Report 2011-504 All Recommendation Responses

Report 2011-504: High-Speed Rail Authority Follow-Up: Although the Authority Addressed Some of Our Prior Concerns, Its Funding Situation Has Become Increasingly Risky and the Authority's Weak Oversight Persists (Release Date: January 2012)

Recommendation #1 To: High-Speed Rail Authority, California

To ensure that it can respond adequately to funding levels that may vary from its business plan, the Authority should develop and publish alternative funding scenarios that reflect the possibility of reduced or delayed funding from the planned sources. These scenarios should detail the implications of variations in the level or timing of funding on the program and its schedule.

Annual Follow-Up Agency Response From November 2016

Please see the Authority's response to this finding in Report 2009-106.

California State Auditor's Assessment of Annual Follow-Up Status: Resolved

We consider this recommendation resolved, with reservations. The Authority, as well as its peer review group, have acknowledged the challenge of obtaining adequate funding for this project on an ongoing basis. The Authority also outlines potential sources of funding moving forward in its business plan. We caution the Authority to continue to expand on this analysis in future business plans and to ensure it discusses the availability—or lack of availability—of public funds including federal funds. We note also that the Authority discusses where it estimates the status of the project to be as of 2020, the date the Legislature originally intended for the project to be complete, and estimates completion of phase one in 2025. We caution the Authority to continue to discuss how changing funding sources may continue to delay completion of the project.

Annual Follow-Up Agency Response From September 2015

The Authority continues to work with stakeholders (cooperating agencies, the Legislature, federal government, and the private sector) to define alternative delivery scenarios on blended systems operations. These alternatives will have different levels of costs and differing funding needs. The Authority has known funding sources from Proposition 1A, $3.3 billion in committed federal funding, and cash flow projections which illustrate that private sector capital should be available when the IOS has been built. The first construction phase, the ICS, is fully funded.

The 2014 Business Plan identifies the High-Speed Rail project is also a candidate for Cap and Trade funds. The 2014-15 Budget contained $250 million of cap and trade funds to advance the program. With the passage of SB 862, on an ongoing basis, without the need for annual appropriation, 25% of the annual Cap and Trade proceeds will go to the continued development and construction of the high-speed system. This will be reflected in future business plans. The 2014 Business Plan clearly identifies known sources of funding and the funding needed to complete the full Phase 1 program over the next 20 plus years based on the facts known as of May 2014. To provide increased clarity from the 2012 Business Plan, the additional funding needed is labeled as "uncommitted" to ensure that it is clear that these funds were not currently identified as of May 2014.

Future Business Plans will continue to be updated with additional information on Cap and Trade funds which, depending on actual program performance, could fund significant portions and, possibly all, of the IOS. They will also further describe how capital that can be raised based on the project's net cash flow once operations begin that can be used to help build additional parts of the Phase 1 system. Also, as previously noted, the Authority will only proceed to construction on any segment when all necessary funding has been identified.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Until the business plan reflects the possibility of reduced or delayed funding from the planned sources and sufficient alternative funding scenarios, we will continue to report the status of this recommendation as partially implemented.

Annual Follow-Up Agency Response From October 2014

The Authority continues to work with stakeholders (cooperating agencies, the Legislature, federal government, and the private sector) to define alternative delivery scenarios on blended systems operations. These alternatives will have different levels of costs and differing funding needs. The Authority has known funding sources from Proposition 1A, $3.3 billion in committed federal funding, and cash flow projections which illustrate that private sector capital should be available when the IOS has been built. The first construction phase, the ICS, is fully funded.

The 2014 Business Plan identifies the High-Speed Rail project is also a candidate for Cap and Trade funds. The 2014-15 Budget contained $250 million of Cap and Trade funds to advance the program. With the passage of SB 862, on an ongoing basis, without the need for annual appropriation, 25% of the annual Cap and Trade proceeds will go to the continued development and construction of the high-speed rail system. This will be reflected in future business plans. The 2014 business plan clearly identifies known sources of funding and the funding needed to complete the full Phase 1 program over the next 20 plus years based on the facts known as of May 2014. To provide increased clarity from 2012 Business Plan, the additional funding needed is labeled as "uncommitted" to ensure that it is clear that these funds were not currently identified as of May 2014.

Future Business Plans will continue to be updated with additional information on Cap and Trade funds which, depending on actual program performance, could fund significant portions and, possibly all, of the IOS. They will also further describe how capital that can be raised based on the project's net cash flow once operations begin that can be used to help build additional parts of the Phase 1 system. Also, as previously noted, the Authority will only proceed to construction on any segment when all necessary funding has been identified.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

The Authority has taken steps to develop alternative funding scenarios, such as the infusion of cap and trade funds; however, the business plan does not reflect the possibility of reduced or delayed funding from the planned sources.

