark for overseeing those subcontractors. DWR Did Not Accurately Value Its Initial Contract With Hallmark or Ensure That It Received Fair and Reasonable Pricing for one of Hallmark’s Subcontractors DWR did not establish accurately the cost of the Hallmark contract before awarding it, resulting in an increase in the expense of the original contract award. When it awarded the contract to Hallmark, DWR did not ensure that the funding would cover adequately the services required for the duration of the contract; instead it simply transferred $4.1 million from the original URS budget to the new Hallmark contract. Although DWR awarded the contract for $4.1 million, it did not base this amount on accurate historical monthly costs or the correct term of the contract. Instead, DWR incorrectly used a contract term of 12 months to calculate the contract amount even though the contract itself was drafted for a term of 37 months. DWR also did not take into account the additional services that Hallmark’s subcontractors were performing under the contract. Hallmark has had to subcontract many of the program management functions and DWR is generally paying a markup of 5 percent. Consequently, just seven months after awarding the contract, DWR amended it, increasing the budget by $7.3 million to cover the contract’s full term. DWR amended the contract three additional times to extend the term through December 2017 and to increase the total cost by $2.4 million. As of July 2017, the amount of the Hallmark contract had increased to a total of $13.8 million. 30 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 In addition, DWR paid for an important work product without ensuring that the price was fair and reasonable or that the work product was finalized. Specifically, in October 2012 DWR issued a deliverables paid task order to engage McKinsey & Company (McKinsey), a subcontractor to Hallmark, for $2.69 million, to develop the governance structure for the design and construction phase of the project, but DWR did not justify adequately the cost or ensure that it received a final work product.5 DWR regulations require it to estimate the value of services to be provided based on fees paid for similar services or based on a market survey. However, DWR staff in the contracting unit raised concerns about whether the cost of this task order was fair and reasonable because Hallmark did not present price comparisons or market rates for similar work. Although the task order stated that the price negotiated for McKinsey was fair and reasonable, it provided no analysis or support for the price, and we do not believe it complied with DWR’s regulations that require a fair and reasonable price be provided based on fees paid for similar services or on a market survey. DWR’s contracting unit staff stated that they did not feel an email from Hallmark was sufficient justification for a fair and reasonable price because Hallmark did not provide either comparable prices or a market survey. The DWR contracting staff also were concerned that Hallmark’s email did not specify how Hallmark determined whether the price was reasonable because the email simply stated that the dollar amount “is worth it because McKinsey has such a great track record”, without specifying the dollar amount. However, DWR could not provide any documentation showing that the contracting unit staff’s concerns were ever addressed. Consequently, we don’t believe that DWR had adequate assurance that Hallmark’s price for this $2.69 million deliverable was “fair and reasonable.” Additionally, despite paying $2.69 million for this task order, DWR never made sure the consultant finalized the governance structure documents. DWR stated within the task order that these documents were due in January 2013, and according to DWR officials, DWR received draft documents but did not receive final governance structure documents. We discuss the status of the governance structure in more detail later in the next section. 5 Deliverables paid task orders are task orders for which the contractor receives payment based on completion of the deliverable or work product. This differs from regular task orders for which the contractor is paid a specified rate for time spent on the task. CALIFORNIA STATE AUDITOR | Report 2016-132 31 October 2017 Recommendations To fully comply with state contracting law, DWR should ensure that it competitively selects architectural and engineering consultants based on demonstrated competence and professional qualifications. In addition, DWR should document in the contract file its evaluation of the competence and professional qualifications of all contractors and any subcontractors that are added to the contract subsequent to the competitive selection process. To ensure that only qualified subcontractors are added to contracts after the initial award is made, DWR should make sure that contractors select their own subcontractors and that DWR subsequently approves the selection after it verifies their qualifications. DWR should ensure that it retains adequate documentation in its contract files to support that contract prices are fair and reasonable and all deliverables are received. 