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September 16, 2010

Wendy GreuelCity Controller

City of Los Angeles

Office of the Controller

ARRA Performance and Financial Audit of

the Department of Transportation


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TABLE OF CONTENTS

EXECUTIVE SUMMARY............. ........... .. 1

CONTROLLERS ACCOUNTABILITY PLAN...6

INTRODUCTION AND BACKGROUND..................8

SECTION I: TRANSPARENCY AND ACCOUNTABILITY OF ARRAFUNDS...........................15

SECTION II: FULL COST RECOVERY AND CITY FRONT-FUNDING...21

SECTION III: OTHER CITY REQUIREMENTS..24

APPENDIX ARANKING OF RECOMMENDATIONS.........................................................27


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ARRAPERFORMANCE AND FINANCIAL AUDIT OFTHE DEPARTMENT OF TRANSPORTATION

EXECUTIVE SUMMARY

The Controllers Office has completed a performance and financial audit of theDepartment of Transportations American Recovery and Reinvestment Act (ARRA orRecovery Act) funded programs/projects. The primary objective of this audit was todetermine whether the Los Angeles Department of Transportation (LADOT or theDepartment) has adequate processes to ensure ARRA funds are expended in

compliance with Recovery Act requirements and funded programs and projects areimplemented efficiently and will result in the intended outcomes. The purpose of theaudit was to identify any potential issues early in implementation, in order for theDepartment to take corrective action before Federal funds are potentially jeopardized orplaced at risk.

The audit was performed in accordance with Generally Accepted Government AuditingStandards (GAGAS) and covered the period from January 1, 2009 through January 31,2010. Fieldwork was conducted between December 2009 and March 2010.

BACKGROUND

The Recovery Act was enacted on February 17, 2009 to create/retain jobs, stimulate theeconomy and make significant improvements to the nations infrastructure. It providesFederal funding for a wide range of Federal, State, and local programs, as well as taxrelief for qualified businesses and individuals. ARRA requires increased accountability,transparency, and control of these funds. ARRA fund recipients must have thenecessary systems in place to provide proper oversight, accounting, reporting andproject management controls to ensure funds are used efficiently and for their intendedpurposes.

The Recovery Act authorizes expenditure of approximately $787 billion. Approximately$275 billion will be available as contracts, grants and loans.1 As of March 2010, the City

of Los Angeles was awarded $594 million of the $1.5 billion requested ARRA funds forvarious programs and projects2. As of our review, the LADOT has been awarded $40.8million (29%) of the Citys $143 million transportation/infrastructure grants. Theremaining $102.2 million was awarded to the Department of Public Works, Port of LosAngeles and Los Angeles World Airports. The LADOT received seven ARRA grants to

1Governments are not eligible for ARRA contracts. As of March 31, 2010, $179 billion has been awardedcomprised of $154 billion in grants, $24 billion in contracts and $925 million in loans.2City of Los Angeles, ARRA Recovery Website LA Recovery.gov


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install LED traffic signals, install new traffic signals and left-turn arrows, improve railgrade crossings, and purchase commuter buses. As of January 31, 2010, ARRAawards, billings and reimbursements for LADOT were reported as follows:

Awards

(in millions)

Billings toGrantors

(in millions)

ReimbursementsReceived

(in millions)

Est. Jobs to be

Created/Retained

Jobs

Created/Retained

$40.8 $1.83

$1.1 264

9 public

Source: LADOT

SCOPE AND METHODOLOGYThe audit involved limited reviews of the financial as well as programmatic(performance) aspects of LADOTs ARRA projects. Specifically, the audit determinedwhether the Department of Transportation has:

A capable system or process that ensures ARRA funds are separatelyidentified from non-ARRA funds;

A mechanism in place to ensure all costs are accurately recorded,adequately supported and claimed for reimbursement;

Set up program goals as outcomes and expectations for ARRA programsand has adequate processes to accurately monitor, assess and reportresults completely and timely to the proper authorities;

A process in place to ensure program contractors, including

subcontractors, are selected and hired in accordance with City policiesand procedures and ARRA requirements; and

A process in place to mitigate instances of fraud, waste, error, and abuse.

Overall AssessmentLADOT has significant experience with Federal Highway Administration (FHWA) andFederal Transit Administration (FTA) grant funding, as well as working with Caltrans,who is the primary recipient for six of LADOTs seven ARRA projects. As a result, theDepartment is familiar with these grantors requirements as conditions for funding andhas established processes for contracting, project management, and accounting.

Although the ARRA requirements are generally similar to other Federal grantrequirements, there are additional requirements mandated by the Recovery Act.5

3 Expenditures are primarily related to materials purchased for the LED Retrofit Program.4

The estimated number of jobs to be created/retained represents the estimated jobs that will becreated/retained throughout the grant period. These estimates do not include job estimates forcontracted-out projects.5 In some cases, the Recovery Act specifically addresses Federal agencies; however, assurance as tocompliance relies on the recipients also following the same requirements.


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Therefore, pre-existing processes and procedures may need strengthening to ensureadequate compliance with ARRA.

LADOT has processes in place to ensure that ARRA funds are recorded andexpenditures are tracked for reimbursement and the progress of projects is monitored

through completion. The Department also has processes and controls in place toensure that ARRA funds are expended in compliance with the Recovery Act, and ARRAdata elements are tracked and reported to Caltrans and the White House Office ofManagement and Budget (OMB).

While LADOT appears to have made good faith efforts in having processes that will helpensure it meets the publics and policy makers expectations for job and economicoutcomes, complies with ARRA requirements, and provides complete and accuratereporting, our evaluation indicates there are areas that could be improved.

For example, since the primary objectives of ARRA are to stimulate the economy and

create/retain jobs, contracting processes should be streamlined or expedited to ensureprojects are started as quickly as possible. Also, in order to ensure data accuracy andappropriate cost recovery, the Department needs to improve its processes in the areasof reporting and billing to Caltrans.

Key Risks

The following items are areas of potential risk based on our assessment:

1. The Departments existing contracting processes may not be sufficientto meet the publics and policy makers intentions that ARRA funds areexpended quickly to promote job creation/retention and stimulate theeconomy.

