Budget and Finance Subcommittee

MEETING OF THE Budget and Finance Subcommittee

MEETING DATE March 10, 2016

TIME 12:00 p.m. (via phone)

LOCATION Valley Metro 101 N. 1st Ave., 10th Floor Lake Mead Conference Room Phoenix, AZ 85003

VALLEY METRO • 101 N 1ST AVE • STE 1300 • PHOENIX AZ • 602-262-7433

March 4, 2016

Budget and Finance Subcommittee Thursday, March 10, 2016 10th Floor, Lake Mead Conference Room 101 N. 1st Avenue, 10th Floor 12:00 p.m. (via phone)

For those participating by telephone, please mute your phone when not speaking.

Action Recommended

1. Public Comment 1. For information

A 15-minute opportunity will be provided to members of the public at the beginning of the meeting to address the Board on all agenda items. The Chair may recognize members of the public during the meeting at his/her discretion. Up to three minutes will be provided per speaker or a total of 15 minutes total for all speakers.

2. Minutes 2. For action

Minutes from the February 11, 2016 BFS meeting are presented for approval.

3. Refunding Bond Issuance Authorization – Third 3. For action Supplemental Resolution

Scott Smith, Interim Chief Executive Officer, will introduce Paul Hodgins, Manager, Revenue Generation and Financial Planning, who will request that the BFS forward to the Board of Directors authorization for the issuance of tax- exempt, senior lien refunding bonds in Fiscal Year 2016. This authorization action is the Third Supplemental Resolution in accordance with Master Resolution adopted by the Board in 2009.

4. Valley Metro RPTA Budget and Finance Subcommittee 4. For action Name Change, Scope Expansion, and Inclusion of Valley Metro Rail (VMR) Representation

Scott Smith, Interim CEO, will request that the BFS forward to the Boards of Directors the resolution defining the role 1

and membership of the Audit and Finance Subcommittee (AFS.)

5. Future BFS Agenda Items 5. For information

Chair Williams will request future BFS agenda items from members and John McCormack will review the proposed future BFS agenda items.

6. Next Meeting 6. For information

The next meeting of the BFS is April 14, 2016 at 12:00 p.m.

Qualified sign language interpreters are available with 72 hours notice. Materials in alternative formats (large print, audiocassette, or computer diskette) are available upon request. For further information, please call Valley Metro at 602-262-7433 or TTY at 602-251-2039.

To attend this meeting via teleconference, contact the receptionist at 602-262-7433 for the dial-in-information. The supporting information for this agenda can be found on our web site at www.valleymetro.org

DATE AGENDA ITEM 1 March 4, 2016

SUBJECT Public Comment

PURPOSE A 15-minute opportunity will be provided to members of the public at the beginning of the meeting to address the BFS on all agenda items. The Chair may recognize members of the public during the meeting at his/her discretion.

BACKGROUND/DISCUSSION/CONSIDERATION None

COST AND BUDGET None

COMMITTEE PROCESS None

RECOMMENDATION This item is presented for information only.

CONTACT John P. McCormack Chief Financial Officer 602-495-8239 [email protected]

ATTACHMENT None

VALLEY METRO • 101 N 1ST AVE • STE 1300 • PHOENIX AZ • 602-262-7433

DATE AGENDA ITEM 2 March 4, 2016

Summary Minutes Valley Metro RPTA Budget and Finance Subcommittee Thursday, February 11, 2016 Lake Mead Conference Room 101 N. 1st Avenue, 10th Floor Phoenix, AZ 12:00 p.m.

Members Present Councilmember Thelda Williams, City of Phoenix (Chair) Councilmember Eric Orsborn, City of Buckeye Councilmember Jenn Daniels, Town of Gilbert (via phone) Councilmember Suzanne Klapp, City of Scottsdale Councilmember Skip Hall, City of Surprise

Chair Williams called the meeting to order at 12:02 p.m.

1. Public Comment

None.

2. Minutes

Minutes from the January 11, 2016 BFS meeting were presented for approval.

IT WAS MOVED BY COUNCILMEMBER HALL, SECONDED BY COUNCILMEMBER ORSBORN AND UNANIMOUSLY CARRIED TO APPROVE THE JANUARY 11, 2016 BFS MINUTES.

3. Request for Proposal (RFP) for Financial Audit Services

Mr. McCormack said this is an action item for the Budget and Financial Subcommittee to recommend to the Board of Directors authorization for the CEO to issue an RFP under a joint procurement process with Valley Metro Rail for contracted financial audit services.

The audit services that we have completed over the last five years were with Heinfeld and Meech. We have a five-year rotation, so after five years the auditor is replaced and we go out and we solicit another auditor for the upcoming five-year period.

Baseline services here that are in the program are expressing an opinion on the financial statements, testing internal controls for federal programs. There's a review of

VALLEY METRO • 101 N 1ST AVE • STE 1300 • PHOENIX AZ • 85003 • 602-262-7433

our National Transit Database information that we submit. These are statistics, primarily operating statistics that impact the formula of federal funds. Ultimately the FTA is able to see passenger miles delivered and compare those by region and that drives the amount of federal funds that some to the region, so there's an audit process that ensures those numbers are correct. And, as I mentioned, we have a mandatory rotation to a new auditor.

Essentially for the financial statement review, there's testing of account balances and the internal controls looking for material issues significant enough to make those financial statements reliable to the reader. And then a review of the elements of the comprehensive annual financial report, the management and discussion analysis in which we describe what the significant changes were during the course of the year, and required supplemental information such as how we did versus the budget. These are additional information pieces that are included in the CAFR.

With respect to the single act audit, as I mentioned, these look at internal controls for federal programs. They test transactions where federal grants are involved to make sure that we are in compliance with the federal regulations and the compliance with OMB Circular A133, which describes how overheads are allocated and what are eligible costs under the federal programs.

And the NTD information I described that to you a moment ago, is used as part of the federal funding allocation. It also is used by transit providers to gauge the effectiveness of and efficiency of their systems. You'll see some of that information a little bit later in transit performance report.

This year I included some supplemental services, so there are -- these are agreed upon procedures which would be a review of travel, credit card procurement financial controls. They would include a review of the policies and procedures and how the test transactions how we complied with those policies and procedures. And the auditor would provide a report of findings not only in conformance with our own procedures but in conformance with best practices.

So this is the recommendation that I'm seeking today and I'm happy to answer any questions that you might have.

Chair Williams said does anyone have any questions?

Councilmember Hall said so this would have been anyway without the supplemental? In other words, this is a five year -- we're making that five-year move; right? Is that what you're saying, John?

Mr. McCormack said we would be making this procurement at this time anyway regardless because we are at the end of the five-year cycle. The only difference is that we're adding these supplemental internal control review procedures to the base of audit services that we've been buying from Heinfeld and Meech and from prior to them

CliftonLarsonAllen in the prior period.

IT WAS MOVED BY COUNCILMEMBER ORSBORN, SECONDED BY COUNCILMEMBER HALL AND UNANIMOUSLY CARRIED TO FORWARD TO THE BOARD OF DIRECTORS AUTHORIZATION FOR THE INTERIM CEO TO ISSUE A RFP UNDER A JOINT PROCUREMENT PROCESS WITH VALLEY METRO RAIL, INC. FOR CONTRACTED FINANCIAL AUDIT SERVICES. THE PROCUREMENT PROCESS TO BE USING STATE OF ARIZONA STATEWIDE FINANCIAL AUDITING SERVICES RFP.

4. Valley Metro RPTA and Valley Metro Rail Budget and Finance Subcommittee Structure Modification

Mr. McCormack said thank you, I don't have a PowerPoint on this one, so we're going to have to kind of look at the memo itself, but as some of the discussions recently with the boards looking to create an additional VMR presence, in the Budget and Finance Subcommittee.

What we're proposing to do is to have a combined committee where there would be disclosure on the RPTA financial matters and the VMR financial matters around this table.

In order to do that, what you have on the second page is the current roster of BFS members showing their terms. The way it's structured today, we have a permanent seat with the City of Phoenix, we have two West Valley city members, two East Valley city members.

The proposal is that in order to incorporate VMR, we would have one additional VMR member, that is, of the four members, other than the City of Phoenix, one of those would be a rail member, sit on the rail board. So we would have five members from RPTA and two of the five members would also sit on the rail board. And that's the proposal.

We had thought about expanding the group, but we get into some issues with a quorum. Because there's five members of the rail board, if we were to bring more than two together, we would have a quorum for Valley Metro Rail's board. So leaving the number at five seemed to be the appropriate thing and then to add an additional rail member seemed the most logical.

Chair Williams said and Phoenix is on both boards; right?

Mr. McCormack said yes.

Councilmember Klapp said does the rail board have officers? Are they going to pull an officer to come? Or, I mean, how would they choose the person from the rail board to be included in our committee?

Mr. McCormack said excellent question. I think that we would use the same process as we do now to recruit BFS members, that is, there would be a message out from the board chair to the members to see those that might want to express interest in participating on a Budget and Finance Subcommittee.

Mr. Smith said you have a different dynamic, too, because you have the five members, you have three that are paying into the system currently, two that are not. I don't know how that held -- those dynamics would play out. This is one of the things that the intergovs would be very good at figuring out between them. That is a dynamic that doesn't exist on the RPTA side.

Mr. McCormack said so we would look to implement this change effective July 1, 2016.

Councilmember Klapp said so right now, the rail board doesn't have any oversight of budget before it goes to the full board?

Mr. McCormack said that's correct.

Mr. Smith said and one of the reasons to do this, and this is also part of something that's going to be evolving, is on an ongoing basis we hope, and we're working toward, and there will be a proposal coming forward to establish more of an in-house -- internal audit function. And, for example, some of those additional scope that John included --

We're asking that because we don't have an internal audit, so we rely on outside agencies like City of Phoenix. There's no doubt that not only with the situation that we're currently dealing with but also on an ongoing basis. I mean, we have hundreds of millions of dollars of contracts coming through this place.

And yet, we don't have any consistent internal audit function to really make sure that our policies and procedures are functioning. So one thing we are working with is to include that. It will be part of the budget consideration. We're working with Phoenix. They obviously have a very much invested interest as a designated recipient, so and, you know, their risk is more so in these ongoing contracts than the others, so working with them.

