California Office Of State Auditor's Report: Valley Transportation Agency (VTA) (2007-129)

8/7/2019 California Office Of State Auditor's Report: Valley Transportation Agency (VTA) (2007-129)

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CALIFORNIA STATE AUDITORB u r e a u o S t a t e A u d i t sDoug CordinerChief Deputy

Elaine M. Howle

State Auditor

555 C a pit o l Ma l l , Su i t e 3 Sa c ra m ent o , C A 54 6 . 4 4 5 . 5 5 6 . 3 . a x www.bs a .c a .go v

July 31, 2008 2007-129

Te Governor o CaliorniaPresident pro empore o the SenateSpeaker o the AssemblyState CapitolSacramento, Caliornia 95814

Dear Governor and Legislative Leaders:

As requested by the Joint Legislative Audit Committee, the Bureau o State Audits presents itsaudit report concerning the Santa Clara Valley ransportation Authority (VA) and our reviewo its governance structure, scal management, and project planning and monitoring.

Tis report concludes that the average tenure o VAs board o directors (board) is shorter thanthat o comparable transit agencies because o a shorter statutory term length and a rotationschedule devised to share ve o the 12 board seats. VA has improved the operations o itsboard but could use its advisory committees more eectively in developing policies and buildingregional consensus. Moreover, VA has been operating without a comprehensive strategic planor the past two years, but is developing a new plan to be published at the end o 2008.

VAs nancial reports and plans generally conorm to best practices, and recent improvementshave made these reports clearer and more useul to decision makers. However, VAs capitalbudgets could be improved by including clearer inormation about the timing o expectedproject costs. Such an understanding could help the organization manage debt, investments,and cash fows more eectively. Although VA specied the assumptions behind its operatingorecasts in its short-range transit plans, it did not do the same or its capital program orecasts.VA is working to improve its long-term nancial planning by establishing two debt reductionunds and updating its orecasting tools.

While VA meets most best practices or project planning, it has not always identied undingor uture operating costs or estimated the potential project revenues or its capital projects.

In general, VA has adequate policies in place to monitor projects, but it implements thesepolicies inconsistently.

Respectully submitted,

ELAINE M. HOWLEState Auditor


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Cairia Stat Aitr Rrt 2007-129

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Ctts

Summary 1

Introduction 5

Chapter The Santa Clara Valley Transportation Authority Has Begun Reorming

Its Governance Structure and Practices but Could Do More to Include

Key Stakeholders in Its Decision Making 15

Recommendations 29

Chapter

Financial Reporting and Planning Generally Meet Best Practices, butChanges to Capital Budgeting and Planning Could Reduce Future

Expenses and Improve LongTerm Forecasting 31

Recommendations 46

Chapter 3Deciencies in Project Planning and Inconsistent Project Monitoring

Could Limit Eective Decision Making 49

Recommendations 56

Appendix ASanta Clara Valley Transportation Authoritys Progress in Implementing

the HayGroup Recommendations 59

Appendix BMethodology or Selecting Projects the Santa Clara Valley Transportation

Authority Approved in Fiscal Years 200506 and 200607 63

Response to the AuditSanta Clara Valley Transportation Authority 67

Caliornia State Auditors Comments on the Response From theSanta Clara Valley Transportation Authority 77


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Sar

Results in Brie

Te Santa Clara Valley ransportation Authority (VA), one o thelargest o more than 60 independent transit districts in Caliornia,has received criticism in recent years rom, among other sources, anorganizational and nancial assessment published in March 2007by a consultant VA hired. Over the past year, VA has respondedto this assessment by making numerous improvements across itsorganization. Although VAs practices conorm to best practicesin many instances, recent improvement eorts and plans have notadequately addressed criticisms that it neglects constituency input inits decision making and that it lacks precision in capital budgeting.

Additionally, VAs project-planning process is missing certaincritical components, such as planning or uture operating costs, andits project managers do not always comply with project-monitoringmechanisms. Tus, the quality o the inormation reachingVA decision makers could be impaired. Te collection o VAaccomplishments and remaining deciencies indicates anorganization striving or a high standard but still requiring somechanges to reach it.

VA, which is responsible or both transit services andtransportation planning within Santa Clara County (county),is governed by a board o directors (board), which comprises12 appointed ocials who hold other elected oces, and ismanaged by a general manager who oversees seven divisionscomprised o more than 2,000 employees. Te board consists otwo members rom the Santa Clara County Board o Supervisors,ve rom the San Jose City Council, and ve rom the city councilso other cities in the county. A series o standing and advisorycommittees support the work o the board. Most o VAs revenuecomes rom state, ederal, and local grants and the local sales tax,which it uses to operate and improve a transit system that includesbus, shuttle, and light-rail services, as well as paratransit services orpeople whose disabilities prevent their accessing the other services.

A May 2004 report rom a civil grand jury ound the boardtoo large, political, and transient to react to a host o problems,including the stalled implementation o a transit plan that eaturedan extension o the Bay Area Rapid ransit system into San Jose.About two years later, VA hired a consultantthe HayGrouptoassess its organizational and nancial status. Te consultantsMarch 2007 report proposed a comprehensive overhaul o VAsorganization and practices. For example, while noting that thestructure o the board could serve VA well, the consultantrecommended VA address certain challenges, such as memberturnover, to improve the boards eectiveness.

Audit Highlights . . .

Our review o the Santa Clara Valley

Transportation Authority (VTA) revealed

the ollowing:

The average tenure o VTAs board o

directors (board) is shorter than that o

comparable transit agencies, which is

attributable to a shorter statutory term

length and a rotation schedule devised to

share ve o the 12 board seats.

Board operations have improved, but VTA

could use its advisory committees more

eectively in developing policies and

building regional consensus.

VTA has been operating without a

comprehensive strategic plan or the past

two years, but the organization had some

elements o a strategic plan during that

period and is developing a new plan to be

published at the end o 2008.

Financial reports and plans generally

conorm to best practices, and recent

improvements have made these

reports clearer and more useul to

decision makers.

Capital budgeting could be improved

by including clearer inormation about

the timing o expected project costs.

Such an understanding could help the

organization manage debt, investments,and cash fows more eectively.

Although VTA species the assumptions

behind its operating orecasts in its

shortrange transit plans, it does not do

so or its capital program orecasts.

continued on next page . . .


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In comparing the structure o the board with those o otherCaliornia transit agencies o comparable size and scope, we ound

the agencies structures similar, but two dierences in particularappear to be causing VA to have the shortest board tenure o thesix transit agencies: a shorter statutory term length and a rotationschedule devised to share board seats among the smaller cities inthe county. VA has already begun to x the rotation scheduleproblem, and a statutory change to the term length would onlystrengthen VAs eorts in that regard. Without urther evidencethat more signicant changes to VAs governance structure areneeded, it appears reasonable or VA to implement incrementalchanges to address these problems and evaluate their eect beoreconsidering more signicant alternatives.

In response to the HayGroup report, VA has also attemptedto improve how participants in its governance structuretheboard, board committees, and executive managementinteractand deliberate. Specically, VA more clearly dened the workplans o the boards our standing committees and tried to reduceduplication in the assignments it gave those committees. VA hasalso provided better board orientation and training materials.

In contrast to these improvements, VA has not enhanced theoperation o its ve advisory committees, each o which representsa specic constituency, and has not completely changed the way itengages the advisory committees in the deliberative process. Forexample, rather than involve the pertinent advisory committees inits eorts to reorm the boards rotation schedule, VA presenteda nished proposal or them to either accept or reject. Tus, evenas VA attempts to reorm its governance structure, it continuesto ollow the same practice the HayGroup report specicallycriticized; namely, advisory committees do not have an opportunityto consider policy and plans in the early stages o development sothey can provide meaningul input to VA sta and the board.Consequently, VA continues to miss opportunities to gatherdiverse ideas and build regional consensus or its proposals.