Annual Follow-Up Agency Response From October 2013

As reported in our one-year response dated January 24, 2013, to the California State Auditor, the Authority continues to work with stakeholders (cooperating agencies, the Legislature, federal government, and the private sector) to define alternative delivery scenarios on blended systems operations. These alternatives will have different levels of costs and differing funding needs. The Authority's business plan includes a section related to the impacts of potential delay in funding or other factors on the project. The Authority has known funding sources from Proposition 1A, $3.3 billion in committed federal funding, and cash flow projections which illustrate that private sector capital should be available when the IOS has been built. The first construction phase, the ICS, is fully funded. The revised business plan clearly identifies known sources and the funding gap that remains to be filled over the next 20 plus years as the full system is built out.

In the spring of 2012, during finalization of the 2012 revised business plan, the Department of Finance and the Administration identified cap-and-trade revenues as a potential funding source for the high-speed rail project. Such funds, if used, would be applied to the completion of the IOS after the construction of the first construction segment, which is fully funded and was approved for appropriation in July 2012. The Authority will work with the Department of Finance to define a specific plan for use of cap-and-trade funds, which will be presented in detail in the next business plan to be issued in draft in early 2014.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

1-Year Agency Response

The Authority stated that it continues to work with stakeholders to define alternative delivery scenarios on blended system operations. Additionally, the Authority asserted that in the spring of 2012, the Department of Finance and the Administration identified cap-and- trade revenues as a potential funding source for the program. Further, the Authority stated that it will work with the Department of Finance to define a specific plan for the use of cap-and-trade funds, which it claims will be presented in detail in the next business plan to be issued in draft in the fall of 2013.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

Although the Authority's business plan includes three alternative funding scenarios, all three assume a similar or increased level of federal funding compared to the Authority's primary plan, which the federal government has not indicated will occur.

6-Month Agency Response

The Authority stated that it continues to work with stakeholders to define alternative delivery scenarios on blended system operations. Additionally, the Authority asserted that in the spring of 2012, the Department of Finance and the Administration identified cap-and-trade revenues as a potential funding source for the program. Further, the Authority stated that it will work with the Department of Finance to define a specific plan for the use of cap-and-trade funds, which it claims will be presented in detail in the next business plan to be issued in draft in the fall of 2013. However, although the Authority's business plan includes three alternative funding scenarios, all three assume a similar or increased level of federal funding compared to the Authority's primary plan—which the federal government has not indicated will occur. (See 2013-406, pp. 241-242)

California State Auditor's Assessment of 6-Month Status: Partially Implemented

Recommendation #2 To: High-Speed Rail Authority, California

In order to respond effectively to circumstances that could significantly delay or halt the program, the Authority should ensure that it implements planned actions related to managing risk.

6-Month Agency Response

The Authority hired a risk manager in August 2012. The Authority asserts that the risk manager will attend the risk management meetings related to updating the risk register, identifying new risks, performing qualitative risk analyses, and coordinating and tracking risk responses. (See 2013-406, p. 242)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #3 To: High-Speed Rail Authority, California

To avert possible legal challenges, the Authority should ensure that the independent peer review panel adheres to the Bagley-Keene Open Meeting Act or seek a formal opinion from the Office of the Attorney General (attorney general) regarding whether the panel is subject to this act.

Annual Follow-Up Agency Response From October 2013

As reported to the California State Auditor in the Authority's SB 1452 response dated September 17, 2012, and as discussed in Will Kempton's letter dated December 13, 2012, (provided with the one-year response) to the State Auditor, the peer review group serves as an advisor to the Legislature and is not appointed by nor does it report to the Authority. The Authority, therefore, does not have the legal authority to direct how the peer review group conducts its meetings, including providing legal advice to the group about open meeting law requirements.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

1-Year Agency Response

The Authority originally addressed our recommendation by requesting an opinion from the attorney general on January 5, 2012. Subsequently, on October 10, 2012, it withdrew its request for a legal opinion stating that it did so because the independent peer review group is appointed

by the State Treasurer, the State Controller, the Director of Finance, and the Secretary of Business, Transportation and Housing. The Authority explained that although it provides information requested by the peer review group, it believes that it does not have the legal authority to direct how the peer review group conducts its meetings including providing legal advice to the group about open meeting law requirements.

California State Auditor's Assessment of 1-Year Status: No Action Taken

While the Authority does not appoint the members of the peer review group, state law requires the Authority to "establish'' the independent peer review group and, as such, we believe the Authority would be an appropriate entity to request the opinion. In addition, the peer review group informed us that it believes its actions are not covered by the Bagley-Keene Open Meeting Act when it conducts its meetings. The peer group bases its belief on the advice of the Authority's former counsel when it explained to us why it does not comply with the Bagley-Keene Open Meeting Act. Therefore, the Authority has not implemented our recommendation.