Expanding the responsibilities of this committee into being also an audit committee. And so it may be the audit and finance or the audit budget and finance, because we have to have a place for that auditor to be responsible to and to report to that's sub board.

If you get up into the big board, you know, that just doesn't work. So that will be something that will be coming down both through the budget process, but also in some of the things we're working on over the next couple of months is to look at that or look at establishing that function and hopefully start .

Councilmember Hall said so who will this internal auditor report to?

Mr. Smith said well, it hasn't been decided. I think probably we will be -- we've talked about it. There's no doubt the internal audit function will be reporting to this board. But also it will probably be a dual -- it needs to probably go into the CEOs simply for administrative purposes. But as far as reporting, so that there are no audit reports that ever get buried or the audit scope, the audit reports will be approved by this board. The audit plan will be approved by this board. And then the audit reports will come to this board. So it will sort of be like a dual dotted line kind of a responsibility, which is what I would suggest. It's up to you to decide if that's the organization that you want up to the main board. But that's typical for these kinds of situations.

I found that if you have where it just reports to the board, you don't have management, you don't have supervision from the just getting the job done. If it goes obviously just to the CEO, in large organizations that may be fine, but there's always some sort of responding board. On this one, I think considering where we are, we need that kind of direct responsibility to this committee.

So that's what we're working that up. You'll probably get that, if not next month, then the month after that you'll get our proposal and it will basically where we're headed.

Councilmember Hall said I think the mere appearance of the CEO needs to be removed.

Mr. Smith said absolutely. It needs to. They need to know that, number one -- and frankly one of the reasons for to changing this committee is they need outside the perception needs to be -- the real perception needs to be that there is an audit function. And that it's a legitimate ongoing audit function. And they need to know that board members, elected officials are receiving and are directing that process. Receiving the reports and directing the process and involved. You know, that's part of the transparency that we need to establish. And we can't do it -- we need to do it in a way that, you know, says, hey, we get it. We're here. Here's what we're doing.

Chair William said because the newspaper articles all assumed and fault us because we didn't follow that function.

Mr. Smith said we must have a consistent audit process -- there's got to be an org chart. To address the question, do you have a full audit function? Yes, we do. We have internal auditors; we have a committee they report to. Now that may be all you need to do. And then of course then the function has actually got to work. And that part is we can easily take care of.

Chair Williams said I serve on the city's audit committee and works very well as our -- and or auditors do programs or departments or whatever, you know, and then any questions and it works very well.

Councilmember Klapp said I serve on our audit committee also.

Councilmember Hall said I do too, city of Surprise.

Mr. Smith said and what we're looking at is probably, and we haven't fine-tuned this, but I'll work with John on this, maybe a couple, at least two in the department, we need that kind of coverage and I don't think they would lack for work. With all the activity that we have, they would stay very busy.

Councilmember Orsborn said I was just going to say aside from the other quagmire that we're in related to what's been happening, this will be really good for that, but I think bigger pictures we started a few years ago on this route of meshing these two organizations together and going from just Valley Metro and just Rail to trying to bring everybody together under one roof. And this, to me, kind of furthers that process.

Councilmember Klapp said I'm kind of surprised there isn't anybody that's reviewing the budget before it gets to the rail board. So we have this committee is a positive, obviously, for that side of business.

Mr. Smith said and from our side we need to -- I mean, we have two legal separate organizations that are involved in one ultimate goal. Just different modes to accomplish that. So the goal is to create an organization that respects and recognizes the legal separation and the legal -- different reporting requirements. I mean, we have different requirements. Each agency has -- an organization has its specific requirements, for example, to the federal government.

Which is why we have two separate financial reports and two separate issues. While on the other hand understanding that the reason why we are functioning as one organization is because of the economies and the efficiencies that we gain.

So, you know, that's a balancing act. And I think that that accomplishes that of bringing everything into greater control, greater efficiencies and transparencies while also respecting the reality of the situation, which is you have two separate legal entities that have very unique -- you have different boards for a reason. They also have different responsibilities to the FTA.

Councilmember Orsborn said then the practical side of it is one of the fourth non-city of Phoenix folks will probably flip for somebody who has rail or is on the rail board. So there will be some change in the makeup of this side of it.

Mr. Smith said and that will evolve. And once again, like I said, how that's made up I think in order to have this dual function you're going to need at least two members. How that plays out it will -- once again, they've got to get together. You only have one west side member of the realm, that's Glendale, but they're not -- right now they're not paying into the system, so how that will play out, we'll let them sort that out and figure out what they feel most comfortable with. Then I think we'll settle into a system that will

work.

Chair Williams said so do I have a motion? Jenn, did you want to say anything?

Councilmember Daniels said no, I'm good. I'm listening intently to the conversation and I would share the concern, but it sounds like it will all work itself out.

IT WAS MOVED BY COUNCILMEMBER HALL, SECONDED BY COUNCILMEMBER KLAPP AND CARRIED TO FORWARD TO RPTA AND VMR BOARD OF DIRECTORS AN EXPANDED OVERSIGHT ROLE OF THE BFS TO INCLUDE VMR BY REQUIRING THE TWO MEMBERS OF THE BFS REPRESENT BOTH RPTA AND VMR BEGINNING JULY 1ST, 2016.

5. Draft Contingency Policy

Mr. McCormack said agenda Item 5 is an information item. When we were visiting last time on the -- and passed the reserve, the new reserve policy, we talked about how to build in some -- a contingency policy so that we had confidence that the reserves that we set were adequate.

This is a preliminary draft of what we believe is a good start to the contingency policy. It is -- it's based on, really, an annual assessment, which I call a risk register, essentially where we break our budget down into its operating revenue -- operating and capital revenues, operating expenditures, and capital expenditures. We break each of those down into the elements that are significant and might have significant risk for unforeseen changes.

So to outline some of the risks that we have on operating revenues and capital revenues in the budget in the document here and on the operating expenditure side. The fixed route bus for example, price of fuel, our contract service rates are kind of the two major items.

Paratransit we -- the largest single risk is the demand, because this is a demand service, unlike fixed route bus where we're putting service on the street on a regular basis. The number of folks that use the Dial-A-Ride services we have no control over. It's based upon what the actual demand are. So the quantity of trips is a significant risk factor. There may be changes to the service rates of the contract provider for paratransit. And then there's some, you know, general impacts of damage and accidents that we see in operations.

On the capital side, there's a lot of construction risk and I've kind of broken down what those are here. I will say that on our capital projects, we really have an independent contingency that's built into each capital project. So when the baseline cost estimate is built for every capital project, you have the direct cost and then you have a contingency.

Typically on the major rail projects we have a 15 percent contingency built in to the

capital budget already. And then as the project evolves through its various stages, there's continual updates as to where that contingency stands. There's allocated -- contingency is allocated to certain direct elements of that construction. And then there's some project reserve or unallocated budget.

So as the project evolves, some of the project reserve may get allocated into the direct line items, but that process is reviewed quarterly and so forth, typically on the major rail infrastructure by the Federal Transit Administration, we have routine meetings with the oversight consultant that's assigned by the FTA and we have an internal group that's reviewing it on a monthly basis.

So I will say that with respect to the large capital projects, there's contingencies already built into those specific budgets and the budget that we build into the annual budget contains those contingencies, they're not broken out on separate line item within our budget document, but they exist within the capital budgets themselves.

Councilmember Hall said so when we see a $2-million-dollar project with a 150 of what? There's $300,000 built in, so it's really $2.3 million. So the line item isn't 2.3 but $300,000 of that is contingency?

Mr. McCormack said approximately 15 percent of, our standards for design. When the engineers build that baseline budget, they're building in a 15 percent contingency line that they start with. And then they begin allocating it to the specific lines as the project evolves.

Councilmember Hall said okay. You know, I'm glad this was information only because I followed this along pretty good until I got to the risk register. Wow. I had no idea.

Mr. McCormack said so let's go through the risk register --

Mr. Smith said let me put it this way. Here's the risk. If, John, you go over line item by line item, the risk of you being strangled before you finish this is very high, okay.

Councilmember Hall said what's a high number here, the $57.5 million?

Mr. McCormack said maybe we can pick a couple lines out, and I'll just kind of give you the philosophy of what's going on here.

Mr. Smith said let's pick that line, and I'll bring in expenditures fixed bus routes, that one is at $57.5 million.

Mr. McCormack said the $57.5 million is the current estimate of what the contract is for that particular project. So $57.5 million is the amount that we have in our preliminary budget for that contract to deliver that service. We've assigned a 4 percent risk factor to it at $2.3 million dollars.

Now, why that number? Basically that number is an estimate of what I consider to be a risk if we are not able to procure that contract, we're not able to amend -- agree to with First Transit on that contract. If we have to go back and re-procure, I'm saying there's a $2.3-million-dollar risk factor. And maybe that number is too low. I picked the number out based upon the fact that the Veolia competitive contract is higher than that. It's about $5 million dollars higher than --

Mr. Smith said let's get into the basis. We already have a contract that's a fixed price on that for those services. The $57.5 million is already under contract. But we're coming upon an extension or an option period. It's a very low -- if we wanted to reduce our risk, we would just continue on, and the cost would be pretty much null. That's why 4 is such a low risk. Because we have options that could eliminate or reduce those risks to anything.

If we wanted to choose to take a riskier route or if First Transit can't perform or comes up and says we don't want to perform, then we would go out and it would probably be -- it would probably cost us more to replicate those services. But given the current situation, we have options that we could actually reduce that risk very low and that's why it's given such a low risk to file.

You go around to the next one fuel, the price of fuel, totally out of our control. Very volatile, we're going pretty good right now with fuel the way it is, but who knows what might happen. And so that's why you see that as a much higher risk factor, because we can't control that.

We try to sign as long-term contracts as we possibly can. We try hedge. We do all sorts of things, but still, as you know, the fuel field market is very volatile, so that's a 33 percent risk factor, although the dollar amount is much lower, so the risk factor is higher, but the net impact financially on us is lower because it can move by a whole lot and those costs don't flow to the bottom line as much as the overall contract which includes maintenance and drivers and all the things that go on with having that First Transit. Is that a good explanation?