Ater operating without a comprehensive strategic plan since atleast 2006, VA is preparing to publish a strategic plan at theend o 2008. Te transportation plans that VA ocials saidrepresented VAs strategic planning process in the interim do notcontain all the necessary elements and did not demonstrate onecohesive direction. Rather, the disparity in the documents indicatesa shit in how VA views its prioritiesspecically, a disconnectbetween the ocial vision statement, which emphasized equityand was included in some documents, and a new eciency-basedapproach included in others. Consequently, a new strategic planthat presents a unied direction or the organization is warranted.

VTA is working to improve its longterm

planning by establishing two debt

reduction unds and updating itsorecasting tools.

While VTA meets most best practices

or project planning, it has not

always identied unding or uture

operating costs or estimated the

potential project revenues or some

capital projects.

VTA generally has adequate policies

in place to monitor projects, but it

implements them inconsistently.


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Our review o VAs nancial reporting and planning revealed thatit generally ollows best practices in preparing its reports and plans.

Additionally, VAs scal sta have recently improved the value othose documents by including more historical and projected guresas well as more detailed and simpler-to-understand inormation.However, urther changes to nancial reports would allow VAto more eectively plan and better evaluate its perormance. Inparticular, revising its capital project budgets so that budgetedamounts represent what VA actually plans to spend on its projectsin a given year, and adding other more precise inormation, wouldprovide the board with better inormation and could improveVAs understanding o its cash needs or projects. In turn, a moreaccurate understanding o its cash needs could potentially reduceuture nancing expenses or capital projects.

Te project-planning practices o VA meet best practicesin several areas, but opportunities or improvement remain. Inparticular, we ound in our review o 10 selected projects thatVA created detailed plans or the projects but did not alwaysanticipate the potential revenues a project might generate, securenecessary project unding or Measure A ransit ImprovementProgram projects, and identiy the sources o unding or utureoperating costs. Te principal causes o these deciencies arethat VA has not documented its planning process and hasnot systematically required these elements o project planning.Consequently, VA risks pursuing projects that it may not be ableto nancially support in the uture.

VA has established project-monitoring policies that, i ollowedor all construction projects, would ensure that it implementsprojects within a structure o appropriate control. However, VAimplements its project-monitoring policies inconsistently, allowingsome project managers to reduce the requency and level ocontent in required monitoring reports. As a result, accountabilityis reduced and critical inormation may not be reaching decisionmakers in executive management and on the board.

Recommendations

o promote stability in its leadership and to bring the tenure oVA board members in line with comparable transit agencies, VAshould request the Legislature to amend its enabling statutes toallow or a our-year board term.

o monitor the eects o changes in its governance structure thatthe board already approved and to determine whether additionalchanges are necessary, VA should add board tenure to theperormance measures it develops or its new strategic plan.


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making it responsible or managing the countys plan to reducecongestion and improve air quality. Figure 1 is a map o the landmarks

and major transportation lines VA serves.

Figure 1

Major Cities and Towns Within Santa Clara County and Caltrain and Light Rail Lines

San Jose

Milpitas

Santa Clara

Sunnyvale

Mountain ViewPalo Alto

Los Altos

Los Altos Hills

Cupertino

Saratoga Campbell

Los Gatos

Monte Sereno

Morgan Hill

Gilroy

toSanFrancisco

Caltrain

Light Rail

Santa Clara County

Source: Santa Clara Valley Transportation Authority.

VTAs Organizational Structure

VA is governed by a board o directors (board) composed o12 appointed ocials who hold other elected oces. A generalmanager oversees the seven divisions o VA comprising morethan 2,000 employees. As indicated in Figure 2, VAs organizationalso includes a general counsel and an auditor general who reportdirectly to the board, and a senior policy advisor who reports to thegeneral manager.


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Figure 2

Santa Clara Valley Transportation Authoritys Organizational Chart

January 2008

Direct reporting

Indirect reportingBoard of

Directors

General

Manager4 Full-TimeEquivalent

Positions (FTE)

GeneralCounsel

9 FTEsAuditor General

SeniorPolicy Advisor

External Affairs94 FTEs

Fiscal Resources120 FTEs

AdministrativeServices

107 FTEs

Operations1,717 FTEs

Engineeringand Construction

325 FTEs

CongestionManagement

Agency66 FTEs

Silicon ValleyRapid Transit

Program8 FTEs

Source: Santa Clara Valley Transportation Authority.

Composition o the Board

State law denes the board as the legislative body o VA, whichdetermines all questions o VA policy. In accordance withstatute and local agreement, the board consists o 12 members andve alternates appointed as ollows:

wo members and one alternate rom the county supervisors.

Five members and one alternate rom the City Council oSan Jose.

Tree members and one alternate selected by the city councils oLos Altos, Mountain View, Palo Alto, Santa Clara, and Sunnyvaleand the own o Los Altos Hills.

One member and one alternate selected by the city councils oCampbell, Cupertino, Monte Sereno, and Saratoga and the owno Los Gatos.

One member and one alternate selected by the city councils oGilroy, Milpitas, and Morgan Hill.


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o assist in its decision-making processes, theboard established our standing committees:

the Administration and Finance Committee, theCongestion Management Program and PlanningCommittee, the ransit Planning andOperations Committee, and the recently ormedAudit Committee. Each standing committeeconsists o our board members. Additionally, theboard brought together citizens and local ocialsto orm ve advisory committees. As shown in thetext box, the advisory committees oer the boardadvice and recommendations on a broad range otopics. For example, to obtain advice on bus andrail system accessibility and on paratransit

services, VA ormed the Committee or ransitAccessibility, consisting o 12 individuals withdisabilities, nine representatives rom the humanservice agencies, one nonvoting board member,and one nonvoting representative rom VAsparatransit contractor.

Roles and Responsibilities o VTA Divisions

As shown in Figure 2 on page 7, the seven divisions withinVA vary in size. Te divisions also have varying roles andresponsibilities:

Administrative Services: responsible or agency-wide humanresources unctions, saety management, and technology.

Congestion Management Agency: conducts all o VAstransportation planning activities and develops all projectsthrough preliminary engineering and project approval;responsible or development o all o VAs real estate holdings.

Engineering and Construction: responsible or the design o all

VA projects once the planning and preliminary engineering iscomplete and the project is approved and unded; monitors theconstruction o VA projects.

External Aairs: responsible or developing and executing acohesive communications, marketing, and government relationsstrategy and responsible or the board secretary unction.

Fiscal Resources: responsible or VAs accounting and nanceunctions, contracts, and asset and risk management.

Makeup o VTA Advisory Committees

Bicycle and Pedestrian Advisory Committee: one member

rom each o the 15 cities in Santa Clara County (county)

and one member selected rom the county at large.

Citizens Advisory Committee: 17 members representing

community, business, and labor interests.

Committee or Transit Accessibility: 12 individuals with

disabilities, nine representatives rom local human service

agencies, one representative rom the paratransit broker and

one board member.

Policy Advisory Committee: one council member rom

each city in the county and one county supervisor.

Technical Advisory Committee: one sta member rom

each city and rom various other local government agencies.

Source: VTA Construction Administration Manual,November 7.


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Operations: operates, maintains, and provides security or VAstransit system.

Silicon Valley Rapid ransit Program: provides project oversightor the proposed extension o the Bay Area Rapid ransit (BAR)system into San Jose.

VTAs Sources o Revenue and Major Categories o Expense

Based on inormation contained in its audited nancial statements,VA received nearly 50 percent o its revenue rom state, ederal,and local grants and more than 40 percent o its revenue rom salestaxes or its operations and capital projects in scal year 200607.

As shown in Figure 3, most o the remaining revenues came romcharges or services and investment income. VA receives sales taxrevenues rom a 1976 hal-cent sales tax and another hal-cent sales

Figure 3

Santa Clara Valley Transportation Authoritys Revenue

Fiscal Year 200607

0

160

320

480

640

$800

Investment income (3.5%)Other income (0.2%)Charges for service (5.1%)

Operating grants (18%)

2000 Measure A half-cent sales tax (20.6%)

1976 half-cent sales tax (20.9%)

Capital grants (31.7%)*

Revenue(inmillions)

Source: Santa Clara Valley Transportation Authoritys (VTA) comprehensive annual nancial reportor scal year 67.