32 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR | Report 2016-132 33 October 2017 DWR Needs to Take Certain Steps to Better Prepare for the Transition of WaterFix to the Design and Construction Phase Key Points • DWR has not completed either an economic or a financial analysis to demonstrate the financial viability of the project. • DWR has not implemented a governance structure for the design and construction phase of WaterFix. • DWR has not maintained important program management documents for WaterFix. DWR Has Not Completed Needed Analyses That Would Demonstrate the Financial Viability of WaterFix Despite DWR’s own policy stating that an economic analysis is a critical element of the planning process, DWR has not yet finalized one for WaterFix, although it released an incomplete draft economic analysis in 2016. The text box defines the critical questions about the project that this analysis and a financial Questions That Economic and analysis are intended to answer. In October 2012, Financial Analyses Answer DWR issued a task order for a subcontractor, the Brattle Group, to perform an economic analysis ECONOMIC ANALYSIS FINANCIAL ANALYSIS that would measure the benefits and costs of the Answers the questions: Answers the questions: BDCP from a statewide perspective. Over the next Should the project be Who benefits from 31 months, DWR budgeted $434,000 for the built at all? the project? economic analysis. According to the various task Should it be built now? Who will repay order amendments, development of this analysis the costs? was a lengthy process that included various scope changes and input from a variety of stakeholders Should it be built to a Can the beneficiaries different configuration meet repayment including Reclamation, the fishery agencies, or size? obligations? public water agencies, and Delta agricultural interests. In addition, the economic analysis was Will it have a net Will the beneficiaries positive social value for be better off financially revised several times to address feedback from Californians regardless after they meet stakeholders, changes in the project’s costs and of who receives the repayment obligations? footprint, and revisions to the draft BDCP. Then benefits and who pays in May 2015, DWR canceled the remaining work the costs? on the BDCP economic analysis because the project transitioned from the BDCP to WaterFix, Source: DWR’s Economic Analysis Guidebook. as described in the Introduction. 34 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 In June 2015, DWR directed the Brottle Group to instead develop an economic analysis for WaterFix, for which it had allocated an additional $356,000. DWR made public a November 2015 incomplete draft of the WaterFix economic analysis in response to a Public Records Act request in September 2016. However, DWR has not finalized the economic analysis report. According to DWR officials, the economic analysis could not be finalized because DWR determined it was not possible to complete an accurate cost‑benefit analysis until understanding which agencies will be participating in and funding the project and at what level. DWR officials further stated that the project will have varying economic benefits for each of the funding agencies, based on their unique situation including access to alternative water supplies and type of water users. DWR officials stated that once individual water agencies define their level of participation through their various public board processes, DWR will incorporate that information into a final cost‑benefit analysis. DWR has not finalized the economic analysis report. We believe that it is essential for DWR to complete the economic analysis report as soon as it determines the extent to which individual water agencies will participate in funding the design and construction of WaterFix. DWR also has not completed a financial analysis for WaterFix. The financial analysis answers critical questions about the project, which the previous text box lists. In 2012 DWR contracted with the consulting firm Public Finance Management through Hallmark, and in 2013 DWR initiated a task order for Public Finance Management to support the completion of a financial analysis for the project. The scope of work in the task order was organized to generate key deliverables, with the general objectives of reaching agreement on fair and affordable cost allocations and establishing reliable financing for implementation of the project. The task order acknowledged that these deliverables would require the collective effort of DWR, Reclamation, and state and federal water contractors, with the consultant providing support. As of July 2017, DWR data show that it has paid Public Finance Management $276,000 for its efforts. However, according to DWR officials, no final decisions on cost allocations or interim financing have been made because discussions with state and federal water contractors are still ongoing. DWR officials further explained that the final financial analysis report CALIFORNIA STATE AUDITOR | Report 2016-132 35 October 2017 cannot be prepared until the contractors desiring to participate in WaterFix are identified. They also stated that DWR’s contractor— Public Finance Management—modeled a wide range of financing options for WaterFix that were shared with water contractor boards. According to DWR officials, once individual agencies decide to participate, the financing will be tailored to meet each agency’s needs. The financial analysis is critical in determining whether water contractors are willing and able to pay for the construction of WaterFix. The Delta Reform Act of 2009 states that construction of a new Delta conveyance facility (such as WaterFix) shall not be initiated until the water contractors that contract to receive water from the State