We noted that some of the Departments ARRA-funded projects have takenmany months to award contracts and start construction. The Departmentstypical contracting processes, which follow a standard framework to ensurecompliance with established Federal, State and City policies, may not be thebest approach to ensure that ARRA projects have an immediate impact onthe local economy. We noted that four of the FHWA projects were not sentout to bid until at least seven months after the projects were authorized toproceed by the State/FHWA during the Summer of 2009. Construction isestimated to start about 12 months after the projects were approved toproceed and the City approved the funding.


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2. The process to ensure accurate and timely reporting of jobscreated/retained with ARRA funding may not be adequate or reported tothe appropriate agency.

The Recovery Act requires grant recipients to report quarterly on jobs

created or retained with ARRA funding. Prime recipients (entities whoreceive ARRA funds directly from a Federal agency) report jobs data directlyto the Federal website FederalRecovery.gov. Subrecipients are required toreport at least quarterly to the prime recipient; which for many of the Citysgrants, is a State agency. We noted LADOT reported jobs created/retaineddirectly to the OMB in October 2009, instead of reporting the information toCaltrans, who is the prime recipient with reporting responsibility to the OMB.Additionally, reporting deadlines were missed for some projects in November2009 and March 2010. We also noted that the Department reported jobsdata based on budgeted positions retained, and not actual hours worked.

3. The Departments processes need to be strengthened to ensuretransparent and accurate tracking of ARRA-related expenditures.

The process for billing costs for reimbursement needs improvement. TheDepartments Accounting Division bills Caltrans based on vendorsinvoices provided by the Project Manager. However, the Project Managerdoes not review expenditure information to confirm that all costs are billed.As a result, some of the costs incurred for ARRA activities were not billed.

The process to capture all ARRA-related costs needs improvement. Wenoted that not all ARRA-related work orders were completely and

accurately billed. Some work order numbers were revised to include theARRA prefix; however, field employees continued to use the non-ARRAwork order number. As a result, these work orders were not billed, andthe associated costs were not reimbursed.

4. Current processes related to identifying and billing for indirect costsmay not ensure full cost recovery.

For transportation projects, Caltrans only allows billing of indirect coststhrough approved CAP rates. Typically, the Department only claims theindirect costs (central services and departmental administration costs) at the

last billing, when the CAP rate is approved and only if there are remainingfunds available. Therefore, if there are no remaining funds on the grant afterbilling for direct costs, the City has committed to complete the work withoutfull cost recovery. We also noted the Departments preliminary costestimates used for City decision-making for the ARRA projects do not includeindirect or overhead costs. Therefore, these necessary expenditures must becharged by other sources, such as the General Fund. Although CityAdministrative Officer (CAO) staff indicated that the Citys decision makers


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are aware of the full costs of ARRA-funded projects (estimated direct andindirect costs), we could find no formal report detailing all costs that will beincurred for LADOTs projects and the related impact on the General Fund.

5. LADOT does not have an adequate process to ensure MICLA cash flow

reports are submitted to the CAO and the General Fund is reimbursedtimely.

Because ARRA transportation projects are paid on a reimbursement basis bythe grantor agencies, the projects must be front-funded by the CitysMunicipal Improvement Corporation of Los Angeles Commercial PaperProgram (MICLA CP). We noted LADOT has not submitted any of therequired bi-monthly MICLA cash flow reports to the CAO. Without the cashflow reports, the CAO cannot reasonably estimate the Citys needs forissuing MICLA commercial paper and ensuring a sufficient cash flow isavailable for the projects. Also, LADOT did not transfer cash from the MICLA

fund to reimburse the General Fund for direct labor and material costs.

6. LADOT may not have adequate processes to ensure that City Councilapproval is obtained timely for ARRA-awarded grants.

The Department was awarded an $8 million ARRA grant from the FederalTransit Administration on July 31, 2009 to purchase approximately 16Commuter Express buses. However, the request to accept the award wasnot submitted until February 2010. On June 1, 2010, the Council approvedthe acceptance of the grant award. According to the Department, the buspurchase was previously approved and appropriated from Prop A funding,and the ARRA grant was intended to reimburse this source of funds. LADOTstaff indicated that since there is no centralized monitoring on the ARRAfunds within the Department, the process to obtain approval from the CityCouncil for accepting the award was overlooked.

Review of Report

On June 16, 2010, a draft report was provided to LADOT management and the CAO.We held an exit conference with LADOT and CAO representatives on June 24, 2010 todiscuss the contents of the audit report. We considered the comments provided by theDepartment and CAO before finalizing this report. We would like to thank theDepartment management and staff for their cooperation and assistance during theaudit.


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CONTROLLERS ACCOUNTABILITY PLAN

RECOMMENDATIONS PAGE

MAYOR

ACTIONREQD

COUNCIL

ACTIONREQD

DEPARTMENT

ACTION REQD

LADOT management should:

1. Determine whether itscontracting processes canbe further streamlined forARRA projects to ensurethese infrastructureinvestments can have amore rapid impact on jobcreation/retention and theeconomy.

17 LADOT

2. The Mayor and City Councilshould consider requiringdepartments to implementan expedited process forawarding contracts fundedby ARRA grants.

17 X X


3. Ensure that the number of jobs created and/or retainedis reported accurately andwithin required deadlines.

18

LADOT

4. Ensure costs that are directlyattributable to a specificproject are adequatelysupported, captured andbilled as direct costs.

20 LADOT


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RECOMMENDATIONS PAGE

MAYORACTIONREQD

COUNCILACTIONREQD

DEPARTMENTACTION REQD

5. Ensure all costs related to

the project are completelycaptured in the assignedARRA-specific work ordersand billed to the grantor.

20 LADOT

6. The CAO should work withLADOT management todevelop detailed plans andbudgets to identify andcapture all the costs related

to ARRA-funded projectsand present to the Citysdecision makers, especiallyif full cost recovery may notbe achievable.

21 CAOLADOT

LADOT management should:7. Implement a process to

ensure that all costs incurredare reimbursed to the correctfunding source on a monthly

or bi-monthly basis.