* Roughly $9 million o these unds is rom the Trac Congestion Relie Program, which isadministered by the Caliornia Transportation Commission in consultation with the CaliorniaDepartment o Transportation.

Although considered an operating grant in VTAs nancial statements, roughly $8 milliono these unds is rom VTAs share o the .5 percent sales tax collected in Santa ClaraCounty. Another $35 million o V TAs operating grants come rom a Federal TransportationAdministration grant.


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tax rom the Measure A ransit Improvement Program (Measure Aprogram), which voters approved in November 2000 and VA

began collecting in April 2006. Te Measure A program includesseveral improvement projects that VA is expected to build usingrevenue collected over a 30-year period.

Not shown in Figure 3 on page 9 are revenues associated withthe Measure B ransportation Improvement Program (MeasureB program). As discussed in Chapter 3, some o the projects wereviewed were unded with Measure B program unds. As approvedby voters in November 1996, Measure B authorized the countysupervisors to collect a hal-cent sales tax or general countypurposes or a period o nine years. Collections o the tax began inApril 1997. Ten in March 1999, ater some litigation-related delays,

county supervisors and the board entered into an agreement touse Measure B program unds to complete a list o transportationimprovements that voters approved at the same time they approvedthe Measure B program sales tax. Although that sales tax expired inMarch 2006, VA management stated that the projects associatedwith the Measure B program are expected to continue until 2010.

Figure 4, which depicts VAs operating and nonoperatingexpenses, shows that labor costs represented approximately hal oVAs expenses or scal year 200607. Te next highest categoryo expense was the depreciation o VAs more than $2.5 billion incapital assets. Te third highest expense was or capital projectsthat VA constructed or the benet o other agencies. Tiscategory represents VA costs, such as labor, directly associatedwith projectstypically highway improvementsadministeredon behal o state or local government agencies; VA bills thesecosts to the agencies and accounts or this revenue in the capitalgrants category.

Other major expenses include the purchase o materials andsupplies, payment o utilities, procurement o services, andpurchase o transportation services, such as paratransit shuttles.Finally, to expand the transportation options o its customers, VA

is a partner in various ventures, such as Caltrain (a commuter railservice that operates between San Francisco and Gilroy) and theAltamont Commuter Express Rail Service, and provides subsidiesand capital contributions to support those ventures.

VTA capitalizes the costs o improvements made to its transit system and then spreads these costsover the remaining useul lives o the related assets using a straightline depreciation method.


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Figure 4

Santa Clara Valley Transportation Authoritys Expenses

Fiscal Year 200607

Other (5%)Subsidies and capital contributions to other agencies (6%)Contracted transportation services (6%)Services (6%)

Capital projects for the benefit of other agencies (10%)

0

160

320

$480

Expenses(inmillions)

Labor cost (48%)

Depreciation expense (11%)*

Materials, supplies, and utilities (8%)

Source: Santa Clara Valley Transportation Authoritys (VTA) comprehensive annual nancial report or scal year 67.

* VTA capitalizes the costs o improvements made to its transit system and then spreads these costs over the remaining useul lives o the relatedassets using a straightline depreciation method. In scal year 67, VTAs net assets increased by $377 million. The increase in capital assets, neto accumulated depreciation, was $63 million. The remainder o the net asset increase was predominantly made up o additions to restricted cashand investments o $4 million and additions to unrestricted cash and investments o $7 million.

Recent Reviews o VTA

In May 2004 the Santa Clara County Civil Grand Jury (grand jury)published a report criticizing the makeup o the board or being solarge, political, and transient that it could not eectively overseeVA. Te grand jury ound that because o these conditions, theboard had not reacted with diligence to budget problems, haddepleted nancial reserves, and had borrowed against uture taxrevenues rather than resolve an ongoing operational decit. Finally,the grand jury reported that the board had proceeded with a transitplan that could not accomplish all that was promised to voters andrecommended that the board delay expenditures on the BARextension project to provide more complete unding or othertransit options.

In January 2006, based on discussions with the general manager,

the boards chair called or a comprehensive organizational andnancial assessment o VA. Te general manager explainedthat shortly ater his appointment, he and the boards chair andvice chair had a convergence o ideas that led to initiating theassessment. In particular, the general manager elt it was a goodbusiness practice to get an outside perspective on VAs overallorganization, and the board ocers wanted a review o VAsnancial management and reporting to the board. Consequently,ater a review o various consultant proposals, VA hiredthe HayGroup to conduct the assessment. In March 2007 theHayGroup published a report that proposed a comprehensive


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a review o VAs strategic planning processes to determine howVA sets goals, objectives, and priorities; measures and monitors

progress toward achieving goals and objectives; and reprioritizes asneeded. Further, we were asked to review VAs nancial reportingstructure; its orecasting methods, comparing various orecastsrom the prior three scal years to actual results; and its long-termnancial planning.

Finally, the audit committee asked us to examine VAs projectplanning processes by identiying and reviewing projects approvedduring scal years 200506 and 200607, including the BARextension project. For those projects, we were asked to determinewhat analyses were prepared as a basis or approving the projectsand, to the extent possible, compare actual to projected costs,

milestones, and outcomes to determine i goals were achieved.

o examine VAs governance structure, we rst reviewedrelevant statutes and literature on transit governance. We thencompared VAs governance structure with the structure ove other transit agencies in Caliornia. Next we compared thetenure and transit experience o board members at all six agencies.Finally, we examined potential reasons why VA board membershave shorter tenure than board members at comparable transitagencies, including the process o selecting board members.

o evaluate the clarity o the roles and interactions o VAsgovernance structure participants, we examined the results o theHayGroup assessment, determining what actions VA had takenin response to the problems the consultant had identied, and wereviewed the interactions that took place during deliberations ontwo recent VA reorms: a proposal to improve board tenure andthe development o new agency vision and mission statements. Wealso examined VAs current planning documents to determinewhat elements o a strategic plan exist and documented VAsdevelopment o a new strategic plan to be published at the endo 2008.

o review VAs nancial reporting, orecasting, and planning, weobtained recommended practices rom the Government FinanceOcers Association (GFOA) and compared them with VAsnancial reporting, orecasting, and planning practices. We alsoexamined the improvements VA had made in these areas since theHayGroup published its assessment and compared VAs orecastsor expenditures, revenue, and ridership to actual gures or the lastthree scal years.

Finally, to examine VAs project planning and monitoring, weselected 10 projects approved in the biennial budget coveringscal years 200506 and 200607. Appendix B contains a ull


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description o how we selected these projects. We then comparedproject planning and monitoring practices VA displayed on the

10 projects to recommended practices published by the GFOA.


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Catr 1

The SAnTA ClARA VAlley TRAnSpoRTATIonAuThoRITy hAS Begun RefoRmIng ITS goVeRnAnCeSTRuCTuRe And pRACTICeS BuT Could do moRe ToInClude Key STAKeholdeRS In ITS deCISIon mAKIng

Chapter Summary

With the help o a comprehensive and highly critical consultantsreport published in March 2007, the Santa Clara Valleyransportation Authority (VA) has undertaken an overhaul o itsorganization and practices. o increase the tenure o the members

o its board o directors (board), which on average is ar less thanthat o comparable transit agency boards, VA has eliminated arotation schedule set up to share board seats among smaller citieswithin Santa Clara County (county). With the uture additiono a statutory change to the term length o its board members,which we are recommending, VA might be able to enjoy thebenets o increased stability within its governing board. Withouturther evidence that more signicant changes to its governancestructure are necessary, it appears reasonable to implement thesetwo incremental changes and evaluate their eects beore makingurther changes to the board structure and selection process.

In response to the consultants report, VA is improving howparticipants in its governance structurethe board, boardcommittees, and executive managementinteract and deliberate.Specically, VA more clearly dened the work plans o the boardsour standing committees and has tried to reduce duplicationin the assignments those committees receive. As discussed inthe Introduction, each o VAs our standing committees hasour board members and covers a specic purpose. VA has alsoprovided better board orientation and training materials.

In contrast to the improvements it has made, VA has not

enhanced the operation o its ve advisory committees, each owhich represents a specic constituency, and has not completelychanged the way it engages these committees in the deliberativeprocess. Consequently, VA misses opportunities to gather diverseideas and build regional consensus.