Water Project and Central Valley Project have made arrangements or entered into contracts to pay for two things: (1) the costs of the environmental review, planning, design, construction, and mitigation required for the construction, operation, and maintenance of any new Delta water conveyance facility and (2) the full mitigation of property tax or assessments levied for land used in the construction, location, mitigation, or operation of new Delta conveyance facilities. The financial analysis is intended to provide a business case that the project is beneficial, financial modeling to analyze the cost of the project and the debt service associated with financing the project, and an acceptable cost‑allocation methodology. DWR Has Not Fully Implemented a Governance Structure for Managing the Design and Construction Phase of WaterFix Although DWR contracted with a consultant to develop a governance structure for the design and construction phase of the project, it has not fully implemented such a structure. Originally, in 2008, DWR intended the role of the program manager to include overseeing the entire project, from planning through construction. However, in the first nine months of 2012, DWR management, Hallmark, and the State Water Project water contractors attempted with limited success to create a new governance structure that would address issues of organizational design and governance, the roles and responsibilities of the stakeholders in the decision‑making process, and guidance on project implementation. In an October 2012 task order, DWR stated that such a governance structure would be unique and immensely important. At the same time, DWR contracted with McKinsey to develop a governance structure that would create a new way for DWR to work with the public water agencies. DWR used McKinsey’s draft work product as input for the development of the Design and Construction Enterprise Unit (Enterprise Unit), which DWR publicly announced as the governance structure for the project in 2014. 36 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 In September 2015, DWR developed a draft Program Management Documents agreement that would formally implement the Enterprise Unit as the governance structure for Program Management Plan the design, construction, and implementation phase A dynamic document maintained by the program manager of WaterFix. The draft agreement envisioned that the throughout the life of the program providing a scope of work, water contractors would create a joint‑powers schedule, and cost estimates. It also includes the following: authority—the Conveyance Project Coordination • Staffing requirements. Agency (coordination agency)—to be a party to the • Funding sources. agreement along with DWR. The contractors would • Reporting relationships. organize the coordination agency to assist DWR in • Participant roles and responsibilities. the design, construction, and implementation of • Monitoring, change control, and reporting policies WaterFix. The draft also envisioned that DWR and and procedures. the coordination agency would enter into a contract • Critique of project successes and recommendations for with a “world‑class project manager”—designated the improvements (upon completion of the project). program director—to head the Enterprise Unit. Funding Statement However, according to DWR officials, it is currently Also called the program component statement, this is in discussion with the public water agencies to create the authorizing document for funding a program and is the key monitoring and control document. It is a dynamic a governance structure, but whether it will be the document maintained by the program manager throughout same or similar to the Enterprise Unit is unclear. the life of the program. It includes the following: According to DWR officials, because WaterFix • Specific funding sources for the estimated, budgeted, has not yet been approved and because the public and proposed years. water agencies have yet to form the coordination agency, the Enterprise Unit has yet to be officially • Explanation of any changes between the budgeted year and the proposed year. implemented. DWR officials stated that it is currently in discussion with the public water agencies to Charter determine, under current conditions, what the most Describes a proposed activity at a high level. It is the effective governance structure will be for the design responsibility of the program manager to ensure that and construction phase. Further, these officials told us the charter is kept up to date during the life of the program. that the governance structure will very likely follow The Charter includes the following: some of the recommendations from the McKinsey • Program objective. effort. It is essential that DWR develop an appropriate • Scope. governance structure so that it is prepared to oversee • Critical success factors. the design and construction of WaterFix in the event • Deliverables. that the project is ultimately approved. • Milestones. Source: DWR’s Water Resources Engineering Memorandum 65a. DWR Did Not Properly Maintain Important Program Management Documentation Although WaterFix has evolved since it began as the BDCP, DWR has not maintained required program management documents for the planning phase. DWR policy requires certain documentation to initiate and authorize a State Water Project‑funded program—such as the DWR program that supports WaterFix—including a management plan, funding statement, and charter. The