22 LADOT

8. Ensure MICLA cash flowreports are submitted to theCAO bi-monthly.

23 LADOT

9. Ensure ARRA data isaccurately reported on theProject Health Reports andseek CAO assistance whennecessary.

25 LADOT

10. Ensure City Councilapproval is obtained timelyfor all ARRA grant awards.

25 LADOT


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INTRODUCTIONANDBACKGROUND

The American Recovery and Reinvestment Act (ARRA or Recovery Act) was enactedon February 17, 2009 to appropriate approximately $787 billion to stimulate theeconomy by creating or preserving jobs, and investing in transportation, environmentalprotection and other infrastructure for long-term economic benefits. ARRA providesgrant funding for a wide range of Federal, State, and local programs, tax relief forqualified businesses and individuals and fiscal relief for State and local governments.

The Recovery Act requires unprecedented levels of transparency and accountability bythe government and its recipients. Recipients of ARRA-funded grants, contracts andloans must demonstrate to the public where their tax dollars are going and how they are

being spent. As a result, ARRA recipients must ensure the necessary systems are inplace to provide proper oversight, accounting, reporting and project managementcontrols to ensure all ARRA funds are used efficiently and for the intended purposes.

ARRAs accountability objectives require recipients to ensure: 6

Funds are awarded and distributed in a prompt, fair and reasonable manner;

Recipients and uses of all funds are transparent to the public and the benefits ofthese funds are reported clearly, accurately and in a timely manner;

Funds are used for authorized purposes, and instances of fraud, waste, error andabuse are mitigated;

Funded projects avoid unnecessary delays and cost overruns; and

Program goals are achieved, including specific program outcomes and improvedresults on broader economic indicators.

Other specific provisions of the Recovery Act require recipients to:

Certify that infrastructure investments are appropriate uses of ARRA funds andpost the project description information on a website that can be viewed by thepublic;

Report ARRA receipts, expenditures and jobs created/retained 10 days after theend of each calendar quarter, beginning with the quarter ending September 30,2009;

6 In some cases, the Recovery Act specifically addresses Federal agencies; however, assurance as tocompliance relies on the recipients also following the same requirements.


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Ensure Federal Prevailing Wage Rate (e.g., Davis-Bacon Wage Rate)

requirements are followed on all construction projects;

Use iron, steel or manufactured goods produced in America (Buy American) for

construction projects; and

Establish a website available to the public to view information related to ARRAfunds received and expended and descriptions of the infrastructure projectsfunded by ARRA.

Building on this framework, the White House Office of Management and Budget (OMB)developed guidance for implementing ARRA, such as requiring that ARRA funds beclearly distinguishable from non-ARRA funds and encouraging the establishment of anoversight function to review Recovery Act reporting and performance. Federalagencies, as grantors, may also establish additional requirements for their specific

programs and grants. Projects suitable for ARRA are to be started and completedexpeditiously with at least 50% of the funding used for projects that could be startedwithin four months after the enactment of the Recovery Act. Generally, the Citys ARRAagreements with the State have timelines for projects to be completed within a period ofthree years.

ARRA Funding Allocations

Although ARRA funding totals $787 billion, over half of this amount is specificallyallocated as tax cuts for businesses and individuals and financial help for State andlocal governments. The remainder is available to State and local governments andcompanies, non-profit entities and others as contracts, grants or loans. Approximately$275 billion is available as contracts, grants and loans. For competitive grants,applicants must compete through a formal proposal process and awards are madebased on a proposals merit as evaluated by the grantor. Formula or entitlement grantsare awarded based on one or more criteria of local need, or population. The followingchart shows how ARRA funding will be spent nationwide.

ARRA ALLOCATIONS(in billions)

$0

$50

$100

$150

$200

$250

$300

Tax Relief State & Local Infrastruc &

Science

Protect

Vulnerable

Health Care Educ &

Training

Energy Other

Californias share of ARRA funding is estimated at $83.66 billion, and as of December31, 2009, awards were estimated at $35.37 billion, separate from the $30.2 billionallocated as tax relief.


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State of California Est. ARRA Allocations (in Billions)

Health & Human

Services- $16.34

Labor- $5.38

Energy- $5.63

Science &

Technology- $2.03

Public Safety-

$0.83

Other- $1.47Housing- $2.87

Water &

Environment-

$3.19

Education- $10.77

Tax Relief- $30.2Transportation-

$4.95

City and Department of Transportations ARRA Awards

As of March 31, 2010, the City of Los Angeles requested a total of $1.5 billion of ARRAfunds and was awarded $594 million ($335 million in ARRA formula7 grants and $259million in ARRA competitive8 grants.) The table below shows the Citys spendingcategories of ARRA requests and awards.

Spending Category Amount Requested Amount Awarded

Energy/Environment $655,756,163 $147,105,107

Housing/Economic Development 211,136,822 162,552,822

Public Safety 272,213,848 54,150,728

Public Services 138,633,973 87,662,115

Transportation/Infrastructure9 242,473,411 142,863,411

Total $1,520,214,217 $594,334,183Source: LA Recovery web-site

7 Formula grants are allocated based on an allocation formula, either from the Federal or Stategovernment.8 Competitive grants are applied through Federal or State agencies and funding is not guaranteed.9 Of the $142.9 million transportation/infrastructure grants, the LADOT has been awarded $40.8 million(29%), the Department of Public Works has been awarded $64.5 million, the Port of LA has beenawarded $26.7 million and the Los Angeles World Airports has been awarded $10.8 million.


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The LADOT ARRA awards consist of six ARRA grants from the Federal HighwayAdministration (FHWA) for $32.8 million and one ARRA grant for $8.02 million from theFederal Transit Administration (FTA). The City is a sub-recipient through the CaliforniaDepartment of Transporation (Caltrans) for the FHWA ARRA grants, and is the prime

recipient for the FTA ARRA grant. All these ARRA grants are paid on a reimbursementbasis whereby the City has to expend the funds first and submit reimbursement claims(billings) to the grantor agencies.