Ater operating without a comprehensive strategic plan since atleast 2006, VA is preparing to publish one at the end o 2008. Tetransportation plans that VA ocials said represent its strategicplanning process in the interim do not contain all the necessaryelements and do not demonstrate one cohesive direction. Rather,


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the disparity in the plans demonstrates a shit in how VA views itspriorities. Consequently, a new strategic plan that presents a unied

direction or the organization is justied.

Moderate Changes in VTAs Governance Structure Appear toBe Warranted

Aside rom one notable exception, the VA board is structuredsimilarly to other Caliornia transit agencies o comparable size andscope. However, the average tenure o its board members is theshortest o those agencies, indicating less stability among itsmembers. For the period o our review, we identied two causes orthis degree o turnover: the shorter length o term specied in statute

or board members and a two-year rotation schedule, which wasrecently eliminated, or the ve council member seats on the boardnot held by representatives rom the city o San Jose. Although notunique to VA, a board composed only o elected ocials appointedrom local jurisdictions also reduces board tenure, and critics havesaid this structure overburdens the ocials and causes the interestso local jurisdictions to be placed ahead o countywide needs.However, arguments in avor o the structure have emphasized that,as an organization charged with transportation planning, VAbenets rom direct board representation rom the entitiescitycouncils, in particularthat can aect local land-use decisions. In theabsence o evidence that another structure would yield signicantlybetter results, we believe that VA should implement and evaluateincremental improvements to its governance structure, such asincreasing the term length o board members in statute andeliminating the two-year seat rotations, beore considering otherchanges to the board structure and selection process.

Studies on the governance o transit agencieshave not yielded denitive results on whattype o governance structure is most eective.A 1999 study o transit governance preparedor the Federal ransit Administration provided

the most succinct conclusion, as shown in thetext box. However, the studies have identied keytraits o eective boards. For example, the studynoted above identied shared vision, politicalaccountability, stability, and a boards orientationtoward policy as key traits o successul transit

agencies. Te ransit Cooperative Research Program, which isunded through the Federal ransit Administration, stated in a2002 study (2002 study) that a boards receipt o timely inormation,individual board member knowledge o transit, and clarity in rolesand expectations strongly infuence board eectiveness. From thesestudies, we selected two measurable attributes o successul transit

Conclusion o A Study o Transit Governance

No one governance structure . . . can guarantee success.

Many dierent organization structures have been

documented in this report and the successul operations

span the range o governance structures.

Note: Published in 999 by the Federal Transit Administration.


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boardsboard tenure and transit experienceand comparedresults or the board with the results o ve other transit agency

boards in Caliornia, as shown in able 1. We also examined thegovernance structures o the six transit agencies to determinewhether certain structures might lead to more stable boards withgreater transit knowledge.

Table 1

Comparison o Board Structure and Characteristics or Six Caliornia Transit Agencies

AGENCY INFORMATION BOARD STRUCTURE BOARD CHARACTERISTICS

TRANSIT AGENCY

TOTAl

OpERATING

ExpENSES (IN

THOUSANDS)

pOpUlATION

OF SERvICE

AREA FUNCTION

vOTING MEMBER

REpRESENTATION (AlTERNATES) TERM lENGTH

AvERAGE

TENURE

IN YEARS

AvERAGE

TRANSIT

ExpERIENCE

SCORE*

Los Angeles County

Metropolitan

Transportation

Authority

$,53,635 ,9,7 Planning,

rail, bus

4 city council members

5 county supervisors

mayor, city o Los Angeles

3 mayoral appointees

City council members:

4 years

Others: no designated

term length

8.4 .8

Total 13 (0)

San Francisco Bay Area

Rapid Transit District

65,938 3,8,65 Rail 9 directly elected ocials 4 years 8.9 3.3

Total 9 (0)

Santa Clara Valley

Transportation

Authority

374,79 ,8, Planning,

rail, bus

city council members

county supervisors

years 3. .4

Total 12 (5)

Orange County

Transportation

Authority

35,38 3,98, Planning, bus city council members


public members

City elected directors:

years

Supervisors and public

members: 4 years

4.6 .

Total 17 (0)

San Diego

Metropolitan

Transit System

7,339 ,4, Rail, bus 3 city council members

county supervisor

boardappointed chairman

No designated term length . .7

Total 15 (11)

Sacramento Regional

Transit District

69,564 ,4, Rail, bus 8 city council members


4 years 6.9 .5

Total 11 (2)

Sources: Agency inormation rom the 7 comprehensive annual nancial report o each agency (except as noted); board attribute inormation romagency Web sites, agency sta, and board members as o April 8.

* Board members transit experience was categorized using a scale rom to 5, representing no experience and 5 representing extensiveexperience, which we considered to be seven years or greater. We did not include alternates in our calculation o transit experience.

Data rom the agencys independent auditors report or the scal years ended June 3, 7, and June 3, 6.

Data rom the 6 National Transit Database, Federal Transit Administration.

This refects the current board makeup, which could change because it is determined by the number o cities and counties annexed to, orcontracting with, the district.


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Although a report rom the Santa Clara County Civil Grand Jury(grand jury) published in May 2004 criticized VAs board or being

too large and too political, able 1 on page 17 shows that the sizeand composition o VAs board are similar to comparable transitagencies in Caliornia; the board o the Bay Area Rapid ransit(BAR) District is the exception in both size and composition.

In a survey o more than 200 transit agencies nationwide, the2002 study ound that the average board size was nine members,indicating that the transit agencies we reviewed, which are someo the largest in terms o operating expenditures in Caliornia,tend to have larger-than-average boards. Although this maynot be a surprising result given the size and complexity o theorganizations these boards oversee, it is interesting to note that

the same survey ound that only 3 percent o transit agenciesresponding to the survey had boards directly elected by localvotersthe method the BAR District uses. Te most commonmethod o board selection cited by the respondents in the 2002study was appointment by elected ocialsthe method used byve o the six transit agencies listed in able 1. Tese results do notreute the grand jurys claim that VAs board is too large and toopolitical but rather establish that the board size and compositionare common among comparable transit agencies and suggest thatour ndings might have broad implication or other transit agenciesacing similar concerns.

The Average Tenure o Board Members Is the Shortest Among

Comparable Transit Agencies

Averaging just three years, the tenure o board members is shorterthan all the comparable transit agencies included in able 1.One reason or this condition is that the term length establishedin statute or board members is only two yearsthe shortest oall the comparable agencies. Tis explanation is supported by theshort tenure and term length o Orange County ransportationAuthority board membersthe majority o which are city council

members serving terms o one to two years. However, shortterm lengths do not ully explain short tenure because, while termlengths were oten specied, the transit agencies we reviewed didnot appear to have limits on the number o terms board memberscould serveas demonstrated by the average tenures o most o theboards exceeding their term lengths. Consequently, a shorter termlength may contribute to less tenure, but it is not the only cause. In

The 2002 study did not distinguish between appointees who are elected ocials, as are mostboard members o the transit agencies in Table 1, and appointees who are not elected ocials.

The size and composition o VTAsboard are similar to comparable

transit agencies in Caliornia.


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20

Te board is composed o 12 voting members and ve alternates, allelected ocials appointed to serve on the board by the jurisdictions

they represent. Tese ocials ace elections and term limitswithin their jurisdictions that do not necessarily coincide withtheir terms on the board. Consequently, it is likely that VA willat times lose board members beore they have served their ulltwo-year board terms. In addition, losing an election or completingthe number o terms allowed within the represented jurisdictionslimits existing board members ability to serve additional termson the board. Because many o the comparable transit agencies inable 1 on page 17 ace similar constraints, this would not explainVAs relatively short board tenure. Rather, board turnover causedby elections and term limits would seem to be a shared problemamong transit agencies whose boards are composed o elected

ocials appointed rom various jurisdictions.