text box describes each of these documents. That policy also states that the program manager CALIFORNIA STATE AUDITOR | Report 2016-132 37 October 2017 should maintain this documentation throughout the life of the program, and DWR included that same requirement in its contracts with URS and Hallmark. Initially, when DWR established the conservation and conveyance program, it followed its policy by creating the required management documents. Specifically, in 2008, DWR’s division of engineering prepared a Charter and Management Plan (management plan) for the program, which contained all of the necessary management documents. Within the management plan, DWR identified and listed URS’s program manager’s responsibilities, including requesting program changes, reporting the status of business activities to DWR’s executive manager and deputy directors, and updating the management plan as required. The contract with the program manager also specified that the program manager was to develop and maintain the program management plan and further enumerated the following responsibilities: reporting on cost, schedule, significant milestones, and resources compared to established baselines as well as providing oversight, analysis, and quality control of other contractors. The management plan identified the chief of DWR’s division of engineering as the executive manager of the conservation and conveyance program and the individual responsible for overseeing the program manager. The executive manager was also to oversee the program budget, schedule, engineering, and real estate activities and report to DWR’s executive management with periodic updates. However, roughly one year after DWR established the conservation and conveyance program, it began to experience significant personnel changes but did not ensure that the management plan was properly updated to reflect these changes. For example, as this report describes earlier, DWR replaced URS as the program manager with Hallmark in August 2009. Four years later in 2013, DWR’s executive manager of the conservation and conveyance program retired. According to a former chief deputy director, DWR subsequently moved the responsibility for overseeing the program manager to DWR’s executive management, although the management plan was never updated to reflect this change. Roughly one year after DWR established the conservation and conveyance program, it began to experience significant personnel changes. 38 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 Furthermore, DWR’s executive management also experienced significant turnover. For example, since DWR established the conservation and conveyance program in 2008, it has had three different directors and five different chief deputy directors. However, DWR did not update the management plan to document these changes or to describe how DWR handled them. We reviewed the contents of the electronic document management system that DWR uses to store project management documents. The system is an electronic repository that contains numerous documents, including monthly progress reports that provide updates on the project’s milestones and accomplishments, various meeting agendas and minutes, and monthly budget reports. However, through our review of the documents in this system we were only able to locate one update to the management plan that covers the planning phase. The updated program management plan was completed in November 2009, but it did not properly address the significant personnel changes or the shift in the project from the BDCP to WaterFix. If WaterFix is ultimately approved, it will be important for DWR to develop, and update when necessary, a management plan for the design and construction phase of the project. Recommendations To ensure that DWR manages WaterFix in an effective manner, DWR should complete both the economic analysis and financial analysis for WaterFix and make the analyses publicly available as soon as possible. In order to prepare for the potential approval of WaterFix and to ensure that the project is managed properly during the design and construction phase, DWR should do the following: • Develop an appropriate governance structure so that it is prepared to oversee the design and construction of WaterFix in the event it is ultimately approved. • Develop and update when necessary the associated program management plan for the design and construction phase of the project. CALIFORNIA STATE AUDITOR | Report 2016-132 39 October 2017 SCOPE AND METHODOLOGY The Joint Legislative Audit Committee (Audit Committee) requested the California State Auditor to examine the funds spent on planning and design of WaterFix by DWR. Table 2 lists this audit’s approved objectives and the methods we used to address them. Table 2 Audit Objectives and the Methods Used to Address Them AUDIT OBJECTIVE METHOD 1 Review and evaluate the laws, rules, Reviewed relevant laws, regulations, and other background materials related to the and regulations significant to the WaterFix project. audit objectives. 