The ARRA awards granted to LADOT, as of January 31, 2010, are described in thetable below:

FHWA Award Awarded AmountAuthorization Date (signed by

FHWA)

ESPL5006 (581) Left Turn Arrows $4,000,000 7/1/09

ESPL5006 (582) Transit PrioritySystem(TPS/ATSAC) Rehabilitation

6,000,000 6/5/09

ESPL5006 (586) LED Retrofit Program 9,000,000 6/26/09

ESPL5006 (589) New Traffic Signals 3,500,000 7/1/09

ESPL5006 (590) Highway Rail GradeCrossing Surface Reconstruction

7,932,000 6/5/09

ESPL5006 (593) Highway Rail GradeCrossing Improvement System

2,368,000 7/16/09

Total -FHWA $32,800,000

FTA Award Awarded Amount Grant Agreement Date

CA-96-X013-00 - Purchase 16 buses $8,022,665 8/5/09

Total LADOT Awards $40,822,665

Source: LADOT


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For our review period, ARRA awards, billings and reimbursements for LADOT throughJanuary 31, 2010 were reported as follows:

Awards(in millions)

Billings toGrantors

(in millions)

ReimbursementsReceived

(in millions)

Est. Jobs to beCreated/Retained

JobsCreated/Retained

$40.8 $1.810

$1.1 2611

9 public

Source: LADOT

Objectives, Scope and Methodology

The primary objective of the audit was to determine whether LADOT has adequateprocesses in place to ensure compliance with ARRA requirements and fundedprograms and projects are implemented efficiently and will result in the intendedoutcomes.

Our audit was performed in accordance with Generally Accepted Government AuditingStandards (GAGAS) and covered the period from January 1, 2009 through January 31,2010. Those standards require that we plan and perform the audit to obtain sufficient,appropriate evidence to provide a reasonable basis for our findings and conclusionsbased on our audit objectives. We believe that the evidence obtained provides areasonable basis for our findings and conclusions based on our audit objectives.

Fieldwork was conducted between December 2009 and March 2010 and focused on theDepartments ARRA-funded programs/projects. The audit involved limited reviews ofthe financial, as well as programmatic (performance) aspects of the ARRA projects.

We interviewed management and staff and reviewed applicable laws, regulations, anddepartmental procedures to obtain an understanding of the processes and activitiesrelated to the ARRA grants and the Departments controls over these grants. Also, wesampled transactions to determine whether the costs incurred related to ARRA activitieswere allowable expenditures, and whether all costs incurred were timely and accuratelyreported and billed.

We performed walk-throughs of the Departments systems to understand the differentprocesses supporting required ARRA data and identified potential risks surroundingthose processes that may present a challenge to complying with Recovery Act

requirements. We also reviewed the methodology used to compute the number of jobscreated and/or retained, and the accuracy of submitted data.

10 Expenditures are primarily related to materials purchased for the LED Retrofit Program.11 The estimated number of jobs to be created/retained represents the estimated jobs that will becreated/retained throughout the grant period. These estimates do not include job estimates forcontracted-out projects.


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Description of ARRA Projects

Left Turn Arrows

LADOT was awarded $4 million in ARRA funds to construct 65 new left turn arrow

signals at 45 intersections. City forces will construct the new left turn arrowimprovements from plans prepared by LADOT. These signals will incorporate a batterybackup system at each location to maintain signal operation during brief power outages.Contractual work will be needed to support City forces in the installation of cableconduits, pull boxes, and loops.

Transit Priority System

LADOT was awarded $6 million in ARRA funds to rehabilitate and enhance a real-timecommunication system infrastructure by extending the service-time life for both theTransit Priority System (TPS) and the Automated Traffic Surveillance and Control

(ATSAC) System. These systems consist of approximately 1,000 TPS-capable trafficsignals within the existing 3,200 traffic signal network of the ATSAC System.

LED Retrofit Program

LADOT received a $9 million ARRA grant to fund the replacement of incandescenttraffic signal light bulbs with Light-Emitting-Diode (LED) modules for over 1800 existingtraffic signal locations. The work will be done by City forces. As of the end of FY 2008-09, approximately 60% of the light bulbs had been converted to LED systems; thisARRA-funded project will complete the LED retrofit.

New Traffic Signals

Using a $3.5 million ARRA grant, LADOT will construct 25 new traffic signals Citywide.City forces will construct the new traffic signals from plans prepared by the LADOT.These signals will incorporate a battery backup system at each location to maintaintraffic signal operation during brief power outages. Contractual work will also berequired to support City forces in the installation of cable conduits, pull boxes, andloops.

Highway Rail Grade Crossing Surface Re-construction

LADOT was awarded a $7.9 million ARRA grant to significantly improve highway-railgrade crossing surfaces throughout the City. This work will be done by the two railroadsthat operate within the City. The LADOT has negotiated agreements with Union Pacific(UP) Railroad Company and Burlington Northern Santa Fe (BNSF) Railway Company.The companies only allow their personnel or pre-approved specially trained forces towork on the tracks along their right-of-way. The railroads will serve as sole-sourcecontractors in completing the reconstruction. Subsequent to our fieldwork,FHWA/Caltrans de-obligated the Citys funds on June 5, 2010, for perceived Right-of-


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Way issues. On July 2, 2010, FHWA/Caltrans reversed their decision and re-obligatedthe projects funding. A new Notice to Proceed was also issued.

Highway Rail Grade Crossing Improvement System

Using a $2.4 million ARRA grant, LADOT will improve traffic signal and railroad crossingsystems at highway-rail crossings at the Port of Los Angeles and upgrade ATSACequipment at various other highway-rail crossings throughout Los Angeles. This projectwill improve overall public safety through improved coordination between traffic signaland railroad crossing systems.

FTA Grant

LADOT was awarded $8,022,665 to purchase approximately 16 commuter expressbuses. These buses will meet the Clean Air Act Standards (CAA) and the Americanswith Disabilities Act (ADA) requirements.

The remainder of this report details the potential risks identified during our review andour recommendations to mitigate any potential risks.