Te grand jury report states that the commitment o boardmembers time to providing eective oversight o VA can besignicantly beyond what an elected representative in a secondaryappointment can ulll. We asked our board members about thisissue, and the three that responded indicated that the workloadis heavy, but each gave their perspectives o how and why theymanage this burden. For example, one board member stated thatserving on the board is a lot o work, especially or those who wantto master the material presented at the meetings and be agentsor change. However, she explained that the time burden placedon her by service on the board is mitigated by her keen interestin transportation. She urther noted that she considers her boardappointment and city council membership as volunteer positionsthat enable her to work toward improving her community. Finally,she said she has ound VA sta very willing to brie her on issuesand to answer specic questions.

Countywide transit boards made up o a signicant number oelected ocials rom local jurisdictions also ace the problemo obtaining countywide cohesion rom a group with local loyalties.For instance, rather than ocials elected or appointed to serve

solely on the board, 10 o VAs 12 board members are councilmembers rom area cities, and two are members o the Santa ClaraCounty Board o Supervisors (county supervisors) representingparticular districts. On the one hand, having its members be electedocials, rather than citizen appointees, may increase politicalaccountability, as promoted by those who conducted the 1999 studydescribed on page 16. On the other hand, that accountability is tolocal constituencies, rather than to the county as a whole. As thedesignated countywide planning agency, the board might be lessable to make transportation decisions that benet the county atlarge because o its members local loyalties.

Countywide transit boards made up

o a signicant number o elected

ocials rom local jurisdictions

ace the problem o obtaining

countywide cohesion rom a groupwith local loyalties.


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For the purposes o our analysis, we considered transit experienceto be any experience board members had beore their board service

that was directly related to transportation planning, development,or oversight. We obtained inormation on board members transitexperience by reviewing their personal biographies and askingeach board member to either conrm or correct the inormationwe presented. Tirty-six o the 77 board members we contactedresponded to our request. For those who did not respond, weused the inormation gathered rom their biographies. Ateridentiying the transit experience, we scored the experience ona scale o 1 (no transit experience) to 5 (seven years or more otransit experience).

Although we attempted to objectively assess board members

transit experience, our analysis revealed that dening transitexperience is a subjective endeavor. For example, while serving asa council member or county supervisor, an ocial is likely to beexposed to transit-related issues, but it is dicult to determine atwhat level and depth the elected ocial participated in the activity.Additionally, one board member might consider a particularactivity as transit experience while another might not. Further,board members oten have a wealth o public and private sectorexperience that could be equally as benecial as transit experience.Although not directly related to transit, many aspects o anocials experienceslegal, real estate, environmental, economicdevelopment, public policy, and businesscan intersect withtransit issues.

VAs policy advisor echoed this thought when he explained that aboard members transit experience is important but is just one typeo expertise that a well-balanced board should have. He suggestedthat in a board like VAs, which oversees transportation planning,transit, and highway construction, expertise in land use is equallyimportant. Te policy advisor went on to say that no board membercan be expected to be an expert in all elds. Te overarchingprinciple, according to the policy advisor, is that technical expertisecan be hiredwhether it be construction management, nancial

planning, or transit operationsand what an eective boardreally needs is committed members rom various backgroundswho are adept at, or have experience in, policy making withinlarge organizations.

VTA Has Improved the Way Its Board Operates, but It Could Use ItsAdvisory Committees More Efectively

Since the release o the March 2007 HayGroup assessment, VAhas made key changes in the operations o its board. Specically,VA has updated committee work plans and reduced redundancies

VTAs policy advisor explained

that a board members transit

experience is important but is

just one type o expertise that a

wellbalanced board should have.


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advisory committee (citizens committee)or immediate responsesand approval in one instance, and missed a chance to improve its

relationship with its advisory committees in another.

o address board turnover and other governance challenges,the board chair appointed one board member to a governancecommittee in December 2007. According to VAs policy advisor,that board member met with some community leaders to solicitinput and eventually arrived at a proposal that was articulatedwith the help o VAs transormation consultant and thepolicy advisor. Te board chair then asked or a report romthe governance committee to the board in February 2008.

In March 2008 VA sta attended meetings o the policy

committee and the citizens committee to present thegovernance committee proposal and to seek advisory committeerecommendations to the board. Te proposal called or aregrouping o board seats among cities other than San Jose,eliminating the rotation schedule among those same cities,encouraging consecutive terms or directors, and developinga process to select representatives who have the requisiteexperience. Minutes rom the citizens committee meeting revealsome conditional support but also considerable concern aboutVA presenting a proposal without allowing time or in-depthdeliberation. Specically, the discussion at the citizens committeecentered on VAs unsatisactory process or developing the policyrather than on the policy itsel.

Several members voiced concern that VA was asking them toreach a decision beore they had an opportunity to ully considerthe issue. One member urther stated that the proposal wasunacceptable because the public was not allowed the opportunity toprovide input. Te ormer chair o the citizens committee explainedto us that it is all too typical o VA and the board to approachthe advisory committees when it is eectively too late or thecommittees to infuence outcomes, and the governance proposalwas no exception. Ultimately, the citizens committee voted against

the proposal and requested that the board readdress the governanceissue using a process that involves all appropriate stakeholders.

Te proposal that went beore the board in May 2008 was nodierent rom the proposal the governance committee originallyprepared. Te boards Administration and Finance Committeehad recommended approval o the rst three elements o thegovernance proposal related to the rotation schedule, boardmember terms, and board member qualications, but ithad recommended deerral o the ourth element related tocity groupings. Ater debating whether or not to vote on therecommendation to change city groupings, the board adopted

The ormer chair o the citizens

advisory committee explained to us

that it is all too typical o VTA and

the board to approach the advisory

committees when it is eectively

too late or the committees toinfuence outcomes.


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26

three elements o the proposal and voted to postpone a voteon reconguring the city groupings until the August 2008

board meeting. Shortly ater the May board meeting, thegovernance committee asked VAs policy advisor to invite thecitizens committee and the policy committee to each appointtwo representatives to join the governance committee, whichaccording to the policy advisor is now meeting on a weekly basis.

Te process VA used to develop its new mission and visionstatements was more inclusive o board members and VA sta,but VA missed an opportunity to involve advisory committeemembers at the initial stage o the process. In February 2008 VAconducted the Board o Directors Summit (summit) in which aacilitator led board members and VA executive sta through

the process o creating six possible vision statements. VA thentook the ideas expressed in the summit and produced a survey thatsolicited input rom all VA sta on VA values and themes. VAsOce o External Aairs combined the sta survey responses andthe original board and executive sta summit ideas to drat visionand mission statements.

Te external aairs ocer presented the drat statements to allve advisory committees in April 2008, and advisory committeemembers had the opportunity to respond. Te presentation o thesestatements in drat orm is a legitimate way to obtain input romthe advisory committees. However, given the history VA has hadwith its advisory committeesas described by the HayGroup andthe ormer chair o the citizens committeeVA may have beenwise to involve the advisory committees in the initial developmento the drat statement. Such an eort may have urther evidencedVAs desire to involve in its decision-making process the crosssection o community leaders, technical experts, and advocatesthat the advisory committees represent. Better relationships withits advisory committees would help VA benet rom a valuablesource o ideas and eedback that could help it improve and reormon a continuous basis.

According to VAs policy advisor, reviewing the purpose anduse o advisory committees is one o the many projects that VAplans to include in its transormation program. Tis project willhelp dene which issues should go to each committee and when.One change VA is already planning is to provide the citizenscommittee with a regular opportunity to participate in boardmeetings. VAs policy advisor acknowledges that reorming VAsuse o the advisory committees is a ormidable task, especiallybecause it requires not only tangible changes but also a culturalshit in values and the rebuilding o trust.

VTAs policy advisor acknowledges

that reorming VTAs use o the

advisory committees requires a

cultural shit in values and the

rebuilding o trust.


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without all the required elements, these various plans truly satisythe purpose o a strategic planto provide a ramework or an

organization to align its resources in support o its long-term goalsor the uture.

Te initial strategic plan VA produced stated that it covered theperiod 1996 through 2006. In 2001 VA initiated plans or aull revision o the strategic plan. However, VAs ormer boardsecretary explained that, because o an economic downturn atthat time, the board decided it would be inappropriate to usetime and resources to complete the new strategic plan. Rather, theboard chose to ocus on the existing goal o nancial stability byestablishing a business review team in February 2002, ollowedby the ormation o a nancial stability committee later that year.