2 Determine how DWR collaborated to organize and fund the planning and design of the BDCP and subsequently WaterFix. Specifically, Identify the following: a. DWR’s role in organizing and financing • Interviewed relevant individuals and reviewed planning documents, including various the planning and design. planning agreements among participants and DWR’s funding agreements with the State Water Project water contractors, the Authority, and Reclamation. • Reviewed the BDCP and various drafts of the environmental impact report. • Reviewed a May 2008 Legislative Counsel opinion regarding DWR’s authority to construct a water conveyance facility. b. The extent to which DWR engaged • Interviewed relevant individuals at DWR, Metropolitan, Kern, and the Authority. local agencies required to contribute • Reviewed relevant documents, including BDCP steering committee minutes from 2006 towards WaterFix costs in developing through 2010, BDCP management committee documents, WaterFix business committee the funding structure for planning documents, and conservation and conveyance program financial meeting agendas. and design. c. The amounts and proportional share • Reviewed funding agreements to determine the funding obligations of entities of contributions each local agency and participating in the planning phase. any other entity that provided funds for • Reviewed budgets and contracts DWR developed for the preparation of the planning and design made from 2006 BDCP beginning in 2006 to determine estimated costs because DWR did not track to present. adequately BDCP contributions or spending. • Obtained data from DWR’s accounting system identifying participating state and federal entities and their proportionate contributions to the conservation and conveyance program’s planning costs from January 2008 through June 2017. • Traced the amounts from DWR’s data to supporting documentation from the two largest State Water Project water contractors (Metropolitan and Kern), the Authority, and Reclamation. d. Whether the State allocated any • Reviewed state budget acts for fiscal years 2006–07 through 2016–17 to determine General Fund money for planning whether the State allocated any General Fund money for the planning of the BDCP and design. and WaterFix. • Interviewed DWR staff to determine if DWR used General Fund money to fund the planning and design. • Analyzed the expenses from the fund that DWR set up for the conservation and conveyance program expenses to determine whether DWR used any General Fund money to fund the planning and design. continued on next page . . . 40 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 AUDIT OBJECTIVE METHOD 3 Identify, by source, the amounts of • Reviewed documents and data, as further described in Objective 2c. funding DWR, each local agency, and • Interviewed individuals at Metropolitan and Kern and traced their contribution amounts any related joint powers authority raised reported in DWR’s data to the entities’ audited financial statements to confirm the and used to finance the BDCP and amounts and identify the sources of the funds. subsequently WaterFix. In the case of debt • Interviewed individuals at the Authority and obtained documentation of the Authority’s financing, identify the entities that issued 2009 revenue note issuance, repayment, and cost‑sharing structure among its participating debt and their relationships to the water member agencies to determine the source of the funds. contractor and determine when and how they secured each debt issuance. • Reviewed federal assistance agreements and interviewed individuals at Reclamation to determine the sources of its contributed funds. • Interviewed individuals at DWR to determine the need for any additional funding to carry out the remainder of the planning phase. 4 Determine the nature of the Conveyance • Interviewed individuals at DWR and reviewed relevant documentation. We determined that Project Coordinating Agency’s activities, the water contractors have not created the coordinating agency; thus, it has no activities, date of its charter, its composition, and no charter, and has not received any funding. DWR mentioned the coordinating agency in a the amount of funding, by source, it has draft agreement that DWR prepared to establish how DWR intended to manage the design received since its inception. and construction phase. DWR has not executed the draft. • We discuss the coordinating agency beginning on page 35 of the report. 5 Evaluate the process DWR used to • Reviewed relevant contracts, contract amendments, emails, and other documentation select the contractor to manage design regarding DWR’s selection of the contractor to provide program management services for and engineering for the Design and the conservation and conveyance program, and DWR’s efforts to replace that contractor Construction Enterprise Unit. with Hallmark. • Interviewed individuals at DWR regarding the selection of the program manager for the conservation and conveyance program and regarding the subsequent replacement of that program manager with Hallmark. • Reviewed Statements of Economic Interests (Form 700s) for relevant DWR employees and contractors. We did not identify any apparent conflicts. • As we describe on page 36, the Enterprise Unit was never officially established, nor was a contractor selected to manage it. 6 Review and assess any other issues that • Interviewed responsible individuals at DWR and reviewed management practices and are significant to the audit. policies, analyses, and agreements related to moving forward with the construction of WaterFix. • Reviewed and analyzed task orders and deliverables related to the contract for program management of the conservation and conveyance program and WaterFix. Sources: California State Auditor’s analysis of the Audit Committee’s audit request 2016‑132 and information and documentation identified in the table column titled Method. Assessment of Data Reliability In performing this audit, we obtained electronic files of conservation and conveyance program revenues and expenses from DWR’s accounting system for January 1, 2008, through June 30, 2017. