REPORT TO THE UTAH LEGISLATURE Number 2014-06 A Performance Audit of the Utah Transit Authority August 2014 Office of the LEGISLATIVE AUDITOR GENERAL State of Utah STATE OF UTAH Office of the Legislative Auditor General 315 HOUSE BUILDING • PO BOX 145315 • SALT LAKE CITY, UT 84114-5315 (801) 538-1033 • FAX (801) 538-1063 Audit Subcommittee of the Legislative Management Committee President Wayne L. Niederhauser, Co–Chair • Speaker Rebecca D. Lockhart, Co–Chair JOHN M. SCHAFF, CIA Senator Gene Davis • Representative Jennifer M. Seelig AUDITOR GENERAL August 26, 2014 TO: THE UTAH STATE LEGISLATURE Transmitted herewith is our report, A Performance Audit of the Utah Transit Authority (Report #2014-06). A digest is found on the blue pages located at the front of the report. The objectives and scope of the audit are explained in the Introduction. We will be happy to meet with appropriate legislative committees, individual legislators, and other state officials to discuss any item contained in the report in order to facilitate the implementation of the recommendations. Sincerely, John M. Schaff, CIA Auditor General JMS/lm Digest of a Performance Audit of the Utah Transit Authority This report presents an in-depth follow-up to portions of our 2008 and 2012 performance audits of the Utah Transit Authority (UTA). We also reviewed UTA development projects, including transit-oriented developments (TODs) for the first time. UTA is a large multi-modal transit agency with a service area in six counties that includes almost 80 percent of the state’s population. In 2013, about 65 percent of UTA’s revenue ($312 million) came from sales tax collections. Federal support and passenger revenues are also important sources of revenue. UTA provides many valuable services to the community and was recently recognized as the best large transit system in the country by the American The UTA board has Public Transportation Association. Issues raised in this report focus on already approved where UTA needs to further improve oversight, bolster controls, and refine policy changes processes. In response to this audit, the UTA board has already approved addressing all the policy changes addressing all of the recommendations in Chapters II and III recommendations in of this report. The board and UTA management are also in the process of Chapters II and III of this report. reviewing the recommendations in the other chapters for implementation. Chapter II Development Projects Need Better Control and Oversight Questions Exist with the Draper FrontRunner Parking Structure. This is a complex project with many levels of legal documentation. We are concerned with the decision to prepay $10 million to a developer to UTA prepaid for a construct a future garage even though there were no design specifications or future parking immediate plans for construction. Further, two-and-a-half years later, UTA structure, which is against UTA internal hired another contractor to build the garage, but the developer no longer policy and practice. had all the funds immediately available to repay UTA. UTA is still owed $1.7 million. Simply stated, the $10 million prepayment was against UTA policy and practice and appears to us very unusual. Additional concerns include the lack of a cost-benefit analysis, the adequacy of legal documentation, the release of valuable collateral for questionable collateral, the difficulty UTA had supporting $1.5 million in site preparation work, and the general lack of documentation and changing explanations we experienced throughout the audit. The lack of sufficient control and oversight can put taxpayer funds at risk. Office of the Utah Legislative Auditor General - i - An independent law Questions Exist with Jordan Valley TOD Site. Some UTA employees firm concluded that question the procurement process used to select the developer on the Jordan UTA’s agreements with Valley TOD project. We also believe some aspects of the procurement the developer appear process are concerning. Further, the development agreement UTA signed to favor the developer. with the developer appears to us and an independent law firm (Snell and Wilmer) to be overly favorable to the developer. Snell and Wilmer believe that some of the provisions of the contract are “far out of market.” Lastly, to date, $26 million in federal and state funds have been spent on infrastructure and two parking structures at the Jordan Valley project site. The developer’s portion of these costs was set at $3,896,000, but the developer has not yet paid this amount. Better Procedures and Increased Controls Will Improve TOD Process. The number and severity of concerns identified in the two development projects we reviewed warrant increased procedures, better controls, and improved oversight. For example, the TOD function had been operating under the Office of the General Counsel at UTA. This placement created a significant segregation of duty concern. Also, UTA’s internal auditor must take on a more visible role with TOD oversight and provide better information to