On completing those eorts, the board adopted the nancialstability strategy in early 2004. Te Valley ransportationPlan 2030, which was adopted in 2005 and serves as the countywidetransportation plan, expanded on the nancial stability strategywith a recommendation that VA develop a transit expansionpolicy. Tis recommendation resulted in a new eciency-basedtransit model called the ransit Sustainability Policy. VA usedthe ransit Sustainability Policy to reevaluate its bus routes and,

according to the general manager, will eventuallyuse it to examine all VA transit services. Tiseciency-based approach did not necessarilyalign with VAs ocial vision statement,which emphasizes equity over eciency (seethe text box). VAs modication o bus routesbased on the new eciency-based approachmakes it apparent that the vision statement hadalready become obsolete in terms o aectingVA decisions.

According to the general manager, the disconnect between theocial vision and mission statements, which emphasize equity,and the new model, which emphasizes eciency, is evidence oan organization in the process o change. Te general manager

explained that VA stakeholders and even its leadership are adiverse group with oten-shared but sometimes-conficting valuesand opinions. Consequently, change requires appropriate timingand is not always linear rom overarching vision down to nedetails. Rather, the general manager noted, the experience o usingthe eciency-based model to assess bus routes helped many VAdecision makers and constituents see how a vision and missionthat incorporates eciency could actually work. In February 2008the board met to begin the process o developing new vision andmission statements, and according to the general manager, it plansto adopt these new statements in the summer o 2008.

Santa Clara Valley Transportation Authoritys

Initial Vision Statement

Provide a transportation system that allows anyone to go

anywhere in the region easily and eciently.

Source: Santa Clara Valley Transportation Authority, StrategicPlan 1996-2006.


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Te general manger stated that VA is working on a new strategicplan to be included in its countywide long-range planning

document, the Valley ransportation Plan 2035 (VP 2035), whichVA expects to publish at the end o 2008. Te general managerexplained that he wants the strategic plan to be included withinthe existing planning document and updated periodically alongwith that document. Te general manager also explained thathe wants the strategic plan to be part o VP 2035 because hebelieves that a transit agencys strategic and transportation plansshould be directly linked. Although the approach the generalmanager describes appears reasonable, we caution VA toinclude all GFOA-recommended elements o a strategic plan inits new strategic plan and to link those elements to one another byconsistent themes that cascade through each element, rom broad

vision and mission statements to detailed action plans.

Recommendations

o promote stability in its leadership and bring the tenure o boardmembers in line with that o comparable transit agencies, VAshould request the Legislature to amend its enabling statutes toallow or a our-year board term.

VA should monitor the eect o the governance changes approvedby the board in May 2008 and determine whether additionalchanges to its governance structure are necessary. o this end, VAshould add board tenure to the perormance measures it developsor its new strategic plan.

VA should complete its plans to implement the HayGrouprecommendations related to governance and strategic planning.

o demonstrate that it values the expertise o its advisorycommittees, VA and its board should take actions to ensure thatadvisory committees are involved in the development o policysolutions. Such actions should include the ollowing:

Reassessing and stating the purpose and role o eachadvisory committee.

Reviewing work plans or advisory committees to ensure thecommittees have an opportunity to review and provide input onissues in the early stages o development.

Providing the citizens committee with an opportunity to addressthe board at every meeting, similar to the opportunity providedto the policy committee.


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VA should implement its plan to create a comprehensive strategicplan and ensure that the new plan conorms to the practices

recommended by the GFOA.


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Catr 2

fInAnCIAl RepoRTIng And plAnnIng geneRAllymeeT BeST pRACTICeS, BuT ChAngeS To CApITAlBudgeTIng And plAnnIng Could ReduCe fuTuReexpenSeS And ImpRoVe longTeRm foReCASTIng

Chapter Summary

In preparing its nancial reports and plans, the Santa ClaraValley ransportation Authority (VA) generally ollows bestpractices in government nance. Additionally, VA scal stahave improved the value o those documents by adding more

historical and projected gures as well as more detailed andsimpler-to-understand inormation. However, urther changesto certain areas o nancial reporting and planning would allowVA to more eectively plan and evaluate its perormance. Tis isespecially true or its planning o capital projects. Adding precisionto capital project budgeting could help VA better understandits cash needs, potentially reducing uture nancing expenses orcapital projects.

Best practices are also evident, to varying degrees, in VAsshort-term orecasting and longer-term nancial planning. Forexample, VA has established two debt reduction unds and isconducting better planning or long-term liabilities. However,the organization could benet rom more eectively using someo its projections as planning tools and continuing its eorts toupdate orecasting.

Overall, VTAs Broad Array o Financial Reports and Plans Conorm toRecommended Practices

VA regularly produces reports that contain nancial inormation.In speaking with scal sta, we determined that VA publishes

ve main reports. Ater reviewing these reports, we ound thatVA has generally ollowed recommended practices, which stressproviding prompt and reliable inormation to decision makers. Teollowing are the main reports that VA produces:

Comprehensive Annual Financial Report(CAFR): includesannual independent audit o nancial statements, which showVAs nancial position, results o operations, and cash fows.

Quarterly fnancial report to board o directors: primarilypresents operating revenues and expenses.


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Monthly variance reports and monthly activity reports tomanagement: include year-to-date budgeted amounts versus

actual revenues and expenses, as well as VAs operatingexpenses and revenues or the month, and its cash position.

Biennial budget: authorizes VA spending or the two upcomingscal years.

Shortrange transit plan: released every two years but includes10-year projection o expenses and revenues or operations andcapital improvements.

Te Government Finance Ocers Association (GFOA) publishesrecommended practices or governmental reporting and

recognizes governmental reports that meet those standards. TeGFOA-recommended practices stress the importance o providingthe reliable and timely nancial materials decision makers needto make well-inormed choices and presenting inormation inways that meet accounting standards. Tese best practices wereespecially apt or our analysis because VAs scal sta said theyollow GFOA guidance, and VAs CAFR states it was preparedin accordance with GFOA guidelines. As able 3 indicates, VAsnancial reports in general meet GFOA recommendations. Teone area in need o improvementcapital budgetswill beaddressed later in the chapter.

In Response to Concerns From Board Members and an OutsideEvaluation, VTA Has Improved Its Reports and Plans

In addition to GFOA guidance, VA has received input about itsnancial reporting and planning rom its board o directors (board)and an outside consultant VA hired to assess its operations. Boththe board and the consultantthe HayGroupexpressed concernsabout VAs nancial reporting. Te board and the Administrationand Finance Committee (nance committee), which is composed oour board members, called or VA to present additional nancial

inormation or explain nancial inormation to the board moreully. Our review o board and nance committee minutes rom thesummer o 2005 through early 2008 revealed at least ve commentscalling or additional or more meaningul nancial reporting.For example, in a May 2007 nance committee meeting, the vicechair o the committee requested that VA provide all boardmembers (not just nance committee members) with quarterlynancial inormation.

In its March 2007 report, the HayGroup voiced similar concerns bystressing the importance o producing useul nancial inormationand communicating it to the transit agencys decision makers. Te


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Table 3

Santa Clara Valley Transportation Authoritys Conormance With

Recommended Practices in Financial Reporting

RECOMMENDED pRACTICE

pRACTICE OF SANTA ClARA vAllEY

T RA NSp ORTAT ION AUT HO RI TY O vE RAl l CO NFO RM AN CE

Issue a comprehensive annual

nancial report rather than

just basic nancial statements.

Issues comprehensive

annual nancial report that

includes more than basic

nancial statements.

Meets recommendation.

Follow generally accepted

accounting principles

in the comprehensive

annual nancial report and

have nancial statements

independently audited.

According to its independent

auditor, Santa Clara Valley

Transportation Authoritys (VTA)

nancial statements ollow

generally accepted accounting

principles and airly present

VTAs nancial position, results ooperations, and cash fows.


Issue timely nancial

reports in order to inorm

decision makers.