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that we use to support our findings, conclusions, or recommendations. To gain assurance of the accuracy of these data, we traced the program revenues from the two largest state water contractors and all federal sources, which constitute 82 percent of the revenues, to supporting documentation from the responsible CALIFORNIA STATE AUDITOR | Report 2016-132 41 October 2017 entities and found that the dollar amounts materially matched. We performed completeness testing of these data by comparing the total program revenues from DWR’s data to the budgeted amounts in planning documents and by ensuring that the data provided were not comingled with other data. We found the data to be complete. Consequently, we found DWR’s data to be of sufficient reliability for the purposes of determining the amounts that the various state and federal contractors contributed. 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 and Methodology 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: October 5, 2017 Staff: Mike Tilden, CPA, Audit Principal Jordan Wright, CFE Mariyam Ali Azam Mary Anderson Logan J. Blower Legal Counsel: Mary K. Lundeen, Sr. Staff Counsel For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255. 42 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR | Report 2016-132 43 October 2017 * 1 2 * California State Auditor’s comments begin on page 87. 44 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 3 4 CALIFORNIA STATE AUDITOR | Report 2016-132 45 October 2017 1 5 6 7 46 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 8 6 8 5 7 9 10 1 CALIFORNIA STATE AUDITOR | Report 2016-132 47 October 2017 10 11 1 48 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 12 5 11 7 6 CALIFORNIA STATE AUDITOR | Report 2016-132 49 October 2017 8 13 14 11 50 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 14 15 1 16 5 13 15 CALIFORNIA STATE AUDITOR | Report 2016-132 51 October 2017 15 17 1 17 52 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 18 1 1 19 1 CALIFORNIA STATE AUDITOR | Report 2016-132 53 October 2017 20 1 1 54 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 21 1 1 3 1 22 CALIFORNIA STATE AUDITOR | Report 2016-132 55 October 2017 22 1 1 1 1 56 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 57 October 2017 58 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 59 October 2017 60 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 61 October 2017 62 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 63 October 2017 64 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 65 October 2017 66 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 67 October 2017 68 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 69 October 2017 70 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 71 October 2017 72 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 73 October 2017 74 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 75 October 2017 76 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 77 October 2017 78 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 79 October 2017 80 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 81 October 2017 82 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 83 October 2017 84 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 85 October 2017 86 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 CALIFORNIA STATE AUDITOR | Report 2016-132 87 October 2017 COMMENTS CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM DWR To provide clarity and perspective, we are commenting on DWRs’ response to our audit. The numbers below correspond to the numbers we have placed in the margin of DWR’s response. While preparing our draft report for publication, some page 1 numbers shifted. Therefore, the page numbers DWR cites in its response do not correspond to the page numbers in our final report. DWR incorrectly asserts that all activities for the planning of the 2 project were paid for by the public water agencies. In Figure 5 on page 15 we show that $81.2 million of the funding for the conservation and conveyance program, or 31 percent—the largest portion of funding—came from the U.S. Bureau of Reclamation. We stand by our conclusion that DWR did not follow state 3 law in selecting the program manager. As described on pages 25 through 29, and in exhibit 2 in DWR’s response on page 69, it directed URS to “subcontract” with the president of Hallmark without demonstrating DWR assessed his qualifications, including that he was a licensed engineer. The purported “subcontract” created operational inefficiencies that led DWR to eventually award Hallmark a direct contract through an assignment. We address the issues in this summary in the “Findings” section of 4 DWR’s response. Although DWR states that it received excellent value from 5 Hallmark, the fact remains that the current program manager that DWR directed URS to hire as a subcontractor does not possess the qualifications DWR sought when it initially awarded the contract to URS. Furthermore, as we state on page 29, the cost of Hallmark’s contract increased from $4.1 million to $13.8 million. We disagree that the project was conceived as just an engineering 6 enterprise. DWR’s request for qualifications and its contract with URS included more than just engineering; they also required program management services for which URS initially identified an individual as its program manager. DWR’s statement seems to indicate that URS’ program manager did not have the management expertise requisite for the scale and complexity of the project. However, that statement contradicts the letter we reviewed that DWR sent to URS disapproving the program manager. As we 88 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 state on page 24, DWR replaced the URS program manager apparently because he was not working full‑time on the project, not because he lacked the necessary expertise. 