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AUDIT OBSERVATIONS AND RECOMMENDATIONS

SECTION I: TRANSPARENCY AND ACCOUNTABILITY OF ARRAFUNDS

#1: The Departments existing contracting processes may not be sufficient tomeet the publics and policy makers intentions that ARRA funds areexpended quickly to promote job creation/retention and stimulate theeconomy.

In addition to significant accountability and transparency requirements set forth asconditions for ARRA grant funding, the Recovery Act also places an emphasis onexpediting program and project development, and the rapid and responsibleexpenditure of ARRA funds to promote economic recovery. For example, ARRA

established accelerated timeframes for Federal agencies to develop plans to distributethe funding, and for recipient agencies to obligate awarded grant funds. In the OMBsInitial Recovery Act Implementing Guidance, issued one day after President Obamasigned the legislation into law, Federal agencies were instructed to develop processesto ensure grant awards were made timely. Projects that were to be funded by ARRAmonies are commonly referred to as being shovel-ready.

Further, Section 1602 of the Recovery Act (Preference for quick-start activities) statesIn using funds made available in this Act for infrastructure investment, recipients shallgive preference to activities that can be started and completed expeditiously, including agoal of using at least 50% of the funds for activities that can be initiated not later than

120 days after the date of the enactment of this Act. Recipients shall also use grantfunds in a manner that maximizes job creation and economic benefit.

Given that the Federal government set a goal to use half of the infrastructure funding forprojects that could be started four months after the Recovery Act Enactment (roughlyJune 2009) it is reasonable to expect that recipients should do everything possible toensure a speedy project start.

We noted that some of the Departments ARRA-funded projects have taken manymonths to select contractors and begin construction. The Recovery Act gives priority totransportation projects that are projected for completion with a three-year timeframe and

located in economically distressed areas. While the Department has indicated that itsARRA-funded transportation projects will be completed within the three-year timeframe,the Departments typical contracting processes, which follow a standard framework toensure compliance with established Federal, State and City policies, may not be thebest approach to ensure that ARRA projects have an immediate impact on the localeconomy.


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All six of the LADOTs projects funded from the Federal Highway Administration(FHWA) were shovel-ready projects. These projects had been surveyed, planned for,and approved by the City but were pending approval of funding. Ideally, when theseprojects were approved by the FHWA, the projects should be ready to solicit bids andstart construction. We noted that the process of finalizing the bid package has been

slow for four of these ARRA projects (Left Turn Arrows Project, New Traffic SignalsProject12, Transit Priority System, and Highway Rail Grade Crossing ImprovementSystem). These projects were not sent out to bid until at least seven months after theprojects were approved by the State/FHWA, during the Summer of 2009.

Under the Citys current practice, the Department of Public Works (DPW) Bureau ofEngineering (BOE) and Bureau of Contract Administration (Con Ad) are responsible forthe bid and contract award processes for all City infrastructure construction projects,including those typically managed by LADOT. Generally, the bid and contract awardprocess involves the following key phases and it takes about five months to award thecontract:

Bid package preparation Project managers submit plans/specifications for theproject. Normally, it takes about one month for the BOE and Con Ad to reviewthe project forms and requirements and advertise the bid.

Bid period BOE and Con Ad distribute plans and specifications to contractors,and usually allow five weeks for contractors to submit bids.

Post bid analysis and award of contract BOE and Con Ad analyze bids forcompleteness and compliance, perform first-time contractor backgroundinvestigations (where applicable), and select the lowest responsive bidder. Anaward report is prepared for the Board of Public Works approval, which usuallytakes about two months. According to BOE, there is a shortage of staff becauseof the Citys Early Retirement Incentive Program (ERIP), and Board reports nowtake about three months to prepare.

Both the Left Turn Arrows Project and New Traffic Signals Project use a combination ofCity forces and contracts. Some of the delay was due to LADOT project managersdeciding whether these two projects should be bid as one or two projects, since bothrequired similar work (i.e., installation of cable conduits, pull boxes and loops). Once itwas decided that both projects would be bid under one contract (in January), it wasadvertised on March 3, 2010, with a bid due date of March 31, 2010. BOE estimatedthat the draft award report will be ready for the Department of Public Works Office ofContract Compliance (OCC) to review and approve in May 2010. It would then takeapproximately two weeks to obtain Board of Public Works approval, and another weekor two to execute the contract. If BOEs estimates are correct, construction will startmore than 12 months after the Notice to Proceed. To ensure that ARRA funds are

12 For the Left Turn Arrows and New Traffic Signals Projects, City forces will install the signals whilecontractors will install the cable conduits, pull boxes and loops.


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expended timely, City departments should consider implementing an expedited reviewprocess for ARRA-funded projects.

Some delay could also be due to LADOT not being familiar with FHWAs requirementsfor ARRA grants. LADOT was directed by FHWA to re-format the Plans, Specifications

& Estimates (PS&E) for the Transit Priority System and Highway Rail Grade CrossingImprovement System projects to meet Federal requirements. In addition, it had toreplace proprietary information (i.e., equipment brand names) with more genericperformance descriptions in the bid. It is also estimated that construction for these twoprojects will start about 12 months after the Notice to Proceed.

Two primary intentions of ARRA were to immediately stimulate the economy throughthe retention or creation of jobs and achieve long-term public benefits, such as investingin infrastructure. Projects suitable for ARRA were to be shovel-ready and started andcompleted expeditiously. The Recovery Act calls on agencies to commence activitiesand expenditures as quickly as possible consistent with prudent management. Also,

Caltrans guidelines state that funds are available for expenses incurred until September30, 2015, at which point any remaining balances will be cancelled.

Projects that take six months or more to initiate the bid process, or a year to award acontract and help create jobs, do not appear to meet the publics and policy makersexpectations for ARRA funds to have an immediate impact on the local economy.

Recommendations

1. LADOT management should determine whether its contractingprocesses can be further streamlined for ARRA projects to ensurethese infrastructure investments can have a more rapid impact on jobcreation/retention and the economy.

2. The Mayor and City Council should consider requiring departments toimplement an expedited process for awarding contracts funded byARRA grants.