Comprehensive annual nancial

report issued within six months

o the end o scal year. A review o

the past seven quarterly reports

revealed that they were issued on

average 6.5 weeks ater the end

o the reporting period.


Capital budgets should include

summaries o capital projects

by und and category, a

schedule o completion o

the project, and estimated

unding requirements or the

upcoming year(s).

Budgets do not always speciy

the timing o project completion

or ully denote when unds

are expected to be spent on

individual projects.

Needs some improvement.

Sources: VTAs nancial reports; recommended practices published by the Government FinanceOcers Association.

HayGroup also provided specic recommendations to add orclariy certain nancial reporting elements. In response, VAimplemented reporting changes that addressed many o the issuesrevealed by the HayGroup assessment. As noted in Appendix A,VA adequately addressed one o the our recommendations and

has made progress with the three remaining areas that pertain tonancial reporting.

As summarized in able 4 on the ollowing page and detailed in thesubsections that ollow, VA has made an eort to simpliy reportsand present inormation in context since the HayGroup assessment.We ound the strongest evidence o these changes in the biennialbudget or scal years 200708 and 200809, which includes moreo a historical context and a more comprehensive presentation othe capital budgets than did past documents. Other major areaso improvement include changes to monthly nancial reports tomanagement and quarterly nancial reports to the board. Tose


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changes include providing useul inormation, such as projectionswith explanations about variances rom expectations, and issuing

such inormation in a timely manner.

Table 4

Summary o Recent Improvements to Financial Reporting

REpORT CHANGE IMplEMENTATION

Comprehensive annual

nancial report

More nancial summary

inormation added

Fiscal year 67

comprehensive annual

nancial report

Quarterly nancial report Regular scal reports

presented to Administration

and Finance Committee

(nance committee) and theboard o directors

Finance committee began

receiving reports in scal

year 56, and board

began receiving presentationson them in March 8

Monthly variance and

activity reports

Added clarications,

explanations

May 7

Biennial budget Added more useul summary

inormation, added

projections and historical

context, and more clearly

explained the capital budget

Biennial budget or scal

years 78 and 89

Sources: Santa Clara Valley Transportation Authoritys nancial reports.

CAFR Adds Some Summary Inormation

VA published its most recent CAFR ater the HayGroup report,which criticized VAs previous CAFRs or not providing a true,complete picture o VAs perormance; nancial condition;and ability to meet its commitments, goals, and objectives.In contrast, an independent certied public accounting rmthat audited VAs nancial statements concluded the reportsairly present VAs nancial position. In the transmittal letteraccompanying its CAFR or scal year 200607, VA statedit prepared the CAFR in accordance with GFOA guidelines.

In addition, the GFOA recognized VA with a Certicate oAchievement or Excellence in Financial Reporting or its scalyear 200506 CAFR. Our review o recent CAFRs ound no majorchanges in the types o inormation VA reported. Rather, VAadded some summary inormation to the letter o transmittal inits scal year 200607 CAFR that highlights nances and explainsmajor VA initiatives. Although these improvements were minor, itappeared rom our review that a major revision o these documentswas not necessary.


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Changes to the Format o VTAs Biennial Budget

Clariy Its Content

Te board approved the biennial budget orscal years 200708 and 200809 in June 2007,ater receiving the HayGroup report. Accordingto scal sta, the most recent budget aimed tosimpliy nancial inormation, incorporate morehistorical data and projections, and includeadditional and more meaningul inormation inthe capital budget. Specic improvements areshown in the text box. According to the chienancial ocer, a goal is to prepare uture budgetsaccording to GFOA guidance to earn GFOAs

Distinguished Budget Presentation Award.

Changes to Its Capital Budgeting Would ImproveVTAs Financial Reporting

Although VA has increased the quality oits nancial reporting, we ound room or

improvement in one major area, the capital budget, which includesconstruction costs and other expenses related to VAs capitalprojects. Te GFOA recommends that capital budgets includesummaries o capital projects by und and category, a schedule orcompletion o the projects, and estimated unding requirementsor the uture. Although VAs capital budget contains summarieso capital projects, it does not always include the timing o projectcompletion or the unding requirements or upcoming years.According to scal sta, budgeting or VAs capital programis dierent rom budgeting or operating expenses, in whichexpenditures are authorized or and spent during the specicperiod. For capital projects, unds are oten authorized in one yearbut expected to be spent during multiple years. Amounts VAdoes not spend on a project one year it carries over to the nextyear. Funds that represent VAs share o capital projects are held

in VAs investments until they are needed. According to scalsta, past capital budgets have not necessarily refected howmuch VA expects to spend in a given year, but VA is moving inthis direction.

Te lack o precisely reported plans to complete projects andidentiy when money is slated to be spent reduces the useulnesso the capital budget to VAs decision makers. Specically, VAcannot eectively use the document to plan various projects,set and adjust the priorities o the capital program, and monitorcash fows.

Improvements to VTAs Biennial Budget

Budgetsummaryprovided.

Projectionsofoperatingrevenuesandexpensesforthe

ollowing three years included.

Outstandingdebtsummarized.

Variancesinoperatingbudgetsdisplayedfor

two previous scal years.

Majorbudgetarychangesexplained.

Revenuesreportedwithhistoricalcontextofsixyears.

Expensesforbudgetedyearsandtwopreviousyears

provided, with percentage variances.

Budgetsummarizedbydivision.

Projectedoperatingcostsforsome,thoughnotall,capital

projects provided.


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VTA Should Add Precision to Its Capital Budget Document

VA could benet rom increasing the detail o its capital projectbudgeting. Creating budgets that refect project time rames andexpected spending by year, or instance, could allow VA to betterallocate its resources. A review o its capital budgets revealed thatVA currently appropriates unds upront and, in some cases, yearsbeore actual expenditures are to occur. Accounting reports VAprovided to us refect actual spending on capital projects romVAs local unds and Measure A ransit Improvement Program(Measure A program) categories during scal year 200607 atapproximately $131 million. VAs nancial statements or scalyear 200607 show that VA had remaining budgets in thesecategories o approximately $162 million or capital projects.

Although 63 percent o the amount represented unds romnon-VA shares (like ederal and state grants), the remaining37 percent ($60 million) was VA unds.

A review o other transit agencies capital budgets revealed variouspresentations. However, many agencies included elements tomore clearly refect planned capital spending. Some best practiceswe identied rom our review include speciying time ramesor spending unds, multiyear historical spending, and clearexplanations o year-to-year carryovers and their unding sources.With that inormation added, VAs capital budget would be a moremeaningul planning document.

Te chie nancial ocer stated he will recommend that VAupdate its next capital budget to include expected project costs,totals allocated through the end o the last scal year, amountsspent, spending sources (broken down by local, state, and ederal),and new allocations by budget year or the two-year period. He saidthat budgeted amounts or the scal year would correspond withthe amount VA expected to spend or needed to obligate duringthat scal year.

More Accurate Capital Planning Would Benet VTAs Finances

Strong scal planning is especially important or an organizationlike VA that builds many complex, expensive projects overlong periods. By improving its method o tracking the time whenunds will be needed or capital projects, VA could save money.As o the end o scal year 200607, VA had $746 million inoutstanding bonds and trust certicates, which represented anincrease o $46 million rom the previous year. According to a scalresources manager, i VA better understood its cash needs orcapital projects, it could plan more eectively when to issue bondsand potentially how best to invest its money. Specically, a more

According to a scal resources

manager, i VTA better understood

its cash needs or capital projects, it

could plan more eectively when

to issue bonds and potentially how

best to invest its money.


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accurate understanding o cash fow could allow VA to delayissuing debt until a time closer to when the unds were needed.

Also, that inormation could benet VAs overall investments byallowing it the option o placing more o its unds in longer-terminvestments that could optimize its earnings.