Mr. McCormack said yes, it is.

Councilmember Klapp said and you've never used this before, this is new?

Mr. McCormack said we're formalizing it here. This has always been going on in the background. But we've never really formalized the process of starting with what the dollar amount is that's in the base assumption, the baseline, and then assessing a factor to it based upon what's happening out in the market.

Mr. Smith said then usually reserves are sort of -- what do other people do. You look around, you look at other government agencies, and a lot of times it's just a what do we think we need.

I mean, if we're going to err, let's err on the side of caution. This is much more of an attempt to provide some objectivity to truly identify those areas of high risk, low risk, and then you reduce those to, okay, it may be a high risk, but what is the true impact on the financial side.

The idea is not only to identify high risk, but also to limit or better define that financial so we're not over reserving. You know, the two -- there's two worst things: under reserve, which is horrible; over reserve, which isn't horrible, but it's not good practice. You know, you don't want idle -- you don't want to go through and collect these assets and reserves if you're not going to use them. So we're trying to squeeze that down so that we're as efficient as possible.

Councilmember Hall said John, you have some here that are in the reserve amount and some are in the contingency.

Mr. McCormack said yes, and that's because on the revenue side, the way we cover the contingencies of revenue using those reserves that we rebuilt last time, so we build the cash reserves to cover those contingencies so they stay on the revenue side. So that's why they show up over on the reserve column. And there's various reserves. As you recall, there's the operating reserve, there's a capital reserve, there's a working capital reserve which is the larger mega project for rail that are out there when we're done. So, again, the largest impacts, the dollar amount impacts that have the greatest reserve amount are related to the timing of federal funds on those revenues on the revenue side.

Councilmember Hall said so we got enough experience just on this -- I'm just -- I'm not challenging your thought process, but I'm kind of thinking out loud. We have enough experience with current dial-a-ride transit passenger that is pretty low risk in terms of dropping off. So that's why the only 2 percent.

Mr. McCormack said we've already got a 5 percent growth factor built into the dial-a-ride baseline.

Mr. Smith said this is a risk factor as it relates to budget. So, as John said, it may be a more volatile, but if the question is have we budgeted to account for those known risks. And what we're saying is this if it deviates from our budgeted amount, then that's what this risk factor is trying to reserve for.

Mr. McCormack said so there's a 5 percent trip demand built into the baseline. You do see a line down here with a 25 percent increase and that's what the regional -- but with the regional trips, that's a new delivery, that's a new service delivery. So we added, you know, some additional risks to that, although this is another one that, you know, because you're not starting with a great big number to begin with, the contingency amount is relatively small at $330,000 there.

Mr. Smith said but once again, the $1.3 million is based on our best guesstimate, but

until we actually start the service, we don't know what the amount will be, and so that's why it's a higher risk factor. Because we budgeted what we believe, but we recognize that it might change. Whereas the other one, as you said, Councilmembers, much more known from actual experience.

Mr. McCormack said we will formalize the policy into a policy document. And then this not this exact exhibit, an exhibit like this, will be presented as part of every year's annual budget. And, you know, we start with our budget, we start with the working group, the financial working group, which our member cities are involved with that.

It will be an attachment in the documentation for the budget itself that will come up through the management committee and be part of our ultimate budget book when we're finished. So that's how I see it evolving, integrating into the annual budget.

Chair Williams said any questions, Jenn? Do you have any questions?

Councilmember Daniels said I do. I just have one question. If $3.68 million is our contingency, what is that as a percentage of the whole?

Mr. McCormack said I think we're at about $150 million. I'd have to check on where we're at for fiscal '17.

Councilmember Daniels said so we are worried about one and a half percent of contingency?

Mr. McCormack said it’s closer to $170 million. Yeah, so, you know, the number here is, one to one and a half percent, I'd say.

Councilmember Daniels said and there's comfort level with that from a budget perspective?

Mr. McCormack said well, there is from my experience here, because I will say that we have had a practice of being conservative in building our base budgets. And we have traditionally --

Councilmember Daniels said I thought we were doing zero-based budgeting; no?

Mr. McCormack said we do zero-based budgeting; however, when you build a zero- based budget you start from scratch. We ask that each and every element of the budget is prepared by the departments.

Councilmember Daniels said but I thought we never did a zero-based budget from scratch. I thought we used some -- the way it was explained to me, we've used some zero-based budgeting practices, but we've never actually done the full zero-based budget from the beginning where you scratch everything out and start over. We've utilized some of the practices, but we haven't actually done the full zero-based

budgeting.

Mr. McCormack said the way we build the budget is that every department starts with a blank slate. And they must build up their staffing plan, how that staffing plan is allocated to all their various project activities, what their contract expenses are going to be. I would say that if there's an area where departments rely on the prior year budget is that when you get to like office supplies and things like that, we don't require them to identify all the specific paper, pens, pencils, and that sort of thing. We don't get to that level.

But for all the major expenditures we require that the departments build those up to show what those actual expenses are and then -- and we roll those all up into, you know, the larger budget, and then we go back and we do an analysis of how that budget compared to last year, the prior year actuals, last year's budget, and we do analysis to look for items where there could be, I'll say, some an overly conservative in what the assessment is of what the cost will be.

Councilmember Daniels said but you've already built a contingency into individual departments.

Mr. McCormack said I will say that the departments by their very nature will not want to be over budget, because the penalty for being over budget is severe. So they tend to be conservative in their estimates of what they're going to spend.

Councilmember Daniels said so then that's not a true zero-based budget process. And I think that to me is probably part of the root of the problem. When you factor in some overages, you're not doing a true zero-based budget, because the thought process is that, in you are going to go over your budget, you have to come back to contingency and that's not a penalty. It should never be viewed as a penalty, if there was an unexpected expense or if there were something else that came forward that indicated that, you know, maybe they missed something in year one.

If we've been doing this -- how many years now, John, have we been doing zero-based budgeting in theory at Valley Metro?

Mr. McCormack said every year we've been doing this budget process on the integrated basis since 2012, and we utilize these techniques at Valley Metro Rail going all the way back to 2005 and six when I first arrived.

Councilmember Daniels said so you're saying that we've been a true zero-based budget practice since 2005?

Mr. McCormack said yes. I would say that we build the budget from the ground up with every line -- with all the line items being examined.

Councilmember Hall said and justified.

Mr. McCormack said and justified. That's correct. But I have -- I agree with you, Councilmember Daniels, that the department, if they're building contingency -- their own contingency in that that's -- and that consistently generates a favorable variance on actual costs, that that's something that we need to challenge. And so we've challenged the departments that at the end of the year we want them to come -- we want their actual cost to be between ninety-seven and a half percent and a hundred percent of what they budget.

So that's been our mantra to the departments. They traditionally have come in a little higher than that. Last year, the overall RPTA budget was about 5 percent --

Councilmember Daniels said how often do your individual departments come and ask for a contingency transfer for something unexpected? Or for something that they missed in their budget?

Mr. McCormack said I would say it happens a few times a year.

Councilmember Daniels said in every department or just overall from the organization?

Mr. McCormack said I would say it happens a few times a year for the whole organization, and you see a lot of those items in the mid-year budget adjustment, so when we bring the mid-year budget adjustment, which we just adopted, many of those are responses to changes that have happened, and we address those at that time.

Councilmember Daniels said so my thought process on it, John, is that I would rather see us have a higher contingency amount by percentage of the budget and lower individualized department budget so that there's a targeted goal that they're working towards as far as reducing internal costs.

There's obviously hard costs we want them to be able to meet and service that we want them to be able to provide, but to not having them -- to have them request contingency where needed without penalty without, you know, just simply from a learning perspective, because over time what you do is you shrink the need within the department and your contingency amount becomes true contingency, not a reserve fund as it appears that we're using it not, not necessarily an emergency fund, but rather that true contingency there's been a change, there's been a new need, there's been a, you know, an undocumented need, whatever that might be that you work sort of backwards from that.

So you are stretching the department rather than just saying, yeah, I get between 97.5 percent and a hundred percent of your actual goal or your actual allocated budget, you know, make them get to 95 percent of that. And if they have to come forward and ask for a contingency adjustment, then that's what they do. Mr. McCormack said I hear you, yes, and we would have to write some kind of a proposal as to how to do that and we can certainly look to do that.

Councilmember Daniels said I'm looking at it if there really is -- if there's a true contingency need less than one and a half percent probably doesn't cut it. Without our contingency. Is the contingency being used for what is defined as contingency?

Mr. Smith said yes, the contingency becomes the budget as opposed to it being a contingency.

Councilmember Daniels said right. Make it part of that.

Mr. Smith said if it's going to be a contingency or reserve, make it a contingency or a reserve.

Mr. McCormack said any other thoughts, follow-ups on the budget contingency?

Councilmember Orsborn said I just want it either way whether the contingency is in the budget and however we show that or if it's just contingency related to this. I think this is an excellent chart that brings some thoughtfulness down that we would hold them to.

Mr. Smith said so the nature of our business, if I could use that word, it's not unique but it's pretty established. We have routes we run. We have projects we know about. These projects are normally multi-year projects that we are scheduled out literally almost to the week due to the process and the law and the FTA.

And we have a history. We know before we start that if we run these routes on these schedules, we pretty much know, have a good idea of who's going to ride. And we should know what it will take to deliver the services to those people.

And so from that standpoint even in a zero-based budget as far as the direct cost of providing the services, those are pretty much knowable and we can know from experience.

So what we're trying to plan for is two things. Number one, can we be more efficient in our fixed cost and in our variable cost so that we get that down as low as possible. A lot of that we know because most of our service providers are on contract, on multi-year contract. And so -- and we built in very specific reasons why those cost can change.

So from a budget standpoint we really are operating on a three year almost rolling budget simply because of the nature of our business which is very highly dependent upon contract services and multi-year contract services.

But on the other hand, we have these things that we can't prepare for. We're down in ridership for example. Why, because gas is cheaper. Well that's a good thing and a bad thing. It's a good thing because we're saving money on fuel. It's a bad thing because people aren't as willing to get out of their car because they're saving money on fuel. That's something that you can only project so far.