6-Month Agency Response

The Authority originally addressed our recommendation by requesting an opinion from the attorney general on January 5, 2012. Subsequently, on October 16, 2012, it withdrew its request for a legal opinion stating that it did so because the independent peer review group is appointed by the State Treasurer, the State Controller, the Director of Finance, and the Secretary of Business, Transportation and Housing. The Authority explained that although it provides information requested by the peer review group, it believes that it does not have the legal authority to direct how the peer review group conducts its meetings including providing legal advice to the group about open meeting law requirements. Nevertheless, while the Authority does not appoint the members of the peer review group, state law requires the Authority to “establish” the independent peer review group and, as such, we believe the Authority would be an appropriate entity to request the opinion. In addition, the peer review group informed us that it believes its actions are not covered by the Bagley-Keene Open Meeting Act when it conducts its meetings. The peer group bases its belief on the advice of the authority's former counsel when it explained to us why it does not comply with the Bagley-Keene Open Meeting Act. Therefore, the Authority has not implemented our recommendation. (See 2013-406, p. 242)

California State Auditor's Assessment of 6-Month Status: No Action Taken

Recommendation #4 To: High-Speed Rail Authority, California

To ensure that it does not run out of funds for administrative and preconstruction tasks prematurely, the Authority should track expenditures for these activities and develop a long-term spending plan for them. It also should develop procedures and systems to ensure that it complies with American Recovery and Reinvestment Act of 2009 requirements.

6-Month Agency Response

The Authority implemented monthly control procedures and a supporting spreadsheet that utilizes cost data from CalStars to report cumulative information for administrative and preconstruction costs. The spreadsheet provides a breakdown of administrative and preconstruction expenditures by fiscal year and the percentage these expenditures represent of the total allowable expenditures authorized in Proposition 1A. The Authority stated that the spreadsheet will be combined with Program Manager information to project administrative and preconstruction expenditures. The Authority also asserts the spreadsheet may be used for future cost projections. (See 2013-406, pp. 242-243)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #5 To: High-Speed Rail Authority, California

In order to ensure that staff receive relevant information on the program's status, the Authority should amend the oversight consultant's work plan to include a critical review of the progress reports for accuracy and consistency. Authority staff should also request that the Program Manager revise its progress reports to include information on the status of contract products and services in relationship to what was promised.

6-Month Agency Response

The Authority amended the oversight consultant's work plan to include a critical review of the progress reports. In addition, the Authority provided four recent copies of the Program Manager's progress reports that included information on the status of contract products and services in relationship to what was promised. (See 2013-406, p. 243)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #6 To: High-Speed Rail Authority, California

To ensure that it does not misuse public funds and can hold contractors accountable, the Authority should adhere to the conditions of its contracts and work plans, and make any amendments and modifications in writing.

6-Month Agency Response

As published in our March 2011 report titled Implementation of State Auditor's Recommendations, Audits Released in January 2009 Through December 2010 (Report 2011-406), the Authority amended its contract with the Program Manager to require the use of an audit-adjusted field rate—a discounted overhead rate used when consultants use client facilities. Further, the Authority amended its contract with a regional contractor to include work that was not part of the original contract. Finally, the Authority implemented a change control process, which includes making any amendments and modifications to contracts and work plans in writing. (See 2013-406, p. 243)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #7 To: High-Speed Rail Authority, California

To add clarification to the first recommendation we made in our prior report that stated, “To ensure that it can respond adequately to funding levels that may vary from its business plan, the Authority should develop and publish alternative funding scenarios that reflect the possibility of reduced or delayed funding from the planned sources. These scenarios should detail the implications of variations in the level or timing of funding on the program and its schedule,” the Authority should also present viable alternative funding scenarios for phase one in its entirety that do not assume an increase in the federal funding levels already identified in the 2012 draft business plan. If the Authority does not believe that such alternatives exist, it should publicly disclose this in its 2012 final business plan.

Annual Follow-Up Agency Response From November 2016

See response to Recommendation 1. In addition:

The Authority has consistently been transparent in the 2012, 2014, and 2016 Business Plans, on the amount of new funding that would have to be committed in order to fully fund the Phase 1 system. In the 2016 Business Plan, the Authority laid out a number of strategies that it will employ to work towards fully funding a Phase 1 system. These include using positive cash flow generated from selling tickets and operating the system to leverage financing and private investment; securing additional public funds, including federal funds, which can help match project-generated funding; continuing to work with partners to identify and secure funding from a variety of existing sources; and continuing to work to identify opportunities to reduce costs and to deliver the program more cost-effectively through alternative delivery models such as public-private partnerships. As discussed above, these strategies have also been in the public domain and outside of the 2016 Business Plan.

In each of the Business Plans, the Authority has clearly explained what funding has been identified and is available and how much additional funding will be necessary to complete the system. This is consistent with programs of this magnitude that are developed in phases. Following that approach, the 2016 Business Plan identified all of the funding sources for the first phase of the program where the Authority plans to start service, the Silicon Valley to Central Valley Line. The Authority also spelled out that additional funding sources, from both the public and private sector, will be necessary to complete the Phase 1 system and will continue to work with funding partners to identify and obtain the necessary funds. The Authority's Business Plans have been entirely transparent on these issues and have thoroughly described the program's funding picture as it has evolved (and improved) over time.

California State Auditor's Assessment of Annual Follow-Up Status: Resolved

We consider this recommendation resolved, with reservations. The Authority, as well as its peer review group, have acknowledged the challenge of obtaining adequate funding for this project on an ongoing basis. The Authority also outlines seven potential sources of funding moving forward in its business plan, five of which are not from federal sources. We caution the Authority to continue to expand on this analysis in future business plans and to ensure it discusses the availability—or lack of availability—of public funds, including federal funds. We note also that the Authority discusses where it estimates the status of the project to be as of 2020, the date the Legislature originally intended for the project to be complete, and estimates completion of phase one in 2025. We caution the Authority to continue to discuss how changing funding sources may continue to delay completion of the project.

