The Rail Authority is a troubled agency

The California High Speed Rail Authority may not be scandal plagued, but it sure is troubled. In just the past year, it has run into a number of serious problems including the following:

1. Conflicts of Interest

Incompatible Offices

Richard Katz and Curt Pringle are currently in violation of California Government Code 1099, which prohibits public officers from simultaneously holding multiple offices that may conflict. When a government official serves competing interests one or the other will be compromised. Thus, promoting competing goals and interests always results in a conflict of interest, undermining that official’s integrity and the public trust.

Mr. Katz currently holds the incompatible offices of: (1) Board member, California High Speed Rail Authority and (2) Board member, Los Angeles County Metropolitan Transportation Authority (Metro). Due to his position on the Metro board, Mr. Katz also is a board member and vice-chair for the Southern California Regional Rail Authority (Metrolink), a joint powers authority created by Metro and four other county transportation planning agencies in Southern California. There are significant and direct conflicts between the duties and loyalties Mr. Katz owes to the Rail Authority and our local county transportation agencies (Metro and Metrolink) and the communities they serve. There is no way he can uphold his obligations to look out for our local interests while on the Metro/Metrolink boards and the statewide interests he represents while on the Rail Authority’s Board. Note: Mr. Katz is resigning his Rail Authority board seat effective Dec. 1 (this Wednesday). He is resigning specifically to avoid losing his seat on the Metro board, which he apparently covets more than his Rail Authority seat.

Mr. Pringle currently holds the incompatible offices of: (1) Chairperson, California High Speed Rail Authority and (2) Mayor, City of Anaheim. Due to his position as mayor of Anaheim, Mr. Pringle is a board member of the Orange County Transportation Authority (OCTA), which is a second incompatible office. He has refused to resign although will step down as mayor of Anaheim, and his OCTA board position, in January due to term limits.

See: Conflict of Interest: Richard Katz, L.A. County’s Local Voice on the Rail Authority Board, Holds Incompatible Offices See also Rich Connell, E-mails reveal clashes over high-speed rail project, Los Angeles Times (November 24, 2010) (highlighting clashes within the Rail Authority that demonstrate some direct conflict between the local and statewide interests).

Update: The California Attorney General’s office issued an opinion in which it agreed that both Richard Katz and Curt Pringle held incompatible offices.

Conflict with personal financial interests

Mr. Katz and Mr. Pringle both “have received tens of thousands of dollars in consulting fees from firms with financial interests in the $43-billion [high speed rail] project.” See: Rich Connell, High-speed rail leaders receive consulting fees from firms with financial interests in project, L.A. Times, October 31, 2010

From the L.A. Times article:

  • Mr. Pringle and Mr. Katz are both public affairs consultants.
  • Mr. Pringle advises a major construction supplier that owns property along the proposed high speed train routes. His clients also “include a large corporate donor to [Prop 1a] the 2008 ballot campaign that secured high-speed rail funding and now hopes to win construction contracts,” and “the City of Industry, which has objected to a possible route through its freight train corridor.”
  • Mr. Katz’s clients include the Walt Disney Company. Disney is “an enthusiastic backer of the San Francisco-to-Anaheim bullet train project” because one of the high speed rail stations will be located very close to Disneyland. “Disney also has interests in land along the rail right-of-way, specifically a ranch-style studio property close to the spot where the train would turn toward Palmdale as it exits the San Fernando Valley.”

2. Poor Contracting and Oversight Practices

Over the past year, a number of reports have highlighted bad practices by the Rail Authority with regard to how it contracts and provides oversight to those contractors.

State Audit

In April 2010, the California State Auditor released a report: High-Speed Rail Authority: It Risks Delays or an Incomplete System Because of Inadequate Planning, Weak Oversight, and Lax Contract Management, Report 2009-106, April 2010 (PDF) (Google Docs). The subtitle of the audit says it all — the Rail Authority has had “inadequate planning, weak oversight, and poor contract management practices.”

From the summary:

“This report concludes that the High-Speed Rail Authority has not adequately planned for the future development of the program. For example, in its 2009 business plan, the Authority outlined the sources from which it expected to receive the funds necessary to meet the estimated $42.6 billion cost of the program. The Authority stated it would need $17 billion to $19 billion from the federal government; however, the Authority has received a federal commitment of only $2.25 billion. In addition, the business plan does not make clear which government would be responsible for a revenue guarantee needed to attract private investors, or how much it might cost. The program risks significant delays without more well-developed plans for obtaining funds.

The Authority also needs to improve some administrative practices. State law requires the Authority to establish an independent peer review group (review group) to review the Authority’s plans, but only five of the eight members have been appointed. Thus, the Authority cannot fully benefit from the expertise the review group would provide. Additionally, the Authority does not currently categorize and track expenditures for administration, which state law limits to 2.5 percent ($225 million) of the $9 billion in bond funds authorized. Unless it tracks these funds and develops long-range plans for spending them, it risks running out of them prematurely.

Finally, a primary tool for monitoring the program has been inadequate and the Authority has not implemented effective controls over invoice processing and in some cases has paid for work that was not part of contracts or work plans. Three recent monthly progress reports the contractor managing the program (Program Manager) submitted to the Authority contained inconsistent information and did not compare actions performed and products created to what contractors promised to complete in their work plans. Additionally, the Authority paid at least $4 million of invoices for which it had no evidence from the Program Manager that the contractors had performed the work invoiced. The Authority also paid more than $268,000 for work that was not included in contractors’ work plans, impairing its ability to measure performance against those plans, and it misused public funds when it paid $46,000 for furniture not covered in the contract with its Program Manager.” (emphasis added)

State Inspector General Report

The State Inspector General released a report on October 27, 2010. (PDF)(Google Docs). The Inspector General’s review had two purposes: 1) determine if the Rail Authority has proper controls and procedures in place to oversee and administer federal funds; and 2) evaluate the Rail Authority’s progress in implementing recommendations given in the State Auditor’s report.