And so the questions in our budgeting is how can we really plan for that risk of those things that aren't in the norm. And that's where I think we can do a better job. And actually, to get back to Councilmember Daniels part, is to start over every year and the departments will say, well, we start over every year. We pretty much know it's a zero- based, but on the other hand it's a zero base that reflects the known operations.

But unless we give them an incentive to be more efficient within their realm, of course they'll never do that. They'll create a budget that will match history as opposed to trying to change their operations to strive for efficiency. So we can do a better job of that.

But that's what's unique about this and our revenue flows and our cost is that they are -- they're pretty well known and are predictable given a normal environment. What we have to plan for is some of the abnormal while still creating the kind of efficiencies Councilmember Daniels talks about.

Councilmember Orsborn said this really shows maybe over that three- or five-year period, this is generally what we expect, but if we're looking at this every year and knowing that whatever the circumstances are for that year, we know fuel is going to go up this year and so we can tweak this a little bit to --

Mr. Smith said you're exactly right. This helps define for you and for the board what we predict our business environment will be.

Councilmember Orsborn said exactly. This is our set of assumptions. It's a good tool.

Mr. Smith said yeah, because, you know, we're 98 percent sure that this will happen. Oh, you but guess what -- or 97. Things, as we all know, things happen. We have these contingencies. We have these risks as long as we can help identify what those are, then the board -- we don't want any surprises.

And I think what Councilmember Daniels said is true. A contingency should truly be for unforeseen events. We should budget toward what we perceive as real risks and let the contingency handle things that we can't see happen.

6. Fiscal Year 2015 (FY15) Transit Performance Review

Mr. McCormack said this is the annual transit performance report. So every year we look -- we collect the information from all of the providers of services including City of Phoenix, City of Scottsdale operates some trolley bus, City of Glendale operates paratransit and Peoria as well, so these numbers are a collaboration of all of the operators in the region.

The system summary really talks about the main items within the report. And you see looking from left to right we have the fixed route bus, light rail, paratransit, vanpool, and a system total. Boardings in total were about 73 million last year. That was a decline of 1.8 percent from the prior year.

System Wide Summary

Performance % Change Indicator Fixed‐Route Light Rail Paratransit Vanpool System Total from FY14

Total Boardings 56,482,963 14,276,884 1,059,300 1,081,464 72,900,611 ‐1.8%

Percent of Total 77.5% 19.6% 1.4% 1.5% ‐‐‐ ‐‐‐ Boardings Vehicle Revenue 29,089,942 2,482,556 7,816,147 5,817,546 45,206,191 1.0% Miles Operating Cost Per $7.90 $12.60 $4.58 $0.58 $6.64 1.3% Revenue Mile Boardings Per 1.94 5.75 0.14 0.19 1.61 ‐2.8% Revenue Mile

Average Fare $0.83 $0.90 $2.62 $3.44 $0.91 0.3%

Farebox Recovery 20.5% 41.0% 7.7% 109.8% 22.1% ‐3.8%

Operating Cost Per $4.07 $2.19 $33.78 $3.13 $4.12 4.3% Boarding Subsidy Per $3.24 $1.29 $31.17 ‐$0.31 $3.21 5.4% Boarding

The next line shows you where those boardings are about 78 percent are in fixed route bus, almost 20 percent light rail, and 3 percent collectively between paratransit and vanpool.

The number of vehicle revenue miles that we operate increased this year by about 1 percent overall. The fixed route bus increased on those miles -- let me just get that here -- there's about 1 percent on the fixed route bus piece, which is the largest increase in vehicle revenue miles.

The next row there shows what our operating costs per vehicle revenue mile are, so without respect to ridership, our cost per miles delivered across the board increased in a total of by 1.3 percent. The largest driver there was on the bus side which increased about 3 percent, 3.2 percent.

The next row is really efficiency: How many boardings per vehicle revenue mile. And this is where we're hurt. The numbers where we're hurt by declining ridership because we increased revenue miles that we put out and yet the ridership was down. So our boardings per revenue mile overall declined by 2.8 percent.

Average fares, you can see that across the board for the various segments increased slightly by three-tenths of a percent.

Our farebox recovery for fixed route bus was 20.5 percent. Light rail was 41 percent.

And you can see the others out there.

The vanpool program generates more operating revenue than its cost, so that's why it's a positive 109 percent.

Councilmember Hall said I thought we charged $2 per trip. So why is our average fare on both the bus and rail with that less than $2? Maybe you could just explain that a little bit.

Mr. McCormack said there are fare products that are discounts from the single-ride fare. So we have the all-day pass, and we're going to be talking to you later about our fare structure, not today, but within coming months, so we have an all-day pass where people buy the all-day pass and they can take numerous rides.

Mr. Smith said and so the all-day pass -- and this is just an example what I wanted to look at is why we're looking at that. An all-day pass is $4, let's say, for bus. That would be two one-way fares. The average rides on that all-day pass 3.8. So you can see that what they're paying for would be the equivalent on at par of two one-way trips.

But people are taking almost four one-way trips. And that's why you'll see the average fare driven down below that at par rate of $2 per trip.

Mr. McCormack said that's part one. And then the other part is that we have reduced fare program.

Mr. Smith said yes, reduced fare and discounts, which are not at the $2. So the combination of all those activities actually bring our fare down on a per-trip basis to much lower because I get this question: You charge $2 a trip. Well, you know, how in the world are you not getting average fare. Well, it's a combination of all of the above.

And when -- which is one reason John's group is looking at changes, because we believe that there are some inequities or some adjustments that need to be made in our fare strategy. There's no doubt if you are charging the same on an all-day, which is the focus of what he'll report to you on, and you're getting almost four trips out of it and yet you're only charging, there's probably some discussion needs to be had is that a fair fare. Is that a legitimate fare?

So that's what we'll be -- that's the things that we're looking at to try and drive this average fare up without really increasing price, but to get a better balance between actual usage and what we're charging for that usage. So that's part of the study that we're -- or the discussion that John's having in the Fare policy working group.

The next line is the operating cost per boarding, which is total operating cost for each of those modes divided by the number of passenger boardings. For the fixed route bus, it was $4.07. For light rail it was $2.19. On a systemwide level that went up by about 4.3 percent. And the subsidy per boarding is the operating cost per boarding less the fare

that's collected, so it's the really the amount that all other funding sources other than the fare paid for per boarding.

Mr. Smith said and in overall discussions of transit, this is always a hot topic bus versus light rail, which it shouldn't be. But you can see how some of these are skewed. For example, the operating cost per revenue mile is much higher for light rail, which is what normally opponents of light rail will point out. Look how much more it costs to operate.

And then you look at the revenue boardings -- their boardings per revenue mile and it's not even close, which brings your average operating cost per boarding to almost half for light rail as what it is for bus.

So the only reason I bring that up is not to argue one against the other because we do both. But on the bus side and that you'll hear as you go out, as I always heard, the argument, which is usually cherry picking of data, and this is to give you some understanding. I found this fascinating because these are real numbers as far as what it actually costs to produce the kind of delivery -- service delivery that we have.

Mr. McCormack said then there's a whole series of metrics that we have where we're showing the farebox recovery for example, and we show the peer cities, they are the -- predominantly the southwest regions such as Dallas, Houston, Denver, Salt Lake, San Diego. I have a table that, here's the bus system peer comparison we can kind of take a look at that.

Bus System Peer Comparison FY15 Salt Lake Valley Metro Dallas Denver Houston Sacramento San Diego Peer Average 2013 NTD City Region Passenger Trips (millions) 37.9 76.3 60.8 13.8 18.9 51.6 43.2 56.5

Fare Revenue (millions) $37.1 $66.2 $34.1 $15.0 $19.9 $51.8 $37.4 $47.0

Total Ops Cost (millions) $248.8 $313.1 $304.9 $73.8 $107.3 $143.0 $198.5 $229.8

Vehicle Revenue Miles (millions) 27.3 35.5 33.2 5.9 14.7 16.1 22.1 29.1

Operating Cost per Boarding $6.56 $4.10 $5.02 $5.35 $5.68 $2.77 $4.59 $4.07

Average Fare $0.98 $0.87 $0.56 $1.09 $1.05 $1.00 $0.86 $0.83

Average Subsidy per Boarding $5.58 $3.23 $4.46 $4.26 $4.63 $1.77 $3.73 $3.24

Fare Recovery 15% 21% 11% 20% 19% 36% 18.8% 20% Boardings per VRM 1.39 2.15 1.83 2.34 1.28 3.21 1.95 1.94

So on the bus system -- and I'll preface this by saying that the data that we have here is based upon the National Transit Database.

Mr. Smith said as you can see, and I think what John's getting at is you can see that, you know, there's no way you have a pure apple to apples thing, but it's pretty close. It's the best we have.

Because system's are unique and they have unique layouts, unique considerations, but I think by any measure we stack up very well when it comes to our operating data. You

know, we are more expensive than some, but less expensive and more efficient than most. And that's where we want to be.

When we talked about multi-efficiency of our system, the cost of our system, and the success, there's no doubt we have some room to grow and some places we can be better, but, you know, I'd much rather be operating from this position where we know we're doing a pretty good job already. We can do a better job than if you were on the high end and you were looking at massive cost and low ridership than most successes, and I just don't think that that's where we -- what this data shows you.

Mr. McCormack said the other thing about this chart is that we're comparing the data from 2013 for the peers to our fiscal '15, so I'm going to create for the board, and we'll get this out to you, another column that will show what our FY13 numbers were to provide you with, you know, a direct year-to-year comparison, because those cities could have changes from '13 to '15. They could have some greater ridership. They could have some greater costs.

And so our numbers are really somewhat conservative compared to the peers because we're two years behind those. So I will get that for the board and we'll get that out to you so you can see what the '13-to-'13 comparison was.

Councilmember Hall said if you take Houston out of that as far as the average fare, just take Houston out, it looks like we've got more room for fare increases.

Mr. Smith said and that's one reason why John's looking at -- and I'll just without getting into the details, because we'll have a much more detailed report. We've noticed that people sort of figure out the fare structure.