Annual Follow-Up Agency Response From September 2015

The Authority continues to work with stakeholders (cooperating agencies, the Legislature, federal government, and the private sector) to define alternative delivery scenarios on blended systems operations. These alternatives will have different levels of costs and differing funding needs. The Authority has known funding sources from Proposition 1A, $3.3 billion in committed federal funding, and cash flow projections which illustrate that private sector capital should be available when the IOS has been built. The first construction phase, the ICS, is fully funded.

The 2014 Business Plan identifies the High-Speed Rail project is also a candidate for Cap and Trade funds. The 2014-15 Budget contained $250 million of cap and trade funds to advance the program. With the passage of SB 862, on an ongoing basis, without the need for annual appropriation, 25% of the annual Cap and Trade proceeds will go to the continued development and construction of the high-speed system. This will be reflected in future business plans. The 2014 Business Plan clearly identifies known sources of funding and the funding needed to complete the full Phase 1 program over the next 20 plus years based on the facts known as of May 2014. To provide increased clarity from the 2012 Business Plan, the additional funding needed is labeled as "uncommitted" to ensure that it is clear that these funds were not currently identified as of May 2014.

Future Business Plans will continue to be updated with additional information on Cap and Trade funds which, depending on actual program performance, could fund significant portions and, possibly all, of the IOS. They will also further describe how capital that can be raised based on the project's net cash flow once operations begin that can be used to help build additional parts of the Phase 1 system. Also, as previously noted, the Authority will only proceed to construction on any segment when all necessary funding has been identified.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Although the Authority's 2014 business plan contains more options than the prior plan, it does not contain sufficient alternative funding scenarios. Moreover, the 2014 business plan notes that future funding will likely need to encompass low-cost federal debt programs. Thus, the Authority continues to rely on future support from the federal government. Therefore, we will continue to report the Authority's implementation of this recommendation as partially implemented.

Annual Follow-Up Agency Response From October 2014

The Authority continues to work with stakeholders (cooperating agencies, the Legislature, federal government, and the private sector) to define alternative delivery scenarios on blended systems operations. These alternatives will have different levels of costs and differing funding needs. The Authority has known funding sources from Proposition 1A, $3.3 billion in committed federal funding, and cash flow projections which illustrate that private sector capital should be available when the IOS has been built. The first construction phase, the ICS, is fully funded.

The 2014 Business Plan identifies the High-Speed Rail project is also a candidate for Cap and Trade funds. The 2014-15 Budget contained $250 million of Cap and Trade funds to advance the program. With the passage of SB 862, on an ongoing basis, without the need for annual appropriation, 25% of the annual Cap and Trade proceeds will go to the continued development and construction of the high-speed rail system. This will be reflected in future business plans. The 2014 business plan clearly identifies known sources of funding and the funding needed to complete the full Phase 1 program over the next 20 plus years based on the facts known as of May 2014. To provide increased clarity from 2012 Business Plan, the additional funding needed is labeled as "uncommitted" to ensure that it is clear that these funds were not currently identified as of May 2014.

Future Business Plans will continue to be updated with additional information on Cap and Trade funds which, depending on actual program performance, could fund significant portions and, possibly all, of the IOS. They will also further describe how capital that can be raised based on the project's net cash flow once operations begin that can be used to help build additional parts of the Phase 1 system. Also, as previously noted, the Authority will only proceed to construction on any segment when all necessary funding has been identified.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

The Authority's 2014 business plan, although it contains more options than the prior plan, does not contain sufficient alternative funding scenarios. Moreover, the 2014 business plan notes that future funding will likely need to encompass low-cost federal debt programs. Thus, the Authority continues to rely on future support from the federal government.

Annual Follow-Up Agency Response From October 2013

As reported in our one-year response dated January 24, 2013, to the California State Auditor, the Authority continues to work with stakeholders (cooperating agencies, the Legislature, federal government, and the private sector) to define alternative delivery scenarios on blended systems operations. These alternatives will have different levels of costs and differing funding needs. The Authority's business plan includes a section related to the impacts of potential delay in funding or other factors on the project. The Authority has known funding sources from Proposition 1A, $3.3 billion in committed federal funding, and cash flow projections which illustrate that private sector capital should be available when the IOS has been built. The first construction phase, the ICS, is fully funded. The revised business plan clearly identifies known sources and the funding gap that remains to be filled over the next 20 plus years as the full system is built out.