7 DWR mischaracterizes the services for which Hallmark was “subcontracted.” DWR and the former director attempt to narrowly define the responsibilities of Hallmark, when, in fact, the “subcontract” made Hallmark responsible for the entire scope of work for program management services. Further, the description of Hallmark’s role provided by the former director was based on assertions that neither he nor DWR was able to support. In addition, nowhere in DWR’s exhibit 2 contract language directing URS to subcontract with Hallmark’s president to fill the position of program manager, or in the scope of work in DWR’s exhibit 1—its agreement with URS describing the tasks it expected the project manager to perform—does it specify that Hallmark or its president was hired exclusively to provide cost control as DWR claims. For example, as stated in item 7 of exhibit 1 appearing on page 63, Hallmark was also responsible for coordinating, overseeing, and monitoring other contractors including, but not limited to, environmental, engineering and construction services. 8 DWR states that Hallmark was hired to provide its “proven management skills.” However, DWR was unable to demonstrate that it assessed Hallmark’s qualifications. As we state on page 25, our review of DWR’s contract file for Hallmark found no evidence that DWR evaluated Hallmark’s qualifications for the program manager role. 9 It is unclear to us what budget projection DWR is referring to. As we state on page 20, in 2012 DWR signed agreements with water contractors for an additional $100 million—a 71 percent increase to the initial $140 million budget—to fund the remaining planning phase activities. Additionally, as we also state on page 20, DWR ultimately exhausted this $100 million augmentation and had to contribute $15 million in surplus revenues in 2015 and 2016 along with an extra $6.8 million contribution from Reclamation and the Authority to fund additional planning costs. 10 We do not misunderstand the contract. Although we agree that the scope of work included multiple elements, one of the main elements was construction project management services, which include services like those included in exhibit 1 on pages 59 and 60 in DWR’s response and many of the deliverables listed on pages 62 through 66. By law these services must be performed by a licensed architect, registered engineer, or licensed general contractor; and DWR’s request for qualifications required the program manager to have a professional engineering license. CALIFORNIA STATE AUDITOR | Report 2016-132 89 October 2017 While we do not dispute that subcontracting is permitted, as 11 we explain on pages 27 and 28, and as shown in exhibit 2 in DWR’s response on pages 69 through 72, the arrangement DWR created was not a true contractor‑subcontractor arrangement. Specifically, URS was not overseeing Hallmark’s work products, it was not determining payment to Hallmark, and it was not legally responsible for Hallmark’s work. Additionally, we expected DWR to require URS to provide an equally qualified replacement program manager or for DWR to have used a competitive process to select a replacement program manager. Finally, because the program management services DWR was seeking included construction project management, state law requires the program manager to be a licensed architect, registered engineer, or licensed general contractor. DWR describes in its response the inherent conflict the unusual 12 arrangement created, and the contract terms it had to include to protect against this precarious situation. As we describe on page 28, DWR also eventually changed this arrangement to address the inefficient workflow that resulted from the subcontract. Furthermore, the asserted success of the arrangement does not justify the manner in which DWR procured Hallmark’s services as program manager. Our report does not narrowly focus on the request for 13 qualifications process. On pages 24 and 25 we state that because of the size, cost, complexity, and significance to the State of WaterFix, we expected DWR to have required URS to provide an equally qualified replacement program manager. Because DWR included a requirement in its request for qualifications that the program manager work full‑time on the project it is unclear to us why DWR did not enforce this requirement, but instead directed URS to “subcontract” with Hallmark who lacked some of these qualifications. By requiring URS to provide a qualified program manager who is able to work full‑time on the project, as required by the request for qualifications, DWR would have avoided the 5‑month delay it asserts would have occurred if it had used a competitive process to replace its program manager. Despite DWR’s assertion, the “subcontract” makes it clear that 14 Hallmark is the firm responsible for the entire scope of program management services. The “subcontract” did not identify any overlap between Hallmark and URS in the work of the program management services to be provided by Hallmark that would suggest a “team” approach. In fact, in DWR’s exhibit 2 on page 69 directing URS to subcontract with Hallmark and its president specifies that “Hallmark is an independent contractor and is not the agent or employee of DWR or URS”. 