And for example, one of the shocking bits of information that I saw is that it's cheaper to buy daily passes every day than to buy a monthly pass by a long way. When you look at actual usage and you look at the cost and that shows you that, one, that's it out of whack.

And on the low side. And don't think that our riders aren't perceptive enough to figure out that. And we've seen a migration. We've actually seen growth in our daily pass sales, which we'd like to believe that, gee, we're having more people ride more, but that is part of it. But the most thing is people have done the simple math and they've recognized that that's a great value. It's almost too good of a value.

So that's what John's group is working on is looking at all the different fares which have not been increased since March of '13, so three years. And we're not looking at it across the board, one, but we're looking at that very thing because we think that we're underpricing some of our services and it's purely a pricing strategy.

And I think the draft I've seen, the initial discussions are very, very positive in reconciling that. I don't think it will change rider habits very much. It will just make the fare paying

more honest.

Mr. McCormack said so I don't know if you, observing the bus system, if you had any questions on that, the numbers that I kind of highlight are operating cost per boarding and we are favorable to the average there at $4.07 versus $4.59. And our subsidy per boarding $3.24 versus $3.73.

Mr. Smith said and if you look on, you have the graphs there. If you look at the year over year, I think you'll see the cost considerations revenue sort of near what we've been talking about from '13 to '15, that is our data. So really good graphs that show you peer on the far left and then our three-year schedule. Once again, remembering that the peer is up 2013.

Mr. McCormack said yeah, I mean, actually these details show that comparison to the year over year, so when you look at the bus side of the operating cost per boarding, the peer group in 2013 was $4.59. At that point we were at $3.85. Now we've moved up from $3.85 to $4.07 over the next three years.

Mr. McCormack said the next slide is just the -- it's the rail piece. And in terms of the rail peers, we include Sacramento in this group because they have light rail and fixed route bus, so you have the six cities there.

Light Rail System Peer Comparison FY15 Salt Lake Valley Metro Dallas Denver Houston Sacramento San Diego Peer Average 2013 NTD City Rail No. Directional Route Miles 171.4 94.2 16.5 76.1 97.1 108.4 94.0 39.2 Passenger Trips (millions) 29.5 23.8 11.3 13.5 19.0 29.7 21.1 14.3 Fare Revenue (millions) $20.4 $49.4 $4.5 $14.7 $19.0 $35.6 $23.9 $12.8 Total Ops Cost (millions) $151.0 $87.1 $18.4 $50.0 $45.5 $66.4 $69.7 $31.3

Vehicle Revenue Miles (millions) 9.1 10.2 1.0 3.9 6.6 7.8 6.4 2.5 Operating Cost per boarding 5.12 3.67 1.62 3.70 2.39 2.23 3.30 2.19 Average Fare $0.69 $2.08 $0.40 $1.09 $1.00 $1.20 $1.13 $0.90 Average Subsidy per boarding $4.43 $1.59 $1.23 $2.61 $1.39 $1.04 $2.17 $1.29 Fare Recovery 14% 57% 24% 29% 42% 54% 34% 41% Boardings per VRM 3.23 2.33 11.44 3.45 2.87 3.83 3.29 5.68 Our operating cost per boarding was $2.19. The peer average is 3.30. When you look at the specific cities, you have some outliers Dallas is fairly quite high at $5.

You have Houston at $1.62, which is very low. And one of the reasons for that is that Houston has a short track and a lot of boardings. You look at their boardings per vehicle revenue mile for Houston, it's $11.44. So that's due to a very short alignment that's very dense and very well utilized, that drives down their operating cost per boarding.

And traditionally what happens is that as the light rail is expanded out into less dense regions, you will have lower boardings per vehicle revenue mile. That's a natural.

You're going to have that. So our numbers are probably as good as they're going to get.

As we continue to expand our system, we're going to move more like some of the other more mature systems in terms of boardings per vehicle revenue mile and cost per boarding and subsidy per boarding.

Councilmember Hall said Salt Lake City is dense and look at their boardings per revenue mile.

Mr. Smith said Salt Lake City has a very unique light rail and it's been incredibly successful there. Yeah, and while Salt Lake City is not dense, they definitely have because the way the Salt Lake Valley has grown where it's vertical.

There are the mountains on both sides, and also you have very established population centers and a downtown that is much more of a destination for the entire area than the Phoenix downtown area. As you know, everything evolves around Temple Square. In downtown Salt Lake, and the University is not far from there.

So, you know, that's why it's hard to do apples to apples for these systems. Just geographically it's a different set up much more amenable to light rail travel. And the other reason why that is, is because they are vertical --

Councilmember Hall said does it go all the way to Provo?

Mr. Smith said light rail doesn't. They have commuter rail that goes to Provo. Light rail goes to the point of the mountain to Draper and goes out more. But the other thing, too, is that that means the highway corridor is much more restricted. You got I-15 going north south and it's real tough other than that to go north south in the Salt Lake Valley, which means it's a lot -- which means that the option to get onto light rail to do that same thing much more quickly is different than it is in Phoenix where you have a central city with multiple things coming in, multiple spokes coming.

Councilmember Klapp said has Dallas always been the highest? Is that -- I mean, I find it kind of remarkable that Dallas would be subsidizing more than the rest knowing Dallas. Is that the way they've always operated their bus and light rail?

Mr. McCormack said since I've been watching it for the last three, four years they have - - I would say that they have probably in their cost structure they probably have a greater element of safety and security. I think they have their own embedded police in their system, so --

Councilmember Klapp said why?

Mr. McCormack said why they would do that, because either they ran into security problems or they felt that they needed their own transit police force.

Mr. Smith said I think it is the number of cities they cross, too, the jurisdictions. They're probably Dallas is at least probably a three to four county minimum - if not more, five county. I don't know how many cities and jurisdictions it crosses. Our light rail goes through three jurisdictions. And with the East Valley on the light rail we really divide it between Mesa, Tempe, and Phoenix. It's a much different issue.

If our light rail covered as many jurisdictions as bus does and since it's a different animal, my guess is we'd be having different discussions on security then simply because at some point in time it becomes unyielding to try to coordinate fifteen police departments and the sheriff's department. And I think that's what Dallas ran into.

Mr. McCormack said when you look at just the top two lines there, it got 171 directional route miles and their passenger trips are 29.5 million. You know, we've got 39 directional route miles and 14 million in passenger boardings, so we have a very good utilization of boardings per revenue mile, 5.68 versus Dallas 3.23. And that, you know, as the system grows out, it's -- you're not going to get as strong of a vehicle revenue mile boarding as you do with a smaller system.

Mr. Smith said in places like Denver and Salt Lake also their light rail becomes almost heavy rail as it gets out of the city center, because it gets out into rail corridors along freeways and you'll stations only every two miles and they're connected to the park-and- rides or a TOD or something like that. And that happens in both those cities that I'm familiar with.

I mean, you get right outside of downtown Denver, for example, and it gets on I-25 and it runs along the interstate for probably three-fourths of the distance. And it ends up clear out in Littleton and things like that, but that's all railway. And in Utah they were fortunate that they had both Burlington Northern or Union Pacific and Southern Pacific lines because it was the place where rail -- they have a lot of railway right-of-way and excess right-of-way with all the consolidation, so they have places they could put their light rail that goes between all these cities and the copper mines, and so that's what they did.

So you get outside of downtown Salt Lake and all of a sudden it's out of the street and it's into a dedicated right-of-way. Which stretches the system but also makes it a point to point to point to point as opposed to ours which is intersection to intersection. Different way in operating.

Mr. McCormack said the next one is the paratransit. So when you look at the peers here: Dallas, Denver, Houston, Seattle, Salt Lake, and San Diego, the average trip length is about 8 miles per trip. We are at about 7 miles per trip.

Paratransit System Peer Comparison FY15 Salt Lake Valley Metro Dallas Denver Houston Seattle San Diego Peer Average 2013 NTD City Region Average trip length # miles 8.12 8.16 9.75 8.77 7.65 6.44 8.15 7.38 Passenger Trips (millions) 0.5 1.2 1.6 1.1 0.4 0.5 0.9 1.1 Fare Revenue (millions) $1.3 $2.5 $1.3 $0.8 $1.5 $2.0 $1.6 $2.8 Total Ops Cost (millions) $21.0 $46.9 $42.4 $61.4 $19.2 $14.5 $34.2 $35.8 Vehicle Revenue Miles (millions) 4.2 10.0 15.3 9.7 2.9 3.3 7.6 7.8 Total Ops Cost/VRMile $4.99 $4.68 $2.77 $6.35 $6.54 $4.41 $4.96 $4.58 Operating Cost per boarding $40.51 $38.15 $27.06 $55.67 $50.00 $28.38 $38.66 $33.78 Average Fare $2.59 $2.02 $0.86 $0.68 $3.85 $3.93 $1.77 $2.62 Average Subsidy per boarding $37.92 $36.13 $26.20 $54.99 $46.16 $24.45 $36.89 $31.17 Trips per VRM 0.12 0.12 0.10 0.11 0.13 0.16 0.12 0.14

Operating cost per boarding for the peers was about $39 and we are about $34. And subsidy per boarding $37 for the peers and we're at $31. That basically concludes the presentation.

Councilmember Hall said does the newspaper ever ask for this?

Mr. Smith said this truly is information in good news, a good news program. Mr. Smith said that is not widely known. And I think there's especially some of this data as it relates to peer to peer. Like I said, in every one of those issues I'm proud of the way we stack up. And I get it that there are explanations, but I think there's -- it would be hard to argue, especially since we were looking at 2013 versus '15 data. Which as John said is even more skewed toward our benefit, which means the differences are probably much better now to our benefit.

But I think there's certainly a great story that is not being told. And shame on us for not -- really. They're not going to come looking for those stories, so Hillary and I have already started a program or starting to put together a program where we can reach out and we can create some of these informational. And it's in the early stages. We're trying to decide exactly how to best accomplish that.