In the spring of 2012, during finalization of the 2012 revised business plan, the Department of Finance and the Administration identified cap-and-trade revenues as a potential funding source for the high-speed rail project. Such funds, if used, would be applied to the completion of the IOS after the construction of the first construction segment, which is fully funded and was approved for appropriation in July 2012. The Authority will work with the Department of Finance to define a specific plan for use of cap-and-trade funds, which will be presented in detail in the next business plan to be issued in draft in early 2014.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

1-Year Agency Response

The Authority stated that it continues to work with stakeholders to define alternative delivery scenarios on blended system operations. Additionally, the Authority asserted that in the spring of 2012, the Department of Finance and the Administration identified cap-and- trade revenues as a potential funding source for the program. Further, the Authority stated that it will work with the Department of Finance to define a specific plan for the use of cap-and-trade funds, which it claims will be presented in detail in the next business plan to be issued in draft in the fall of 2013.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

Although the Authority's business plan includes three alternative funding scenarios, all three assume a similar or increased level of federal funding compared to the Authority's primary plan, which the federal government has not indicated will occur.

6-Month Agency Response

The Authority stated that it continues to work with stakeholders to define alternative delivery scenarios on blended system operations. Additionally, the Authority asserted that in the spring of 2012, the Department of Finance and the Administration identified cap-and-trade revenues as a potential funding source for the program. Further, the Authority stated that it will work with the Department of Finance to define a specific plan for the use of cap-and-trade funds, which it claims will be presented in detail in the next business plan to be issued in draft in the fall of 2013. However, although the Authority's business plan includes three alternative funding scenarios, all three assume a similar or increased level of federal funding compared to the Authority's primary plan—which the federal government has not indicated will occur. (See 2013-406, p. 243)

California State Auditor's Assessment of 6-Month Status: Partially Implemented

Recommendation #8 To: High-Speed Rail Authority, California

To ensure that the public and the Legislature are aware of the full cost of the program, the Authority should clearly report total costs, including projected operating and maintenance costs for the program.

6-Month Agency Response

The Authority's 2012 revised business plan discusses total capital costs including operating and maintenance costs. The Authority believes that capital costs and operating and maintenance costs, including costs by year, have been accurately and thoroughly discussed in an open manner through a range of communication media, including through board meetings that are open to the public. (See 2013-406, p. 244)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #9 To: High-Speed Rail Authority, California

To ensure that the public and the Legislature are aware of the full cost of the program, the Authority should clearly disclose that the 2012 draft business plan assumes that the State will only be receiving profits for the first two years of operation in 2022 and 2023, and potentially not again until 2060 in exchange for the almost $11 billion the Authority assumes it will receive from the private sector over a four-year period.

Annual Follow-Up Agency Response From November 2016

The 2016 Business Plan was clear on when the monetization of future cash flows through private sector investment would occur. It stated that it "could be available in 2028 after ridership and net operating cash flow have been demonstrated." The 2016 Business Plan was also clear on the length of an operating concession and the ability of the Authority to continue to enter into operating concessions after the initial operating concession on the Silicon Valley to Central Valley Line. It stated that "[a]fter completion of the Phase 1 system and its first operating concession period, the State will have a fully developed and operable asset that it can continue to monetize over successive 20-30 year periods to generate funds for reinvestment."

The full cost of the Program and the potential monetization opportunity was also transparently discussed in the 2016 Business Plan. It stated that "[t]he private financing analysis has been based on the discounting of the net operating cash flow after capital replacement at three illustrative discount rates: 8 percent, 11 percent and 14 percent" and "[t]he discount rate applied by the private sector in valuing future net operating cash flow is based, in large part, on the level of risk transferred to a private sector partner. For example, it is more likely that the private sector would apply a higher discount rate to any net revenue from a section just placed into service. Conversely, a lower discount rate (and therefore higher valuation) would be used for proven cash flows from existing operational sections.

Finally, in Section 7 of the 2016 Business Plan, the Authority clearly articulates the level of forecasted revenue, operating and maintenance costs, and lifecycle costs that the system would generate during the ramp-up period (2025 - 2028) and until the monetization event occurs. Readers are able to understand the amounts of forecasted net operating cash flow that would flow to the Authority during the ramp-up period and

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

The Authority's 2016 business plan indicates that cash flows could be available beginning in 2028. The business plan also includes the discount rates, and forecasted revenues.

Annual Follow-Up Agency Response From September 2015

The 2014 Business Plan in the Financial Analysis and Funding chapter describes that "Once the IOS is in operation, cash flows will be available from the project that can be used to support capital from government, private-sector debt programs and private sector equity investments. As discussed in the next section, $6.2 billion to $12.4 billion is anticipated to be available from project supported capital sources for use in developing the Bay to Basin."

As in typical concession transactions, the Authority would, through a competitive procurement, sell the operating rights for the segment for a period of time, such as thirty years. The concessionaire would pay the Authority upfront, an amount based on the projected revenues from the system over that time (e.g., the $6.2-12.4 billion referenced above). The Authority would then use that upfront payment to help with the expansion of the system, and the concessionaire would use the revenues generated over time by operations to recoup its investment. This process would be repeated for subsequent operating segments.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Although the Authority's 2014 business plan includes a reasonable methodology for securing up front investment, the information is not presented in an easily-accessible way--it's included as a footnote in the technical documentation the business plan references--and does not clearly disclose when the State may begin receiving profits. Until this information is explicitly disclosed in the business plan itself, we will continue to report this recommendation as partially implemented.

