Report 2011-504 Recommendations and Responses in 2013-041

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

Department Number of Years Reported As Not Fully Implemented Total Recommendations to Department Not Implemented After One Year Not Implemented as of 2012-041 Response Not Implemented as of Most Recent Response
High-Speed Rail Authority 1 23 5 n/a 5

Recommendation 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.

Response

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.

Recommendation 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.

Response

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.

Recommendation 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.

Response

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.

Recommendation 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.

Response

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.

Recommendation 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.

Response

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.

Current Status of Recommendations

All Recommendations in 2013-041