Te need to manage debt eectively became apparent withrecent changes in the municipal debt market. Many municipalbond insurers have been downgraded, and those rating changeshave aected variable rate bonds. As a result, VA has seen itsinterest rates or variable rate bonds increase, which has aectedthe roughly $236 million in debt related to VAs Measure Aprogram. In early 2008, the interest rate on VAs debt paymentsor variable rate bonds began increasing rom between 3 percent to

4 percent to an average o about 6 percent or the rst ve monthso 2008, based on data provided by VA. From the same data,which included inormation through May 2008, we ound thatthe average interest rate or scal year 200708 was 4.9 percent,which is greater than the 4.35 percent a scal resources managerstated was budgeted or Measure A program variable rate bondsor that year. According to VAs chie nancial ocer, or every1 percent increase in the interest rate or these securities, VAsinterest expense increases by about $45,900 weekly. AlthoughVA indicates that it is responding to the market changes, thisexample illustrates the market risks o certain kinds o debt andhighlights the need or eective management o debt and cash fow.

In the July 2007 reorganization o scal resources, VA recognizedthe benet o better understanding cash fow as it builds projectsand issues debt by adding an analyst position in the divisionsnance department to ocus on cash fow related to capital projects.Further, the scal resources reorganization document describes therole certain scal sta play in coordinating with project managersto ensure the accuracy o capital budget requests and assisting withongoing monitoring. However, in May 2008 a VA scal resourcesmanager explained that she did not expect the scal analyst positionto be lled soon because o nancial constraints.

In addition, VA hired a consultant to model the timing oMeasure A bond issuances and expected grant revenues. Measure Aprogram projects, including the extension o the Bay Area Rapidransit system into San Jose, represent the majority o VAs largeupcoming capital projects. Te chie nancial ocer said that hewould like to expand the role o the Capital Improvement ProgramOversight Committee (oversight committee), which is made up odivision chies at VA who primarily review other capital projects,to begin reviewing Measure A projects. According to the chienancial ocer, constant engagement among divisions is neededto ensure communication among those preparing the budget,

VTAs experience with its variable

rate bonds illustrates the market

risks o certain kinds o debt and

highlights the need or eective

management o debt and cash fow.


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meetings o the oversight committee, which primarily overseesVA transit-unded projects (projects that do not all under

specied voter-approved measures). During this analysis, stareview and discuss specic project management indicators, likethe budget, commitments, actual spending to date, the previousmonths spending, the estimated total project cost, the ratio ototal incurred costs to the budget, and summary completionschedules. Although this ongoing monitoring at the project levelis an important part o project management, it does not satisy theGFOA-recommended practice o comparing orecasts to actualsbecause the activities did not appear to be part o an eort toimprove orecasting.

Enterprise Fund Forecasts Have Been Conservative and Fairly Accurate

Recent orecasts o activity in VAs Enterprise Fund, whichincludes operating expenses and revenues, have been airly accurate.Te Enterprise Fund covers the expenses o transit operations andcertain capital projects, which are primarily unded through thebasic sales tax and ares. VAs projections or Enterprise Fundrevenues and expenses, as documented in the short-range transitplan or scal years 200506 through 201415, were airly accuratewhen compared to actual gures or scal years 200405 through200607. As illustrated by Figure 5 on the ollowing page, however,during those years, VA on average underestimated revenues by5.2 percent and overestimated expenses by 2.3 percent. Accordingto a VA scal resources manager, these projections representVAs approach o conservative orecasting.

Ridership Forecasts Have Varied in Accuracy

VA orecasts its ridership or each scal year. Te VA managerresponsible or preparing ridership orecasts provided us with aninternal report, which he indicated was prepared in August 2003,that includes ridership orecasts or scal years 200304 to

200708. As indicated by Figure 6 on page 43, these orecastswere not consistently accurate, but VA has presentedconservative estimates in its orecasts or the last two scal years.For the 200405 scal year, VA overestimated its ridership byabout 6.7 percent. According to a VA manager, the actual decreasein bus ridership likely refected the reduction in services VAmade in January 2004 and the are increase made in January 2005.

In contrast, VA underestimated its ridership or scalyears 200506 and 200607 by about 3.1 percent and 9.1 percent,respectively. According to a VA manager, those projections are inline with VAs conservative approach to orecasting. VA saw a


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Figure 5

Comparison o Enterprise Fund Revenues and Expenses

Actual and Forecasted

300,000

320,000

340,000

360,000

380,000

$400,000

200405 200506 200607

Fiscal Year

Int

housands

Expenses

Actual

Forecasted

300,000

320,000

340,000

360,000

380,000

$400,000

200405 200506 200607

Fiscal Year

Int

housands

Revenues

Actual

Forecasted

Sources: Santa Clara Valley Transportation Authoritys (VTA) comprehensive annual nancial reportsor scal years 45 through 67 and shortrange transit plan or scal years 56through 45.

Note: Enterprise Fund expenses account or approximately 7 percent o VTAs total spending andconsist o the provision o transit services and some capital project activities. It does not includeconstruction o capital projects unded through voterapproved measures that VTA accounts or inthe capital project und.

larger-than-expected increase or those years because itunderestimated ridership rom new light-rail services that were

added in scal year 200506. Both bus and rail ridership increasedduring the three-year period we reviewed.

VA revises its ridership orecasts each scal year. For thethree scal years mentioned above, these revised orecasts werecloser to actual ridership; however, sta orecasted less ridership orall three years. An average o the three-year dierence indicated adierence o about 1.8 percent per year.


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Figure 6

Ridership, Actual and Forecasted

36

37

38

39

40

41

42

Forecasted

Actual

200405 200506

Fiscal Year

200607

Numberofriders

(inmillions)

Sources: Santa Clara Valley Transportation Authority ridership (orecasted and actual).

VTAs LongTerm Financial Planning Generally Meets or Is MovingToward Meeting Recommended Practices

VAs long-term nancial planning meets GFOA-recommendedpractices in most cases, but it has not completely implementedchanges to respond to the HayGroups recommendations.Specically, VAs current long-term orecasts or the MeasureA program do not realistically plan revenues in all areas. TeHayGroup noted this issue and recommended that VA betterbalance its revenues and expenditures. In response, VA has beenupdating its orecasting methodology, and recent eorts haveincreased its compliance with the HayGroup recommendations.

GFOA publishes recommended practices or entities conductinglong-term nancial planning. As shown in able 6 on the ollowingpage, VA has already met or is in the process o conorming tothese recommendations.

Te HayGroup assessment called on VA to balance its long-term

revenue and expenditure plan, address ununded liabilities, ndadditional revenue sources, better manage real estate, providemore training or organization leaders, update projections andmodels, conduct stress tests, standardize methodology or nancialanalysis, and establish more realistic are revenue goals. VAsprogress toward implementing the HayGroup recommendations isdocumented in Appendix A.


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Table 6

Santa Clara Valley Transportation Authoritys Conormance With

Recommended Practices in LongTerm Planning

RECOMMENDED pRACTICE

pRACTICE OF SANTA ClARA vAllEY

T RA NS pO RTAT IO N AU TH OR IT Y O vE RA ll CO NF OR MA NC E

Conduct longterm nancial

planning or each major und or

a horizon o at least ve years.

Projections or major unds are

or at least ve years.


The plan should include an

analysis o the nancial

environment, revenue and

expenditure orecasts, debt

position, key indicators o

nancial health, and strategies

or achieving and maintaining

nancial balance.

Plans include analyses o major

categories like revenues and

expenditures. According to

scal resources sta, Santa Clara

Valley Transportation Authority

(VTA) is in the process o

updating longterm planning

tools to better analyzedierent scenarios.

Needs some improvement.

The plan should be

communicated eectively to

ocials and the public.

In accordance with ederal and

regional requirements or certain

transit agencies, VTA publishes

shortrange transit plans every

two years that project years

orward and periodically

publishes longrange plans that

refect a 5year vision.


The plan, and the orecasts

contained therein,

should be monitored and

updated periodically.

Most projections are updated at

least annually as part o annual

updates or the shortrange

transit plan.


Sources: VTAs shortrange transit plan or scal years 78 through 67; recommendedpractices published by the Government Finance Ocers Association.

A Key Element o Its Current Forecasts or LongTerm Capital Projects

Is Uncertain

As explained earlier, VA included a revenue source equivalentto a quarter-cent sales tax or th

Documents

California Office Of State Auditor's Report: Valley Transportation Agency (VTA) (2007-129)