Annual Follow-Up Agency Response From October 2014

The 2014 Business Plan in the Financial Analysis and Funding chapter describes that "Once the IOS is in operation, cash flows will be available from the project that can be used to support capital from government, private-sector debt programs and private sector equity investments. As discussed in the next section, $6.2 billion to $12.4 billion is anticipated to be available from project supported capital sources for use in developing the Bay to Basin."

As in typical concession transactions, the Authority would, through a competitive procurement, sell the operating rights for the segment for a period of time, such as thirty years. The concessionaire would pay the Authority upfront, an amount based on the projected revenues from the system over that time (e.g., the $6.2-12.4 billion referenced above). The Authority would then use that upfront payment to help with the expansion of the system, and the concessionaire would use the revenues generated over time by operations to recoup its investment. This process would be repeated for subsequent operating segments.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Although the Authority's 2014 business plan includes a reasonable methodology for securing up front investment, the information is not presented in an easily-accessible way. Thus, we do not believe the 2014 business plan clearly discloses when the State will begin receiving profits.

Annual Follow-Up Agency Response From October 2013

As reported in our one-year response, dated January 24, 2013, to the California State Auditor, the Authority will clarify in the next business plan that a decision by the State to raise financing from the private sector based on the net cash flows of the project (i.e. profits as described by the Bureau of State Audits) will mean that the State will not be able to use those cash flows for other purposes during the term of the financing.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

1-Year Agency Response

The Authority stated that it would clarify in its next business plan the decision by the State to raise financing from the private sector based on the net cash flows of the project, which means the State will not be able to use those cash flows for other purposes during the term of the financing.

California State Auditor's Assessment of 1-Year Status: Pending

6-Month Agency Response

The Authority stated that it would clarify in its next business plan the decision by the State to raise financing from the private sector based on the net cash flows of the project, which means the State will not be able to use those cash flows for other purposes during the term of the financing. (See 2013-406, p. 244)

California State Auditor's Assessment of 6-Month Status: Pending

Recommendation #10 To: High-Speed Rail Authority, California

To ensure that it has adequate staff to effectively oversee the program, the Authority should continue to fill its vacant positions.

1-Year Agency Response

As of October 2012 the Authority filled all but one of its high-level vacant positions; the position of Chief Financial Officer remains vacant.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

As of March 2013, the Authority filled all of its high-level positions.

6-Month Agency Response

As of October 2012 the Authority filled all but one of its high-level vacant positions; the position of chief financial officer remains vacant. (See 2013-406, p. 244)

California State Auditor's Assessment of 6-Month Status: Partially Implemented

Recommendation #11 To: High-Speed Rail Authority, California

To ensure that it has adequate staff to effectively oversee the program, the Authority should conduct a workload analysis to determine the total number of staff it needs as well as the functions those staff should perform.

1-Year Agency Response

Chapter 152, Statutes of 2012 (Senate Bill1029) required the Authority to submit a comprehensive staff management report (report) to the Legislature prior to awarding a contract to commence construction or committing funds for the contract. The Authority submitted this report to

the Legislature on October 1, 2012. The report describes the organizational structure of the High-Speed Rail program as well as its staffing structure. Further, the report provides an overview of the functions performed by the Authority, its external oversight agencies, interagency team members, and private sector service providers. The report also includes descriptions of the roles and responsibilities of the members of the Authority's executive management team and a summary of recent changes in the Authority's staffing allocations over fiscal year 2010-11 through fiscal year 2012-13. Finally, the staff management report describes the phasing of activities and related staffing needs as the first construction segment of the Initial Operating Section moves into final design and construction.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

6-Month Agency Response

The Authority stated that it will explore available options for conducting a workload analysis once it has filled its high-level positions. (See 2013-406, p. 245)

California State Auditor's Assessment of 6-Month Status: Pending

Recommendation #12 To: High-Speed Rail Authority, California

To comply with the political reform act, the Authority should establish written policies and procedures for tracking whether all designated employees and consultants have completed and filed their statements of economic interests on time, thereby identifying any potential conflicts of interest.

6-Month Agency Response

The Authority has written policies and procedures in place to collect, follow up, and retain statements of economic interest. Those policies and procedures include sections on annual statements, assuming office statements, leaving office statements, and retention. The procedures were approved by the chief executive officer on July 17, 2012. (See 2013-406, p. 245)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #13 To: High-Speed Rail Authority, California

To increase transparency and to ensure that it is aware of any financial interest that a subcontractor may have in the program, the Authority should require subcontractors to file statements of economic interest.

Annual Follow-Up Agency Response From October 2014

The Authority's existing policies are designed to identify financial and other possible conflicts to the fullest extent as defined by applicable state and federal laws while recognizing that not every financial interest will trigger the statement of economic interest reporting requirement. The Authority's existing procedures comply with government code and Fair Political Practice Commission (FPPC)regulations.

Currently, the Authority collects Statements of Economic Interest (Form 700) from the key personnel of the prime contractors designated under the Authority's Code. Additionally, the Authority has designated certain individuals, who are employed by subcontractors, to file Form 700s.