So, you know, as my father used to always say he was a school superintendent for many years and he had a mentor that said from his days at Stanford as a grad student, said, George, nobody will ever come and shout your good news. They'll always -- they'll be more than happy to tell the world what you're doing wrong. Nobody is going tell the world what you're doing right, so you better -- you better learn early on you got to do your own work and don't ever apologize for it. We're going to start tooting our own horn.

Because we got a good story to tell. And we don't even have to embellish it. That's the great thing. If we just lay the data out there and tell people what's going on it's a good story. Now whether they decide to share that story with their readers or viewers or whatever, you know, that's another story. But I think if we couch it the right way, if we deliver it the right way, that's what we're working on. It's an interesting story and it's

great story, so we're going to do the best we can to get it out there.

Councilmember Orsborn said I think that's a great idea because the numbers are, just like you said, you know, they tell the story themselves. Good, honest for trying to get that stuff out. I think the other thing that really helps us is driving ridership, because it makes all of those numbers look so much better.

And I know that's probably not a Budget And Finance Subcommittee topic, but the idea of getting the message out not only about how well it works, but versus our peers but the financial aspects of it as a rider and then maybe of some of those rider's stories so that people -- I mean, in fact, I talked to somebody yesterday who they live in the community of Verrado in Buckeye and they commute to Tempe for a one of the buildings right along the town lake, and I said, hey, have you considered taking the fixed or the EXPRESS bus in to central station and hop on light rail and take it all the way into Tempe. And then you're walking to work I never thought about that. I could -- because I spend an hour and a half in the car as it is right now.

That's probably an hour, an hour, I don't know, an hour and a half trip, I'm guessing, to get to that location. So maybe it's telling some of those stories which will drive ridership which will make those numbers look so much better. And then when you get out to those far reaches we don't have to say that this is probably the best it's going to get. We're driving and telling that story and creating a market for transit.

Mr. Smith said the one thing that surprises me, to continue, what Eric was saying was that there's some huge numbers. I, you know, when I got here, I have to admit I didn't know the numbers of ridership. When you start throwing out numbers like 56 million, 14 plus million on light rail, so, you know, 72 plus -- almost 73 million total, those are numbers that catch people's attention. There's two things that are going on here. First of all, they may not know they can do that. Secondly, is that they don't realize that this isn't a solo trip. That they're going to have a lot of people they can share this experience with.

And when you start saying we had 56 million riders last year. Do you realize that? People going what. That's a number that boggles. We're almost 15 million on light rail. That's a number that boggles people. It catches them off guard. Really. 15 million. That's a lot. That's a big number.

And it also gets away from one of the big arguments that, you know, every time I see a bus it's empty. Well, then you ask, when do you really see a bus. Well, you know, I'm going to the grocery store with my family at 7:30 at night, you know, and I look at a local bus --

Councilmember Hall said they just delivered a bus full of people.

Mr. Smith said and I just answer this, I said, you know what, and I agree with you. I was driving the freeway the other day, there wasn't five cars on the freeway. What, what

time do you drive, oh, 2:00 in the morning. Any mode of transportation if you pick the time you can find the glass half full and the glass half empty.

But this data is good stuff and we're going to help the board to also share this story, because when they want -- when the papers want to talk to you, you know, they'll talk to us, but, you know, we're inside guys.

The board has a lot greater impact because you're elected officials, you're the direct connection, and we're going to give you more ammo and more information to work with, too, because it's a good story. And it's a story that most people really don't realize is out there.

Councilmember Klapp said I think you put it in very simple terms. Give me five numbers and I can remember.

Mr. Smith said as we talk about it, I said, you know the great thing is, you know, we looked at our peer cities people love to be better than their peer cities. There's always this competition. You know what amazed me, is that you look at all -- you guys have all traveled around, people have gone to San Diego they see the trolley, they've gone to Salt Lake, they've gone to -- and seen TRAX and the T-REX in Denver, or DART in Dallas, you know, they all have seen those things. Do you realize how much more efficient -- do you realize we do things for 20 percent less and this and this and this. That's all you need to know. And they're going, wow. See that's a point of pride as opposed to us showing up as an albatross which is what a lot of people believe.

And one thing we've been doing and starting to do is recognize that we -- we're a service organization that has several different customer constituents. And one thing we forget is that one of our biggest constituency that we don't realize are the 90 percent of the people in this valley don't -- they don't get on to public transit, but guess what they do? They're the ones that vote to approve the 104 and the Prop 400. And we vote on the Prop 500, and we need to remember that every day we're in a mod election.

Every day we have to sell the value of our system to those people who have not yet chosen to use the system and that's part of the communication strategy is to get them comfortable with the successes of our system and to help you so that when we have to go and ask them formally like Phoenix just did and like the region will do -- have to do in the next few years, it's not an education program from day one, that we've prepped them and it's simply an extension of what we've been talking about. That's the fun. That's the fun part when you get that level.

Councilmember Hall said that would be 200,000 people a day ride the bus.

Mr. Smith said it's amazing. It was a lot bigger number than I imagined. That is Valley Metro and City of Phoenix.

Mr. McCormack said we measure our weekday ridership, Saturday ridership, Sunday

holiday ridership, and we tend to focus on the weekday ridership.

Councilmember Orsborn said if I can add one more thing. In the chart that you show, does it make sense to add in a comparative city that it -- where we want to go. And so, in other words, those are folks that generally have the same -- more or less the same miles, the same riders, and we're comparing here's where we're at compared to everybody that's sort of like us, but our step up or what we want to become is more a -- METRO in DC or --

Mr. Smith said it's a little harder because you go from light rail to heavy rail. Completely different world. I mean, the whole cost structure, the whole -- I mean, even the regulatory is very different when you move out of light rail.

Councilmember Hall said that Washington -- or that Boston to Washington actually makes money, doesn't it?

Mr. Smith said I think it's about the only one that does. And so -- and just --

Councilmember Orsborn said just the light rail or the bus, the transit side of it, if we had somebody who's our -- kind of our --

Mr. Smith said our aspiration. We can do that. We can do that. And we'll do our best, once again, arm you with information that you need and also --

Councilmember Hall said well, it looks like we're getting to be like San Diego, John.

Mr. Smith said San Diego is a good example. Here was a city that everyone said the trolley was a gimmick. It was purely a touristy type thing, I mean, even though the trolley and how they designed it. I didn't know nobody believes that. Nobody thinks that any more. The bus system and everything. And San Diego has gone through some pretty rough -- San Diego County has some pretty rough things of transit.

You know, they were forced by the state and the feds to changes, but the fact is that it's an accepted mode of transportation in a western city that you wouldn't expect has been very successful.

7. Guidelines for Installation of Remote Ticket Vending Machines (TVM)

Mr. McCormack said we started with ticket vending machines when we brought light rail on. And a remote ticket vending machine would be one that's placed away from the light rail line in its own remote location. Phoenix and Glendale have asked us to look at locating them at some transit centers. We did not have any facility guidelines to determine, you know, that we should do that. So some of these guidelines are included in this presentation.

We did set a precedent in 2011. We installed some remote 20 units out on Arizona

Avenue and a couple on Mesa Drive out in the East Valley. And we connected those to our system via the city fiber lines so they're secure.

So the next slide, this kind of just shows you how those twenty units progressed when they first came in. It just shows you that the sales took a while to develop and they've kind of leveled off now at about $50,000 a month in total for the 20 units.

I point of this slide is a couple things, first, of those sales about half of it are in cash. You see down at the bottom 28,000. This is just a snapshot of March 2015. And the other half are in credit and debit sales, so how people are buying their fares.

And the other thing I'd take away from this is that the best performing units, the top four, actually sold 40 percent of the total there, so having those fare -- are the ticket vending machines located in a spot that has higher ridership, it means it's going to generate more sales, obviously, and that's -- as we'll see in the next slide -- very important for the efficiency of that unit to make sales versus its cost.

So this is the slide that shows us how the -- we have 117 units overall. They generated $9.4 million in sales. Of that 97, were rail generated $8.8 million, 20 of them were the remote TVMs generating $600,000.

If you look down to the annual cost per transaction, it was overall 52 cents. The cost of

the ticket vending machine was 52 cents per every transaction. On the rail side it was 47 cents, and on the LINK side it was a $1.76.

So the cost, you know, when you don't have the volume of sales, the cost per transaction is very high. And the cost as a percentage of sales dollars generated you can see for overall it's 14 percent, so that is 14 percent of the revenue that you get is consumed in the ticket vending machine, just maintaining it.

On the rail side of it's 13 percent. On the LINK side it's 30 percent. So it's an expensive vehicle to distribute transit passes, you know, as a percentage. Next slide.

Councilmember Hall said John, what do these machines look like? And can you -- can more than one person access a transaction at once? Do they have to stand in line?

Mr. McCormack said they look like just what you see down on a rail platform. They are five, six feet high. One person can use it at a time. It takes approximately, you know, people that use them on a regular basis, if they're actually buying fare with a credit card or with cash, it takes them about 30 seconds, you know, once they know what buttons to push, they're fairly quick at making their purchases.

Councilmember Klapp said is there the ability to buy a ticket electronically? Without going to a TVM? Because that to me would be the way to go, use the Uber model. Being able to just hit your app and pay for your ticket and get on the bus or the train or whatever it is.

Mr. McCormack said currently, no.

Mr. Smith said that's is the challenge that we have is that we're dealing -- and the decision point for the cities is do we spend more money on existing technology that we know is not the technology of the future, but it's what we have. And so we realize that even on light rail these boxes are 10 years old. So how do we move forward with the new technology, which we will do.

Councilmember Klapp said how far away are we from the possibility of having electronic access? Two years? A year?

Mr. McCormack said yes, I would say a year and a half two years is where we're looking. And we're going to have a presentation --

Councilmember Klapp said so we've got to get through the next two years of trying to serve the public.

Mr. Smith said and do we want to make a big investment now knowing that within the next two to three years we're going to be moving to this technology. But we're not going to move totally to it. Because, once again, we represent a diverse constituency.

Councilmember Klapp said in busy areas I can see the return on in investment, but not in these remote areas. I mean, why would you eat up your 30 percent of your revenue in a machine?