#2: The process to ensure accurate and timely reporting of jobscreated/retained with ARRA funding may not be adequate or reported to theappropriate agency.

Despite being a sub-recipient for six of the seven ARRA-funded projects, LADOTreported jobs created/retained directly to the OMB in October 2009, rather thanreporting the information to Caltrans, the prime recipient with reporting responsibility tothe OMB. The Department believed it was following CAO instructions; however, theinstructions appear to have been misunderstood. According to the CAO, other Citydepartments who are sub-recipients did not submit their first quarterly report directly tothe OMB.


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In subsequent months, LADOT appropriately reported this information to Caltrans, butmissed the November 2009 reporting deadline for all projects, and missed the March2010 reporting deadline for the Transit Priority project. The Department indicated thatthe November deadline was missed due to time spent preparing to meet with the FHWAReview Team and the March deadline was missed because of staffing shortages.

We also noted that LADOT reported FTE hours based on budgeted positions retainedand did not follow the OMBs criteria of using actual hours worked. In January 2010, theCAO provided instructions to departments on how to report the number of jobscreated/retained for ARRA reporting purposes. The Department indicated it is currentlyfollowing the OMB/CAO instructions for determining the number of jobscreated/retained.

The Recovery Act requires grant recipients to report quarterly on jobs created orretained with ARRA funding. Prime recipients (entities who receive ARRA funds directlyfrom a Federal agency) report jobs data directly to the Federal website

FederalRecovery.gov. Subrecipients are required to report at least quarterly to theprime recipient; generally, a State agency. Further, the Act requires that the number of jobs created/retained be accurate and based on the actual number of hours worked.On a quarterly basis, recipients are to determine the number of full-time equivalentpositions, based on the actual number of hours worked, divided by the number of hoursfor a full-time equivalent.

Recommendation

3. LADOT management should ensure that the number of jobs createdand/or retained is reported accurately and within required deadlines.

#3: The Departments processes need to be strengthened to ensuretransparent and accurate tracking of ARRA-related expenditures.

LADOT is experienced with Federal grant awards and the requirements for capturing,recording and reporting of grant receipts and expenditures. Generally, the Departmentfollowed its established grant processes for the ARRA grant awards. While theseprocesses may be adequate for other grant funding sources, some of the specificrequirements of ARRA may not be sufficiently addressed as described below.

The process for billing costs for reimbursement needs improvement.

The Departments Accounting Division bills Caltrans based on information provided bythe Project Manager. However, the Project Manager does not review expenditureinformation to confirm that all costs are billed. As a result, some of the costs incurredfor ARRA activities were not billed.


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For example, we noted that materials expenditures reported on ARRA specific workorders for three projects were incurred and recorded in the General Fund from July 1,2009 to January 14, 2010, but were not billed to Caltrans. The materials expenditurestotaled $35,913 (New Traffic Signals - $22,483; Left Turn Arrows - $11,150 and LED -$2,280).

The Accounting Division initially agreed that these costs should have been billed; but,the Project Manager stated that it is difficult to demonstrate that the materials were fullyused on the ARRA projects. As a result, the Department did not bill for these costs.According to the Department, the expenditures recorded in the General Fund refer toover-the-counter stock. The Department had not billed these costs because there wereno signed packing slips from the Department of General Services (GSD) for thepurchase of these items. However, we noted that the first billing for the Left TurnArrows Project included materials costs of $2,662. The Department is working withGSD to obtain the supporting documents in order to bill Caltrans, and will verify thevalidity of the $2,662 billed material costs. It also appears the Department has not

adequately defined how materials costs should be billed, i.e., as direct or indirect costs.As a result, the City is not recovering all eligible costs related to ARRA activities.

We also noted that the Department did not include the costs associated with payingemployees a meal allowance, a paid benefit to City employees per the CitysMemorandum of Understanding (MOU) #2. Based on MOU #2, a meal allowance of$8.25 is paid to an employee whenever the City requires the employee to work at leastfour hours in excess of the employees regularly scheduled work shift on a normal workday, or at least four hours in excess of an overtime work shift on a normal work day off.Since this paid benefit for meal allowance is a direct cost incurred for ARRA-fundedactivities, and is not included in the Cost Allocation Plan (CAP) calculation, it should beincluded in the billings to Caltrans. We noted that paid meal allowances totaling $434from July 1, 2009 to January 2, 2010 were not included in the ARRA billing for the NewTraffic Signals Project. In addition, we noted that employees are being paid an incorrectallowance amount, i.e., $8.50 instead of $8.25 per the MOU. Although the amountincurred to date is not significant, processes should be in place to ensure all ARRA-related expenditures are properly captured and billed.

The process for tracking work orders for ARRA projects does not ensure that ARRA-related expenditures can be readily identified.

We noted that not all ARRA-related work orders were completely and accurately billed.

The Accounting Division prepares the bill based on the list of work orders provided bythe Project Manager, but does not run a complete listing of work orders related to ARRAprojects. Some work order numbers were revised to include the ARRA prefix; however,employees working in the field continued to use the non-ARRA work order numbers. Asa result, these work orders were not billed and the associated costs were notreimbursed.


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For the New Signal project, 19 work orders were not included in the billing, though laborcosts were charged on three of them. For the Left Turn Arrows project, 19 work orderswere not included in the billing, though labor costs were charged on four of them. Forthose projects for the period July 1, 2009 to November 30, 2009, we determined thatincurred and eligible labor costs totaling $3,284 was not billed to Caltrans.

Also, for the LED project, we determined that labor costs totaled $227,949 as of thereporting date but were incorrectly reported as $73,240, in the December report toCaltrans. Some of the difference was attributable to staff charging time to work ordernumbers without the ARRA prefix, and were not appropriately captured, as discussedabove.

To ensure all ARRA related costs have been accurately captured and billed, periodicreconciliations of the Citys Financial Management Information System (FMIS) to billingsshould be performed.

Recommendations

LADOT management should ensure:

4. Costs that are directly attributable to a specific project are adequatelysupported, captured and billed as direct costs.