To ensure the broadest compliance the Authority has developed two methods for addressing possible conflicts of interest. The Authority's standard contract requires that the contractor, its employees, and all its subcontractors and employees shall comply with the Authority's conflict of interest code. Additionally, the consultant or contractor shall disclose any financial, business or other relationship with the Authority that may have an impact upon the outcome of the agreement. This includes a listing of current and future clients when retained who may have a financial interest in the outcome of the contract or any ensuing construction project which will follow and supply that information to the Authority in the monthly progress report.

The second requirement is adherence to the Authority's organizational conflict of interest policy which includes,... [response truncated due to system limitations on response length]

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

Annual Follow-Up Agency Response From October 2013

As reported in our one-year response, the Authority's existing policies are designed to identify financial and other possible conflicts to the fullest extent as defined by applicable state and federal laws while recognizing that not every financial interest will trigger the statement of economic interest reporting requirement. The Authority's existing procedures comply with government code and Fair Political Practice Commission regulations (legal opinion attached).

Currently, the Authority collects Statements of Economic Interest (Form 700) from key personnel of the prime contractors and applicable subcontractors designated under the Authority's Code.

Under the direction of the Authority, prime contractors collect, archive and transmit subcontractors' Form 700 based on the criteria provided. Submittal of Form 700 will take place on an annual basis on or before April of each calendar year. It will be collected and reviewed by the Authority once a year for the Annual Work Program and Task Order negotiations.

To ensure the broadest compliance the Authority has developed two methods for addressing possible conflicts of interest. The Authority's standard contract requires that the contractor, its employees, and all its subcontractors and employees shall comply with the Authority's conflict of interest code.

The second requirement is adherence to the Authority's organizational conflict of interest policy which includes, among other requirements, full disclosure of any circumstance arising out of a contractor or subcontractor's existing or past activities, business or financial interests, familial relationships, contractual relationships, and/or organizational structure that results in a conflict of interest. Contractors are required to promptly disclose in detail, any actual or potential organizational conflict of interest in writing to the Authority's chief counsel for review and assessment.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

1-Year Agency Response

The Authority asserts that it has put a process in place for determining which contractors and subcontractors should file statements of economic interest.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

Not all subcontractors will be required to file statements of economic interest. In addition, the Authority's policies state that prime contractors, not Authority staff, are responsible for determining which subcontractors are subject to the conflict-of-interest policy.

6-Month Agency Response

The Authority asserts that it has put a process in place for determining which contractors and subcontractors should file statements of economic interest. However, not all subcontractors will be required to file. In addition, the Authority's policies state that prime contractors, not Authority staff, are responsible for determining which subcontractors are subject to the conflict-of-interest policy. (See 2013-406, p. 245)

California State Auditor's Assessment of 6-Month Status: Partially Implemented

Recommendation #14 To: High-Speed Rail Authority, California

To ensure that the Program Manager's monthly progress reports are accurate, consistent, and useful, the Authority should reinstate the oversight consultant's review of the progress reports.

6-Month Agency Response

The Authority asserted that the oversight consultant reviews the Program Manager's monthly progress reports and makes observations and recommendations to the Program Manager. (See 2013-406, p. 245)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #15 To: High-Speed Rail Authority, California

To ensure that the Program Manager's monthly progress reports are accurate, consistent, and useful, the Authority should hold the Program Manager accountable for implementing the oversight consultant's recommendations. For example, the Authority could withhold partial payment of invoices to the Program Manager until it fully addresses these recommendations.

6-Month Agency Response

The Authority stated that the Program Manager discusses, reviews, and incorporates the observations and recommendations of the oversight consultant into a written response to the Authority. The Authority also asserted that its contract managers have the ability to withhold payments in order to deal with nonperformance issues. Additionally, the Authority stated that it continues to add resources to its team to augment its oversight responsibility. (See 2013-406, p. 245)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #16 To: High-Speed Rail Authority, California

To ensure that the Program Manager's monthly progress reports are accurate, consistent, and useful, the Authority should conduct monthly comparisons of the Program Manager's and the regional contractors' progress reports to verify that they are consistent with one another and to ensure that the reports include an accurate status of promised deliverables.

6-Month Agency Response

The Authority stated that the oversight consultant, acting as an extension of the Authority, reviews the Program Manager's monthly progress reports and makes observations and recommendations. Those observations and recommendations are reviewed by the program director and are discussed, reviewed, and incorporated into a written response to the Authority. In addition, the Authority indicated that its audit office's work plan includes scheduled audits of the regional contractors' progress reports and invoices, as well as comparisons on a sample of the Program Manager's and the regional contractors' progress reports. It also stated that the audit office will review the Program Manager's and oversight consultant's activities. (See 2013-406, p. 246)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #17 To: High-Speed Rail Authority, California

To ensure that the regional contractors' monthly progress reports provide sufficient detail to support the monthly invoices, the Authority should perform a monthly comparison of the regional contractors' invoices with the corresponding progress reports. Specifically, the Authority should ensure that the regional contractors' monthly progress reports describe the work they performed in those areas for which they claimed costs in the corresponding invoices. The Authority should discuss with the Program Manager any areas that lack sufficient detail in the progress reports to make such determinations.