The Inspector General found outstanding issues during its review period. For example, “auditors found over a four month period, $72,000 paid without any back-up documentation to public outreach consultants. The invoices simply billed for the exact same amount each month with no details given on work performed. During this same four month period, Ogilvy Public Relations hired in February as the overall communications consultant, was paid $1,005,097.” The Inspector General Report also said the Rail Authority has “fully addressed five of the audit’s recommendations and are currently working to implement the other five.”

See also Dan Weikel, California audit questions documentation of contract work on high-speed rail project, L.A. Times, October 28, 2010.

3. Questionable Ridership Estimates

The Rail Authority is currently working on a third set of ridership estimates that forecast how many people are expected to ride the high speed trains and the stations those riders will use. The first two ridership forecasts were not reliable. Ridership forecasts are extremely important because they estimate how much business the high speed rail system will generate for the Rail Authority. Those forecasted numbers are the basis for a number of things including where the trains and stations should go, whether the system can generate enough revenue to cover operating costs, and whether the Rail Authority can expect to pay back bonds it will need to construct its high speed rail network.

Report by the UC Berkeley Institute of Transportation Studies

The legislature requested that the Institute of Transportation Studies (ITS) at UC Berkeley study the Rail Authority’s last ridership and revenue forecast. ITS released its report in June 2010.

Ultimately, the authors found “some significant problems that render the key demand forecasting models unreliable for policy analysis.”

See: David Brownstone, Mark Hansen, and Samer Madanat, Review of Bay Area/California High-Speed Rail Ridership and Revenue Forecasting Study, Institute of Transportation Studies at UC Berkeley, UCB-ITS-RR-2010-1, June 2010 (Summary) (PDF) (Google Docs)

Ridership estimate errors

A watchdog group in the San Francisco Bay Area, Californians Advocating Responsible Rail Design (CARRD), also found errors in the ridership forecast. CARRD presented its findings to the Rail Authority board in July 2010. It found the following errors:

  • Sample methods were highly biased towards those who are most likely to take high speed trains. 96% of the Californians surveyed to determine their interest in taking high speed rail for commuting were current train riders.
  • Drastic changes were made to the model used to produce forecasts, yet these changes were not included in the public documentation, the final project report or information provided to the peer review committee.
  • The real model used to forecast ridership was never made public nor apparently distributed to the peer review panel

See: Ridership forecast, Californians Advocating Responsible Rail Design (CARRD)

4. Business Plan Problems

Legislative Analyst’s Report

The non-partisan Legislative Analyst conducts an annual review of the state budget. In the case of transportation, it issues a report analyzing transportation spending as well as providing constructive commentary and recommendations for the agency and legislature.

The Legislative Analyst was critical of the Rail Authority’s business plan in its last analysis in March 2010 (HTML) (PDF) (Google Docs).

According to the Legislative Analyst’s report, the Rail Authority’s business plan lacks important details. First, it lacks discussion of risk management, including any detailed description of many key types of risk or mitigation processes. Second, few deliverables or milestones are identified in the plan against which progress can be measured. It is difficult for the Legislature and the administration to track the high speed rail project’s progress because the business plan lacks clearly defined deadlines or what work will be completed. The legislative analyst’s report also cited other less major issues with the Rail Authority’s funding and staffing requests.

5. Poor Record Keeping

Inability to document its official’s trips abroad

The Rail Authority and its officials have failed to report trips to foreign countries and failed to keep adequate records of those trips.

A number of Rail Authority board members and officials have taken trips to foreign countries to learn about and ride high speed trains. The trips were all paid by those foreign countries or their companies who are competing for contracts to build the trains and to operate the high speed rail system. Most of the officials who took the trips failed to record or report information related to those trips as required by law. Curt Pringle is the only official who reported his trips.

See Rich Connell, California bullet train agency can’t document details of officials’ foreign trips, Los Angeles Times, October 24, 2010

“Officials directing the California High-Speed Rail Authority have taken a series of overseas trips paid for by foreign governments…. [T]he rail agency has been unable to document the costs, sponsors or other details of the trips as generally required by state ethics regulations…. [H]igh-speed rail officials could not produce any accounting of the donated travel and failed to post details about the trips on the authority’s website. Such reports, describing who paid for the trips, who took them, the itineraries and breakdowns of travel, lodging, meals and other expenses, are required for travel gifts to agencies. The authority also could not find invitation letters indicating who offered the trips.”

According to the board members and officials who took the trips, the Rail Authority was responsible for reporting the trips because they were gifts to the agency rather than the directors. However, the California Fair Political Practices Commission, the agency responsible for political ethics, is currently investigating those trips and the lack of proper documentation. See: Rich Connell, California investigates bullet train agency officials: The inquiry focuses on overseas trips paid for by foreign governments jockeying to help their homeland firms secure state contracts, Los Angeles Times, November 11, 2010

Bottom line:

  • These issues and problems impact the Rail Authority’s credibility.
  • Jerry Brown and his administration needs to take an active role in correcting these and other problems with the Rail Authority. This is the largest public works project in California, only rivaled in size and impact by the State Water Project that moves water from the Sacramento Valley to L.A. and San Diego. Soon-to-be-Governor Brown should first start with evaluating board members appointed by the governor and tossing those board members who were asleep at the wheel and failed to adequately oversee the Rail Authority and push back against or ask questions of its contractors. Board members appointed by the governor include: Curt Pringle, Lynn Schenk, David Crane, Richard Katz, and Rod Diridon. He should also work with other incoming legislative officials to make similar assessments of their board appointments.

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