90 Report 2016-132 | CALIFORNIA STATE AUDITOR October 2017 15 We stand by our conclusion. As described on page 27 and 28, the relationship established between URS and Hallmark was not truly a “subcontract,” and Hallmark did not have the required qualifications or license to provide the services. Further, assigning the work, although provided for by the contract, avoids the competitive process that is favored in state contracting law. In addition, by assigning the contract to Hallmark, DWR contradicts its earlier assertion that it used a team approach for program management. Finally, Hallmark and URS do not operate as a team if URS is no longer a party to the contract for program management services. 16 As we state on pages 28 and 29, when we asked for its rationale, DWR told us that the assignment provided its staff direct access to Hallmark while saving the 5 percent markup URS charged under the subcontract. However, we question this reasoning because DWR created the difficulties in the first place, and we are not convinced DWR is saving money because Hallmark has had to subcontract many of its program management functions and DWR is generally paying a 5 percent markup for invoices from these subcontractors. 17 DWR has not provided evidence describing how the fee was established or that it was fair and reasonable with price comparisons or a market survey. As we state on page 30, DWR did not justify adequately the $2.69 million cost. Further, on page 30 we also explain that DWR staff raised the same concern because the justification from Hallmark simply stated that the price “is worth it because McKinsey has such a great track record,” which we do not consider to be adequate assurance the price was fair and reasonable. 18 Contrary to DWR’s assertion, our report does not imply that no governance structure exists or that a lack of such a structure is contrary to legal requirements. Our report on pages 34 and 35 states that DWR has not fully implemented a governance structure for the design and construction phase of WaterFix. In addition, we conclude that it is essential that DWR develop an appropriate governance structure so that it is prepared to oversee the design and construction of WaterFix in the event the project is ultimately approved. This conclusion parallels DWR’s perspective as shown in exhibit 5 on page 85 of the contract amendment that added $10 million dollars to the contract and added McKinsey as a subcontractor. The amendment language states that the “conservation and conveyance program has progressed to a phase where the organizational structure and governance have become increasingly critical to the future success for design and construction of the project.” This section is to inform the reader that the governance structure for which DWR paid $2.69 million has not been fully implemented. CALIFORNIA STATE AUDITOR | Report 2016-132 91 October 2017 DWR misunderstands the report. We do not suggest that DWR 19 must assess each water agency’s needs and provide a final financial analysis before the decision to opt into WaterFix is made. On pages 34 and 35 we include the statement from DWR officials that the final financial analysis report cannot be prepared until the contractors desiring to participate in WaterFix are identified. We also include on page 35 DWR officials’ statement that its contractor, Public Finance Management, modeled a wide range of financing options for WaterFix that were shared with water contractor boards. Finally, these officials stated that once individual agencies decide to participate, the financing will be tailored to meet each agency’s needs. We disagree that the documents DWR has maintained serve the 20 same planning function as the program management plan. As the text box on page 36 shows, the management plan includes staffing requirements, reporting relationships, and participant roles and responsibilities, among other things. Additionally, the management plan incorporates that information together in one cohesive document. Our review of Aconex found a document repository (essentially a digital filing cabinet) with numerous, disparate, historical and current documents that DWR staff had to pour through in an effort to locate something that was responsive to our request for the management plan. Our recommendation does not presuppose that time delays have 21 a negative consequence, rather that they should be thoroughly justified and vetted. The recommendation does not limit DWR’s ability to be responsive to stakeholder input, but would require DWR to consciously and transparently consider that input before making decisions that affect project cost and schedule, whether during planning or other phases of the project. We disagree with DWR’s revision to the recommendation because 22 it introduces the risk that DWR will direct contractors to select specific subcontractors, which undermines the intent of the recommendation to have the contractor put forth the subcontractor it believes will best perform the work required by the contract and require DWR to verify the qualifications of the subcontractor before approving the selection.