5. All costs related to the project are completely captured in the assignedARRA-specific work orders and billed to the grantor.


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SECTION II: FULL COST RECOVERY AND CITY FRONT-FUNDING

#4: Current processes related to identifying and billing for indirect costs maynot ensure full cost recovery.

For transportation projects, Caltrans only allows billing of indirect costs throughapproved CAP rates. Typically, the Department only claims the indirect costs (centralservices and department administration costs) on the last billing, when the most recentCAP rate is approved and there are remaining funds available on the grant. Therefore,the City is committing to do the work without an assurance of full cost recovery.

We also noted that the Departments preliminary cost estimates used for City decision-making for the ARRA projects do not include indirect or overhead costs.13 The CAOsOffice indicated that the ARRA Grant Proposal document (referred to as the one-pager) is an estimate outlining how funds will be used. The CAOs report and budgetplan details the fiscal impact, which shows overhead or General Fund costs.

LADOTs ARRA projects were part of a Citywide ARRA allocation for transportation-related projects. The CAO prepared a report to the Mayor and Council in July 2009describing the transportation-related ARRA funding that the City could potentiallyreceive. The CAO reported that, at a minimum, direct costs and fringe benefits wouldbe reimbursed to the City. In addition, to the extent possible, departments receivingARRA transportation grants would maximize the reimbursement of indirect costsbeyond fringe benefits. According to the CAO, this would result in no impact to theCitys General Fund.

Although the CAO indicated that the Citys decision makers are aware of the full costs ofARRA-funded projects (estimated direct and indirect costs), we could find no formalreport detailing all of the Citys costs that would be incurred. When applying for grantfunding, the estimated full cost of the project (including expected reimbursement fromthe grantor, as well as costs that will be absorbed by other funding sources, especiallythe General Fund) should be presented to the Citys decision makers. Citypolicymakers should be informed if full cost recovery will or will not be achieved asrequests for grant approvals, including ARRA funding, are made.

Recommendation

6. The CAO should work with LADOT management to develop detailedplans and budgets to identify and capture all the costs related to ARRA-funded projects and present to the Citys decision makers, especially iffull cost recovery may not be achievable.

13 The preliminary cost estimates referred to in our report are those presented to Council for acceptanceand approval of the awards. LADOT did include all costs, direct, indirect and overhead in a PublicInterest Finding submitted to Caltrans, which was required to document it was more cost effective to useinternal force account than contracted services.


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#5: Current processes do not ensure the General Fund is reimbursed timely forfront funding.

ARRA transportation projects require front-funding by the City and are subsequentlyreimbursed by the grantor. For cash flow purposes, the City uses the Municipal

Improvement Corporation of Los Angeles Commercial Paper (MICLA CP) Program toprovide short-term funding. For LADOTs ARRA-funded projects, $15 million wasappropriated from MICLA Fund 298 for Fiscal Year 2009-10.

LADOTs direct labor costs are paid through the General Fund, and non-labor costs arepaid through the MICLA Fund 298. Over the last three years, materials such as LEDlight bulbs were charged to the General Fund when purchased as part of the LEDretrofit project. ARRA-related funding covers the materials costs for the current year ofthe LED retrofit project.

When ARRA reimbursements are received from Caltrans, all the monies are deposited

to MICLA Fund 298. However, LADOT did not transfer cash from the MICLA fund toreimburse the General Fund for the direct labor and LED material costs that had beenincurred for these ARRA projects. Direct labor and LED material costs of $1,099,561related to the LED project, the New Traffic Signals and the Left Turn Arrows projectsshould be reimbursed to the General Fund instead of MICLA Fund 298. These costswere reimbursed by Caltrans prior to January 2010. The City established the ARRA MICLA special Fund and ARRA Transportation Projects Special Fund in January2010.

The Department maintains a Consolidated Labor Charges Report to track the directlabor and overtime costs to be transferred to the General Fund. The Departmentintends to make the reimbursement transfer to the General Fund quarterly. The CAOhas indicated that reimbursements to the General Fund should be transferred monthly;however, due to departments staff shortages resulting from the Early RetirementIncentive Program (ERIP), layoff, furlough, etc., a bi-monthly transfer is also acceptable.

Recommendation

7. LADOT management should implement a process to ensure that allcosts incurred are reimbursed to the correct funding source on amonthly or bi-monthly basis.

#6: LADOT does not have an adequate process to ensure MICLA cash flowreports are submitted to the CAO.

As stated in Observation #5, ARRA transportation projects require front-funding by theCity and the MICLA CP Program provides the necessary short-term funding. As ofSeptember 2009, departments are required to submit MICLA cash flow reports to theCAO on a bi-monthly basis. However, as of our fieldwork date, the LADOT had not


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submitted any MICLA cash flow reports despite several reminders from the CAO.Without the cash flow reports, the CAO cannot reasonably estimate the Citys needs forissuing MICLA commercial paper and ensuring a sufficient cash flow is available for theprojects.

The CAO relies on departments MICLA cash flow reports to estimate the amount ofMICLA commercial paper that may need to be issued. Without accurate information,the City may issue too much or too little commercial paper to front-fund the ARRAprojects, resulting in either additional financing costs or limited cash available.

Recommendation

8. LADOT management should ensure MICLA cash flow reports aresubmitted to the CAO bi-monthly.


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SECTION III: OTHER CITY REQUIREMENTS

#7: LADOT lacks an adequate process to ensure the accuracy of informationreported on Project Health Reports submitted to the CAO.

Departments prepare monthly Project Health Reports for submission to the CAO whichnotes expenditures incurred to date, the number of jobs created/retained and theconstruction status of ARRA-funded projects. The CAO uses that information to updatethe Citys ARRA LA Recovery website to keep the public informed of how ARRA fundsare being used within the City. Departments are responsible for ensuring theinformation provided to the CAO is accurate so that the Citys decision makers and thepublic can rely on the information as being correct and complete.