Mr. McCormack said I'll give you an example where it may make sense. If you have a transit center and you have member city staff that park behind a window selling fare media, and that is a cost that you're bearing, the putting the machines in lieu of those individuals may make sense -- that's an example of where it makes sense to use the technology as a cost savings. So that's one of the reasons to do this.

Mr. Smith said and long term we'll develop both the ability to do -- it will be like the airport. You have people show up like I love to show up like this. You have people who still have paper. And that's what you'll have. You'll have the different -- because we do have a segment of our constituency that don't do that. MS.

Councilmember Klapp said but you said 50 percent are paying cash so. But I would bet that there are a lot of people who would ride if you had the ability to go on your phone and buy a ticket. And not have to go find a place to buy a ticket.

Mr. Smith said exactly. And that is the ultimate when we talk about aspiration, that's where we want to be. I'd like to be to where -- and I know staff is getting tired of hearing this story -- but I was interested during the Super Bowl that the San Jose transit both for bus and for light rail, in order to ensure the people who were going to the game had a seat, they've developed their system to where if you wanted a bus seat or a seat on light rail you had to -- you went on your smart phone, reserved a seat, paid for it, and got your ticket right here. There were no paper involved at all.

Now I'm sure they don't do that on a daily basis, but for this event they had the ability to make it completely paperless and completely on a smart phone. You know, that's where we want to go is where we have that ability -- that we have those capabilities. But that's two or three years away.

Councilmember Klapp said have we started it? Have we started discussing with anyone how we would do it? Would it be an app on a phone, perhaps?

Mr. McCormack said yes.

Councilmember Klapp said so we'd have to have somebody develop an app and the cost and you have to tie all your stuff to the app.

Mr. Smith said yes, that's probably the easy part. That's where the real cost comes. And then, of course, now you're looking at hardware once again, because even though you have this, since the buses we have controlled access, fare access, but on light rail we don't. We have open platforms.

So the question is how do you -- what technology are you going to bring in to where

now you have bar code scanners and those kind of things where you can validate a ticket and what that is.

And that's going to be a major investment, especially if you also want to start adding that on buses. That's a huge investment. And we know we're going to make that investment. It's just a matter of how do you bring it in and how do you best do it.

Councilmember Klapp said you're right, we've got to decide how much money we want to invest now because the short term --

Mr. Smith said and the cities are for the most part covering the cost of this, so this is informational because Glendale and Phoenix are the ones that want these and they've talked about making the capital investment in these.

Mr. McCormack said the application process will be basically that the city just comes to us who want to identify a location and, you know, we want to know what the benefit is going to be in and about that. We'll work with the cities to review the location, get the construction and operating details together.

So the process will be basically that the city just comes to us who want to identify a location and, you know, we want to know what the benefit is going to be in and about that. We'll work with the cities to review the location, get the construction and operating details together.

Some of the guidelines is that we need a secure location, we need to have the CCTV surveillance so that we can keep our eyes on the equipment. We want that location to have high daily sales potential. And the distance from a retail fare outlet is important because the opportunity for someone to just go across the street to Circle K and they can buy their fare media there, then it makes the need for that device not as great. So we were looking at a distance, you know, we want the fare outlets to be like more than a quarter of a mile away; otherwise, it doesn't make quite as much sense. These, again, are the guidelines.

And the other thing is we wanted to put two TVMs at each location just to have the redundancy so that if one machine went down, you had another machine there to fill and take care of it.

The -- will the TVM offset and reduce fare distribution costs. That's what I was talking about before, where you could have someone behind the glass selling, and this would make a lot of sense, so that's certainly a positive criteria for cost considerations. There would be an intergovernmental agreement. As Scott mentioned, the plan is that the operating and capital cost would be paid for by the member agency.

And next steps, basically we're going to continue this briefing through the board process. We really have consensus at this point that we have these guidelines in place and application, and then we'll begin the process of executing IGAs where it makes sense for the member city to put these units in place.

Chair Williams said are there any additional questions for John?

Councilmember Klapp said thank you, John.

8. Future Agenda Items Requests

Chair William said are there any additional future agenda items?

Mr. McCormack said I would like to suggest that we meet again in March, which would be March the 10th, because we have an opportunity to refund some of our 2009 bonds.

There's the market right now the interest rates are very favorable for us substituting and buying out some of that more expensive debt that we have. And so we would like to bring to the board the resolution to issue about $50 million dollars of refunding bonds and we want to accelerate that process.

So I'm hoping that we could bring that to this committee next month in March and then follow along with the board with the idea that by end of April we would be able to execute the transaction and refund some of these bonds.

Mr. Smith said and if you'd like, since it will be a single item we can do over the phone if we need to. We'll send you out the packet and we can answer any questions. Because this is a big item, we're talking a couple million plus dollars in potential savings. Chair Williams said our next meeting March 10th via phone. And then the regular meeting will be April 14th. Hearing nothing else, we are adjourned.

With no further discussion the meeting adjourned at 1:36 p.m.

DATE AGENDA ITEM 3 March 4, 2016

SUBJECT Refunding Bond Issuance Authorization – Third Supplemental Resolution

PURPOSE To request authorization for the issuance of tax-exempt, senior lien refunding bonds in Fiscal Year 2016. This authorization action is the Third Supplemental Resolution in accordance with Master Resolution adopted by the Board in 2009.

BACKGROUND/DISCUSSION/CONSIDERATION RPTA has the statutory authority to issue revenue bonds to support the capital projects in the Transit Life Cycle Program (TLCP). RPTA has previously issued bonds in 2009 and 2014.

The 2009 series bonds were issued with a True Interest Cost of 3.97%. For the past few years, staff has been regularly analyzing the potential of advance refunding the 2009 bonds given lower interest rates paid for new issues of municipal bonds. Previous analyses have shown that savings to be realized were limited primarily because the 2009 bonds are callable on July 1, 2019 and the interest rate spread was insufficient to cover the long period from date of refunding to date of first call redemption. Recently the interest rates have dropped to the extent that refunding select bonds from the 2009 series today will generate a potential savings over the remaining 9 years of the debt service repayment period.

The 2014 series bonds were issued with a True Interest Cost of 2.38%. The bonds are callable on July 1, 2024, with final maturities on July 1, 2025. There are currently no savings resulting from any advance refunding for the 2014 Series Bonds.

The bonds authorized through this Third Supplemental Resolution are in accordance with the Board adopted Master Resolution. The 2009 bonds were originally issued as tax-exempt municipal and taxable Build America Bonds (BAB); the 2016 refunding bonds will be issued as all tax-exempt, senior lien bonds. This Third Supplemental Resolution was developed by the agency’s Bond Counsel, Squire Patton Boggs, in association with the agency’s Financial Advisor, RBC Capital Markets.

The Third Supplemental Resolution authorizes the issuance of Senior Lien Bonds in an amount necessary to refund the Series 2009A tax-exempt bonds, currently estimated to be $22,845,000 par value. The par value of the issuance may change based on market conditions at the time of sale and will be in an amount sufficient to refund the Series 2009A bonds identified.

The bond issuance is currently envisioned to have coupon rates of 4 percent and 5 percent, depending on the maturity; and sold at a premium, with the True Interest Cost

VALLEY METRO • 101 N 1ST AVE • STE 1300 • PHOENIX AZ • 85003 • 602-262-7433

(TIC) currently estimated to be around 1.7%. The estimated savings based on the current market conditions is $1.3 million. The agency is rated by Standard & Poor at AA+ and by Fitch at AA.

Following are the highlights of the Third Supplemental Resolution:  Authorizes the issuance of the 2016 Refunding Bonds and delegates to the CEO and CFO of RPTA the authority to negotiate the sale of the 2016 Refunding Bonds, for not less than 99 percent of par value, to a group of underwriters to be selected by the RPTA’s CEO and CFO, with concurrence of the RPTA Board Treasurer, from among the pool of underwriters which has previously been qualified by the State of Arizona for its financings.

 Specifies limits or parameters on the financial terms of the 2016 Refunding Bonds, including; aggregate principal in an amount necessary to refund the Series 2009A Bonds; yields not to exceed six percent as computed for arbitrage purposes; and final maturity date not to exceed July 1, 2025

 Refunding Series 2009A bonds will be conducted through an escrow agent.  RPTA’s CEO and CFO, with concurrence of the RPTA Board Treasurer, are also authorized to: o Prepare a Preliminary Official Statement and a Final Official Statement describing the 2016 Refunding Bonds and their security for distribution by the Underwriters to prospective purchasers of the 2016 Refunding Bonds; o Negotiate the form of a Bond Purchase Agreement with the Underwriters; o Designate a Bond Registrar and Paying Agent for the 2016 Refunding Bonds; and o Enter into other customary financing documents

 Contains covenants of RPTA to take all actions necessary to maintain the tax- exempt status of the 2016 Refunding Bonds including entering into a Tax Certificate and Agreement prepared by Bond Counsel

 Authorizes RPTA to spend proceeds of 2016 Refunding Bonds for the sole purpose of refunding the 2009A series maturities listed

 Authorizes RPTA to take all actions necessary to comply with Bond Resolutions and other bond documents

The underwriters will be selected from the pool of underwriters on the state contract. The Financial Advisor (RBC Capital) may conduct a bid process for all qualified underwriters and invite them to describe why they should manage the sale of the agency’s bonds, what their marketing strategies will be and to identify their key

contacts. RPTA, along with the Financial Advisor, will select the underwriters that best fit the agency’s needs. The underwriters are compensated based on the price per $1,000 bond, and the compensation will be paid by the Trustee from bond proceeds.

Given potential uncertainties in the bond markets due to quickly-changing fixed income and equity investment pricing, selecting a collection of qualified underwriters and working closely with them to determine the preferred timing and structure for the issue to maximize investor interest is our preferred approach. Accordingly, RPTA is proposing to sell the bonds through a negotiated sale primarily for market timing flexibility in seeking the best possible price. This strategy is preferred over a competitive sale arrangement which would be less flexible concerning timing and structuring issues.

COST AND BUDGET Recent changes in market conditions have created a new opportunity which was not anticipated in the FY16 Operating and Capital Budget. The resulting debt service will reduce the debt service amounts listed in the FY16 budget and FY16-20 Five Year Plan.