6-Month Agency Response

According to the Authority, to ensure that sufficient detail is provided in the regional contractors' monthly progress reports and that the program director adequately documents any reporting deficiencies noted in the review of the progress reports and invoices, the audit office's work plan includes scheduled audits of the regional contractors' monthly progress reports and invoices and the Program Manager's and oversight consultant's activities. The audit office reports directly to the Audit and Finance Committee of the Authority's board and administratively to the chief executive officer. (See 2013-406, p. 246)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #18 To: High-Speed Rail Authority, California

To be aware of and respond effectively to circumstances that could significantly delay or halt the program, the Authority should hire a risk manager as soon as possible. Until then, it should designate and require Authority staff to attend risk-management meetings and workshops.

6-Month Agency Response

The Authority hired a risk manager in August 2012. According to the Authority, the risk manager will attend the risk management meetings related to updating the risk register, identifying new risks, performing qualitative risk analyses, and coordinating and tracking risk responses. (See 2013-406, p. 246)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #19 To: High-Speed Rail Authority, California

To be aware of and respond effectively to circumstances that could significantly delay or halt the program, the Authority needs to be involved in the development and implementation of the Program Manager's risk-management plan and ensure that Authority staff have roles and responsibilities defined in the plan, such as identifying and mitigating risks in the risk register.

6-Month Agency Response

The Authority stated that the new risk management program includes four general types of risk management workshops and meetings that involve Authority staff. The first type of risk management meeting serves to regularly update the risk register, identify new risks, perform qualitative risk analysis, and coordinate and track risk responses—this includes a review of all program and project risks. In addition, the Authority stated that its risk manager is assessing the current risk meeting process and will be making recommendations for enhancements that will be implemented under the Authority's updated risk management plan. (See 2013-406, p. 247)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #20 To: High-Speed Rail Authority, California

To be aware of and respond effectively to circumstances that could significantly delay or halt the program, the Authority should monitor the Program Manager's risk management practices to ensure that either it or the Program Manager identifies and promptly and appropriately addresses risks.

6-Month Agency Response

The Authority indicated that its risk manager plans to regularly meet with risk management staff, including the Program Manager, to provide necessary Authority control, direction, oversight, and information sharing. (See 2013-406, p. 247)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #21 To: High-Speed Rail Authority, California

To effectively manage its contracts, the Authority should develop procedures to detect and prevent contract splitting.

6-Month Agency Response

According to the Authority, all staff with responsibility for preparing contracts have completed the General Services' training on proper state contracting procedures, including the prohibition against contract splitting. The Authority's contract manual has been updated and provided to Authority employees who have responsibility for preparing contracts. To detect contract splitting, all non-state agency contracts are reviewed prior to execution by the contract specialist within the Authority's contracts and procurement department. (See 2013-406, p. 247)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #22 To: High-Speed Rail Authority, California

To effectively manage its contracts, the Authority should begin awarding contracts with a sufficient amount of lead time.

6-Month Agency Response

The Authority provided a schedule of contract expiration dates to ensure that contract managers receive timely notifications from the contract unit of contract expiration dates. Additionally, the Authority asserted that its contract manual contains language ensuring adequate lead time in the contract award process. (See 2013-406, p. 247)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #23 To: High-Speed Rail Authority, California

To effectively manage its contracts, the Authority should immediately begin the process of soliciting competitive bids for its IT services.

6-Month Agency Response

The Authority asserted that it is moving toward in-house IT support rather than contractors. Specifically, the Authority stated that it hired a DPM II on March 5, 2012. According to the Authority's response, the new DPM II has moved the Authority's network connection from the cloud to the California Technology Agency (CTA) and has implemented the movement of the exchange services from its previous contractor—PK Inc.—to CTA-California Email Service (CES) mail. The Authority claims the process of migrating the electronic mail system to CES will be approximately six to 13 months. Additionally, the Authority stated that desktop support has been transitioned in-house with the support of one full-time associate information systems analyst and a student intern. The Authority further indicated that two retired annuitants have been hired to support the server and network administration, and application development. (See 2013-406, p. 248)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation #24 To: General Services, Department of

To ensure that the Authority is complying with state contracting rules and is following the guidelines of the State Contracting Manual , General Services should conduct a procurement audit of the Authority by January 1, 2013.

6-Month Agency Response

Effective May 1, 2012, General Services indicated that the Authority lacks sufficiently trained staff to conduct procurements and subsequently decreased the Authority's purchasing authority to the minimum level of $4,999.99. Thus, General Services now conducts all of the Authority's purchases above $4,999.99. As a result of decreasing the Authority's purchasing authority, it is not necessary for General Services to conduct a procurement audit. (See 2013-406, p. 248)

California State Auditor's Assessment of 6-Month Status: Fully Implemented

Recommendation for Legislative Action

To assure independence and instill public confidence in the process regarding the Authority's ridership model, the Legislature should draft legislation that establishes an independent ridership review group. For example, the Legislature could use a similar process to the one used to establish the independent peer review panel that the law requires to assess the Authority's business plans.

Description of Legislative Action

N/A

California State Auditor's Assessment of Annual Follow-Up Status: Unknown

All Recommendations in 2011-504

Agency responses received after June 2013 are posted verbatim.