In the first Project Health Report submitted to the CAO, we identified somediscrepancies reported by the Department. For example, we noted total expendituresfor the LED Project from June 18, 2009 through December 31, 2009 were under-stated

by approximately $484,663, because the Department only reported expendituressubmitted for reimbursement through October, but not the unbilled expendituresincurred for November and December 2009. The incurred expenditures for the LEDproject should be $1,810,403 instead of $1,325,740 as reported by LADOT.

Expenditures may also be understated on the Project Health Report becauseemployees may have charged time to work orders without the ARRA designation (asnoted in Observation #3). Because staff did not always report the correct work ordernumber, we determined that labor costs totaling $85,637 from July 1, 2009 to December31, 2009 for the LED, Left Turn Signals, and New Traffic Signals projects were notreported in their respective Project Health Reports. As a result, labor hours wereunderstated as well as the number of jobs created/retained, which should have beenreported as 11.7 instead of 9 for the three projects.

We also noted that LADOT did not correctly report expenditures by the source offunding used to front-fund costs that would be subsequently reimbursed. For example,expenditures for the LED project from June 18, 2009 through December 31, 2009 front-funded by MICLA was $50,619, but were reported as $1,325,740. Further, totalexpenditures of $1,759,784 front-funded by the General Fund were reported as only$2,280.

As this was the first Project Health Report prepared by the Department, staff may nothave been familiar with the reporting criteria imposed by the CAO. The CAO hasrecently started working with City departments to review existing ARRA projects, andnow provides training to departmental staff to ensure reporting criteria is understoodand followed.


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Recommendation

9. LADOT management should ensure ARRA data is accurately reportedon the Project Health Reports and seek CAO assistance whennecessary.

#8: LADOT may not have adequate processes to ensure that City Councilapproval is obtained timely for ARRA-awarded grants.

The Citys grant application and acceptance procedures require formal approval by theCity Council to accept grant awards. Council approval of grant award acceptance helpsto ensure that City Officials are informed of potential financial and programmaticcommitments. We noted that one of the Departments ARRA projects had not obtainedformal City Council approval as of our fieldwork date.

On July 31, 2009, the Federal Transit Administration (FTA) of the U.S. Department ofTransportation awarded an $8 million ARRA grant to the LADOT to purchase 16Commuter Express buses. However, as of our audit fieldwork, the City Council had stillnot formally approved the Citys acceptance of the award.

According to the Department, the bus purchase was previously approved andappropriated from Prop A funding. The ARRA grant was intended to reimburse theProp A funding. The Department indicated that since there is no centralized monitoringon the ARRA funds within the Department, the process to obtain approval from the CityCouncil on the acceptance of the award was overlooked.

The Department requested Council authorization to accept the award on February 12,2010. The CAOs report and recommendation to accept the award was submitted to theAd Hoc Committee on Economic Recovery and Reinvestment on April 8, 2010.Subsequent to our fieldwork date, the Council approved the award acceptance on June1, 2010.

Recommendation

10. LADOT management should ensure City Council approval is obtainedtimely for all ARRA grant awards.


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APPENDIX A

OFFICEOFTHECONTROLLER

ARRA Performance and Financial Auditof the Department of Transportation

Ranking of Recommendations

Number Description RankingCode

Recommendations

SECTION I.TRANSPARENCY AND ACCOUNTABILITY OF ARRAFUNDSLADOT management should:

1. The Departments existingcontracting processes may notbe sufficient to meet thepublics and policy makersintentions that ARRA funds areexpended quickly to promote

job creation/retention andstimulate the economy.

U 1. Determine whether its contractingprocesses can be further streamlinedfor ARRA projects to ensure theseinfrastructure investments can have amore rapid impact on jobcreation/retention and the economy.

N 2. The Mayor and City Councilshould consider requiringdepartments to implement anexpedited process for awardingcontracts funded by ARRA grants.


2. The process to ensure accurateand timely reporting of jobscreated/retained with ARRAfunding may not be adequate orreported to the appropriateagency.

U 3. Ensure that the number of jobscreated and/or retained is reportedaccurately and within requireddeadlines.

3. The Departments processesneed to be strengthened toensure transparent andaccurate tracking of ARRA-related expenditures.

N 4. Ensure costs that are directlyattributable to a specific project areadequately supported, captured andbilled as direct costs.

N 5. Ensure all costs related to the

project are completely captured in theassigned ARRA-specific work ordersand billed to the grantor.


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SECTION II: FULL COST RECOVERY AND CITY FRONT-FUNDING4. Current processes related to

identifying and billing forindirect costs may not ensurefull cost recovery.

N 6. The CAO should workwith LADOT management todevelop detailed plans andbudgets to identify and

capture all the costs relatedto ARRA-funded projectsand present to the Citysdecision makers, especially iffull cost recovery may not beachievable.


5. Current processes do notensure the General Fund isreimbursed timely for frontfunding.

N 7. Implement a process toensure that all costs incurredare reimbursed to the correctfunding source on a monthlyor bi-monthly basis.

6. LADOT does not have anadequate process to ensureMICLA cash flow reports aresubmitted to the CAO.

N 8. Ensure MICLA cash flowreports are submitted to theCAO bi-monthly.

SECTION III: OTHER CITY REQUIREMENTS7. LADOT lacks an adequate

process to ensure theaccuracy of informationreported on Project HealthReports submitted to the CAO.

N 9. Ensure ARRA data isaccurately reported on theProject Health Reports andseek CAO assistance whennecessary.

8. LADOT may not have adequateprocesses to ensure that CityCouncil approval is obtainedtimely for ARRA-awardedgrants.

N 10. Ensure City Councilapproval is obtained timelyfor all ARRA grant awards.

Description of Recommendation Ranking Codes

U- Urgent- The recommendation pertains to a serious or materially significant audit finding or controlweakness. Due to the seriousness or significance of the matter, immediate management attention andappropriate corrective action is warranted.

N- Necessary- The recommendation pertains to a moderately significant or potentially serious audit

finding or control weakness. Reasonably prompt corrective action should be taken by management toaddress the matter. The recommendation should be implemented within six months.

D- Desirable- The recommendation pertains to an audit finding or control weakness of relatively minorsignificance or concern. The timing of any corrective action is left to managements discretion.

N/A- Not Applicable

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