Included in the cost of issuing the bonds will be the fees paid from the bond proceeds at closing to:

 agency’s financial advisor  bond counsel  trustee  ratings agencies  underwriters

It is estimated that these costs will not exceed $370,000. Many of these costs are calculated per $1,000 par value, so the final costs will be calculated when the final par value of the issuance is determined before pricing and closing.

STRATEGIC PLAN ALIGNMENT This item relates to the following goals and strategies in the Five-Year Strategic Plan, FY 2016 – 2020:

 Goal 2: Advance performance based operation o Tactic E: Maintain strong fiscal controls to support Valley Metro’s long-term sustainability.

COMMITTEE PROCESS RTAG: February 16, 2016 for information TMC: March 2, 2016 approved BFS: March 10, 2016 for action Board of Directors: March 17, 2016 for action

RECOMMENDATION Staff recommends that the BFS forward to the Board of Directors adoption of the Third Supplemental Resolution authorizing the issuance of tax-exempt, senior lien bonds in FY 2016 in an amount sufficient to refund certain maturities of the Series 2009A bonds and to pay costs of issuing the bonds.

CONTACT Paul Hodgins Manager of Revenue Generation and Financial Planning 602-262-7433 [email protected]

John P McCormack Chief Financial Officer 602-495-8239 [email protected]

ATTACHMENT None

Third Supplemental Resolution is available upon request.

3/3/2016

Bond Refunding

March 2016

Outstanding Bonds

Par Values ('000) Issued Outstanding Callable 2009A Tax Exempt $73,795 $49,765 July 1, 2019 2009B Taxable Build America Bonds $26,280 $26,280 July 1, 2019 2014 Tax Exempt $115,000 $106,815 July 1, 2024 Total Debt $215,075 $182,860

1 3/3/2016

Proposed Refunding

• Refunding of Series 2009A bonds with new debt • Series 2009 True Interest Cost 3.97%

• Refunding bonds • Series 2016 estimated True Interest Cost 1.71%

• No refunding of 2014 tax exempt bonds • Series 2014 True Interest Cost 2.38%

Proposed Refunding

• Refunding of 2009A tax exempt bonds with new tax exempt debt

Existing debt service retired $30,548,000

New debt service $29,223,000

Estimated savings (net of issuance costs) $1,325,000

2 3/3/2016

Summary of Estimated Savings $ millions Total gross estimated savings $1.695

Estimated Costs of Issuance Underwriters $0.120 Financial Advisor 0.060 Bond Counsel 0.090 Other Administrative 0.100 Subtotal Costs of Issuance $0.370

Net estimated savings after issuance costs $1.325

Recommendation

Staff recommends that the BFS forward to the Board of Directors adoption of the Third Supplemental Resolution authorizing the issuance of tax-exempt, senior lien bonds in FY 2016 in an amount sufficient to refund certain maturities of the Series 2009A bonds and to pay costs of issuing the bonds.

DATE AGENDA ITEM 4 March 4, 2016

SUBJECT Valley Metro RPTA Budget and Finance Subcommittee Name Change, Scope Expansion, and Inclusion of Valley Metro Rail (VMR) Representation

PURPOSE To expand the scope and rename the Valley Metro RPTA Budget and Finance Subcommittee (BFS) resulting in oversight of audit functions and inclusion of VMR representation.

BACKGROUND/DISCUSSION/CONSIDERATION With the passage of Proposition 400 in 2004, the RPTA grew from an agency with a $5 million annual budget to a $250 million annual budget. It became imperative that a greater focus be placed on fiscal responsibilities. The Budget and Finance Subcommittee (BFS) was established by RPTA in November 2006 to provide that oversight. The RPTA and VMR Boards of Directors have discussed the desire to expand the role of the BFS and to provide oversight of VMR in addition to RPTA.

Consistent with the responsibilities outlined in the formation of the BFS in 2006, policy oversight of the RPTA was established to include:

1. Annual operating and capital budget process of the agency 2. Review of budget inputs and assumptions 3. Oversight of the compilation of financial reports for the Boards and member agency review 4. Review of the annual Transit Life Cycle Program and its financial model 5. Review of the five-year capital plan 6. Provide recommendations to the Board of Directors

The RPTA Board established that terms of membership shall be two years, with the ability to be re-elected by the Board, except the City of Phoenix. No members shall serve more than four years as a BFS member. The guidelines also state that one of the five subcommittee members will always be the elected official representing the City of Phoenix on the Valley Metro RPTA Board.

The Board also established that a member’s financial background will be considered, along with geographic representation, when making BFS appointments. Currently, the BFS is made up of the following members identified in the following table.

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BFS Member Sub-Region BFS Term Expiration Councilmember Eric Orsborn West Valley June 2016* Councilmember Jenn Daniels East Valley June 2016 Councilmember Skip Hall West Valley June 2017* Councilmember Suzanne Klapp East Valley June 2017 Councilmember Thelda Williams City of Phoenix Permanent Seat *Eligible for reelection at end of current term.

To respond to Board discussions regarding an expanded policy and agency oversight role for the BFS, staff is recommending the following:

1. Expand the scope to include oversight of an internal audit function; 2. Change the name to Valley Metro RPTA and Valley Metro Rail Audit and Finance Subcommittee (AFS); and 3. Representation of VMR by requiring that two members of the Subcommittee represent both RPTA and VMR.

Expansion of the Subcommittee to include VMR could be attained by maintaining the existing structure for membership, but adding a provision that in addition to the City of Phoenix permanent position, one the remaining four positions must also be a VMR Board member. More than two members of the BFS being members of the VMR Board would violate quorum requirements according to the VMR By-Laws.

STRATEGIC PLAN ALIGNMENT This item relates to the following goals and strategies in the Five-Year Strategic Plan, FY 2016 – 2020:  Goal 2: Advance performance based operation o Tactic E: Maintain strong fiscal controls to support Valley Metro’s long- term sustainability.

COMMITTEE PROCESS Budget and Finance Subcommittee: February 11, 2016 action TMC/RMC: March 2, 2016 approved RPTA and VMR Boards: March 17, 2016 for action

RECOMMENDATION Staff recommends that the BFS forward to the Boards of Directors the attached resolution defining the role and membership of the AFS.

CONTACT Scott Smith Interim CEO 602-495-8205 [email protected]

ATTACHMENT Audit and Finance Subcommittee Purpose and Membership Resolution Valley Metro Organizational Chart

Resolution of the Valley Metro RPTA and Valley Metro Rail Boards of Directors Regarding the Audit and Finance Subcommittee

Background The Audit and Finance Subcommittee (AFS) was originally formed by Valley Metro RPTA (RPTA) Board as the Budget and Finance Subcommittee (BFS) in 2006 after the passage of Proposition 400 to provide policy oversight of the expanded financial activities of the RPTA. The RPTA and Valley Metro Rail (VMR) Boards renamed the Subcommittee to the AFS in 2016 and expanded the scope of the AFS to add oversight of internal audit functions and to oversee financial and audit functions of VMR.

Purpose Policy oversight of the RPTA and VMR is established to include:

1. Annual operating and capital budget process of the agency 2. Reviewing budget inputs and assumptions 3. Oversight of the compilation of financial reports for the Boards and member agency review 4. Review of the annual Transit Life Cycle Program and its financial model 5. Review of the five year operating and capital plan 6. Oversight and review of internal audit functions 7. Providing recommendations to the Board of Directors

Membership The AFS will consist of up to five (5) members. A member’s financial background will be considered, along with geographic representation.

Service of Board members on the AFS include the following:  Terms of membership are for two years, with the ability to be re-elected by the Board  One of the five members will always be the elected official representing the City of Phoenix  No member shall serve more than four years, except the City of Phoenix  Membership is structured so that two members are elected in even numbered years and two members elected in odd numbered years  Elections will occur at the last meeting of the fiscal year with membership to begin at the beginning of the following fiscal year  Two (2) of the members will represent both RPTA and VMR (With the Phoenix member always being one of the two)  No more than two members of the AFS will be from the VMR Board due to quorum requirements

The Chair of the AFS will be appointed by the Chairs of the RPTA and VMR Boards.

In the event a vacancy occurs on the AFS, the Board(s) will conduct an election to fill the vacant seat as soon as practicable.

Considered and passed by the RPTA and VMR Boards of Directors on March 17, 2016 Valley Metro Organization

Valley Metro Rail Valley Metro RPTA Board of Directors Board of Directors Audit and Finance Subcommittee (AFS) Chief Executive Officer RPTA and METRO Rail Management Transit Management Board Subcommittee Committee Committee

Regional Transit Intergovernmental Advisory Group Representatives

Regional Marketing Financial Working Service Planning Security Steering Committee Group Working Group Committee

East Valley Dial‐a‐ TOD Working Risk Management Service Standards Regional Fare Accessibility Ride Working Group Group Committee Working Group Working Group Advisory Group

Valley Metro Governance and Policy Structure Standing Member Agency Staff Committees Ad Hoc Member Agency Staff Committees 1

DATE AGENDA ITEM 5 March 4, 2016

SUBJECT Future Agenda Item Requests

PURPOSE For information

BACKGROUND/DISCUSSION/CONSIDERATION Councilmember Williams will request future agenda items from members.

John McCormack will review planned agenda items for April 14:

 Draft FY17 Preliminary Budget  FY16 Third Quarter Results  Health Insurance Review

COST AND BUDGET None

COMMITTEE PROCESS None

RECOMMENDATION This item is presented for information only.

CONTACT John P. McCormack Chief Financial Officer 602-495-8239 [email protected]

ATTACHMENT Upcoming Meeting Dates for 2016

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Budget and Finance Subcommittee

2016 Meeting Schedule

Thursday, April 14, 2016 12:00 PM

 Draft FY17 Preliminary Budget

 FY16 Third Quarter Results

 Health Insurance Review

Thursday, May 12, 2016 12:00 PM

 FY17 Budget & FY17 - 21 Five Year Plan Adoption

 2016 Transit Life Cycle Plan Update

 Internal Audit Implementation

Thursday, October 13, 2016 12:00PM

 FY16 Year-End Review

 FY17 First Quarter Reports