UTA’s board. During the audit some members of the board told us they were aware of the segregation of duty concern, and had been in The UTA board has the process of correcting it before the audit began. The board did take action taken action to correct segregation of duty by creating a new position for property development (TOD) that will be concerns and better separate from the general counsel’s office, the position has not yet been filled. control for risks at In addition, the board has also approved new policies that implement all the UTA. other recommendations in this chapter. Chapter III UTA Should Benchmark Total Compensation UTA Executive Compensation Includes Large Bonuses and Special The UTA board Benefits. Besides base salary and standard benefits, UTA provides additional recently approved compensation to executives. Top executives at UTA receive bonuses and policy changes addressing every special benefits not available to other UTA employees, including two types recommendation in of deferred compensation plans and car allowances. The two highest-paid Chapter III. employees at UTA also have special life insurance benefits. UTA’s general counsel is also given a special retirement package that doubles his years of service credit for his first ten years of employment (thus increasing his lifetime benefit by about $50,000 per year above the normal pension). UTA Compensation Higher Than UDOT or SLC Department of Airports. The audit team was specifically asked to compare UTA executive compensation to the Utah DOT and the Salt Lake City Airport by the audit requestor and UTA’s board chair, respectively. UTA’s total compensation is high when compared to these two agencies. Some positions, such as general A Performance Audit of the Utah Transit Authority (August 2014) - ii - counsel, are paid significantly higher than at these other entities. We also attempted to compare total compensation of UTA executives with comparable positions at other transit agencies. However, there was concern with the reliability of the data and since the audit recommendations do not depend on the transit comparison; and since UTA has committed to conducting their own total compensation survey, we decided against reporting the transit comparison. UTA Did Not Report All Compensation Information to Transparency Despite being made Website. Utah’s transparency website, transparent.utah.gov, was created by aware that not all the Legislature in 2008 to promote transparency and accountability in public compensation was agencies. UTA did not report portions of employee compensation being reported, UTA management still information from this website, thus obstructing accountability to the public underreported and circumventing the intent of the statute. We raised this issue with UTA compensation in 2013. management several months prior to their submission of 2013 compensation The UTA board information, yet UTA did not correct the omissions prior to submitting recently approved a 2013 information. The UTA board recently approved a policy change new policy to correct this issue. requiring UTA management to submit all compensation data to the transparency website. Chapter IV Financial Constraints Affect Asset Upkeep, Bus Service, and New Projects UTA Faces Financial Constraints. Our 2012 audit indicated that UTA’s revenue and expense projections were optimistic. This follow-up review found that UTA has adjusted projections to make them more reasonable. Nonetheless, as previously reported, the rapid expansion of rail lines has sharply increased debt payments, thereby reducing the funds available for operations and maintenance (O&M) costs. Because debt service, O&M, and capital costs will exceed revenues for most years until 2020, UTA plans on drawing down its reserves to maintain services. The debt service to sales tax ratio steadily increases until 2018. Rail Upkeep Costs Are Significant and Currently Underfunded. As we followed up on our prior audit work on UTA revenues and costs, an important concern arose that had not been addressed in our last audit, which is state-of-good-repair (SGR) costs. SGR refers to the maintenance, overhaul, and replacement of assets. UTA’s board is aware of this issue and has made it a priority. Unfortunately, these future SGR costs are significant The UTA board is with a potential $2.9 billion in expenses up to 2033. Because these cost have aware of future SGR been recently identified, UTA has not yet worked much of these costs into its costs and prioritized long-term planning documents. However, the UTA board is aware of future full funding in its 2020 strategic plan. SGR costs and prioritized full funding in their 2020 strategic plan. Office of the Utah Legislative Auditor General - iii - UTA has reduced bus Bus Service Has Suffered Due to Financial Constraints. Our 2012 audit service because of report stated the following: “As UTA begins to integrate more rail lines financial constraints, within its current system, route adjustments and additional service cuts may which has led be needed.