AUDIT COMMITTEE PLEASE NOTE CHANGE IN MEETING TIME & ROOM LOCATION AGENDA

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1 AUDIT COMMITTEE Thursday, November 6, :00 PM PLEASE NOTE CHANGE IN MEETING TIME & ROOM LOCATION East Wing, Lower Level Conference Room County Government Center 70 West Hedding Street San Jose, CA AGENDA CALL TO ORDER 1. ROLL CALL 2. PUBLIC PRESENTATIONS: This portion of the agenda is reserved for persons desiring to address the Committee on any matter not on the agenda. Speakers are limited to 2 minutes. The law does not permit Committee action or extended discussion on any item not on the agenda except under special circumstances. If Committee action is requested, the matter can be placed on a subsequent agenda. All statements that require a response will be referred to staff for reply in writing. 3. ORDERS OF THE DAY CONSENT AGENDA 4. Approve the Regular Meeting Minutes of May 1, Approve the Regular Meeting Minutes of August 28, North First Street San Jose, CA Administration Customer Service

2 Santa Clara Valley Transportation Authority Audit Committee November 6, 2014 REGULAR AGENDA 6. ACTION ITEM -Review and receive the audited CAFR for the VTA, and the Financial Reports for ATU Pension Plan and Retirees OPEB Trust (both referred to as Trusts) for Fiscal Year ACTION ITEM -Review and receive the Auditor General's report on the VTA BART to Silicon Valley Extension Project Interagency Agreement Compliance Assessment. 8. ACTION ITEM -Review and receive the Auditor General's report on the Trapeze OPS Pre-Implementation Review. 9. ACTION ITEM -Review and receive the Auditor General's follow-up report on the implementation status of management's action plans contained in the Information Technology (IT) Network Security Internal Audit. 10. INFORMATION ITEM -Receive an update from Auditor General Office staff on the status of projects contained in the current Internal Audit Work Plan. OTHER ITEMS 11. Items of Concern and Referral to Administration. 12. Review Committee Work Plan. (Fernandez) 13. Committee Staff Report. (Fernandez) 14. Chairperson's Report. (Price) 15. Determine Items for the Consent Agenda for future VTA Board of Directors' meetings. 16. ANNOUNCEMENTS 17. ADJOURN In accordance with the Americans with Disabilities Act (ADA) and Title VI of the Civil Rights Act of 1964, VTA will make reasonable arrangements to ensure meaningful access to its meetings for persons who have disabilities and for persons with limited English proficiency who need translation and interpretation services. Individuals requiring ADA accommodations should notify the Board Secretary s Office at least 48-hours prior to the meeting. Individuals requiring language assistance should notify the Board Secretary s Office at least 72-hours prior to the meeting. The Board Secretary may be contacted at (408) or board.secretary@vta.org or (408) (TTY only). VTA s home page is or visit us on (408) : 中文 / Español / 日本語 / Page 2

3 Santa Clara Valley Transportation Authority Audit Committee November 6, 2014 한국어 / tiếng Việt / Tagalog. Disclosure of Campaign Contributions to Board Members (Government Code Section 84308) In accordance with Government Code Section 84308, no VTA Board Member shall accept, solicit, or direct a contribution of more than $250 from any party, or his or her agent, or from any participant, or his or her agent, while a proceeding involving a license, permit, or other entitlement for use is pending before the agency. Any Board Member who has received a contribution within the preceding 12 months in an amount of more than $250 from a party or from any agent or participant shall disclose that fact on the record of the proceeding and shall not make, participate in making, or in any way attempt to use his or her official position to influence the decision. A party to a proceeding before VTA shall disclose on the record of the proceeding any contribution in an amount of more than $250 made within the preceding 12 months by the party, or his or her agent, to any Board Member. No party, or his or her agent, shall make a contribution of more than $250 to any Board Member during the proceeding and for three months following the date a final decision is rendered by the agency in the proceeding. The foregoing statements are limited in their entirety by the provisions of Section and parties are urged to consult with their own legal counsel regarding the requirements of the law. All reports for items on the open meeting agenda are available for review in the Board Secretary s Office, 3331 North First Street, San Jose, California, (408) , the Monday, Tuesday, and Wednesday prior to the meeting. This information is available on VTA s website at and also at the meeting. NOTE: THE BOARD OF DIRECTORS MAY ACCEPT, REJECT OR MODIFY ANY ACTION RECOMMENDED ON THIS AGENDA. Page 3

4 AUDIT COMMITTEE Thursday, May 1, 2014 CALL TO ORDER MINUTES The Regular Meeting of the Audit Committee was called to order at 4:30 p.m. by Chairperson Price in the East Wing, Lower Level Conference Room, County Government Center, 70 West Hedding Street, San José, California. 1. ROLL CALL Attendee Name Title Status Cindy Chavez Member Present Rose Herrera Member Absent Gail Price Chairperson Present Perry Woodward Vice Chairperson Present A quorum was not present and a Committee of the Whole was declared. 2. PUBLIC PRESENTATIONS There were no public presentations. Member Chavez took her seat at 4:31 p.m. and a quorum was declared. 3. ORDERS OF THE DAY There were no Orders of the Day. CONSENT AGENDA 4. Regular Meeting Minutes of February 6, 2014 M/S/C (Woodward/Chavez) to approve the Regular Meeting Minutes of February 6, REGULAR AGENDA 5. VTA s Extension of BART to Silicon Valley Project Construction Schedule Assessment Patrick Hagan, Auditor General, provided an overview of the report highlighting the findings of the assessment and noted the following: 1) the schedule is being managed appropriately; 2) the schedule is realistic and on time; 3) VTA s overall level of risk is Medium; and 4) VTA Management agrees with all Auditor General s Office recommendations and has committed to assess, implement and report results by October 30, NOTE:M/S/C MEANS MOTION SECONDED AND CARRIED AND, UNLESS OTHERWISE INDICATED, THE MOTION PASSED UNANIMOUSLY North First Street San Jose, CA Administration Customer Service

5 Members of the Committee made the following comments: 1) suggested remedies be included in the contract; 2) the importance of conveying to the public the seriousness of the audit and remedies; and 3) queried about contractor personnel changes. M/S/C (Woodward/Chavez) to approve submitting a recommendation to the Board of Directors to review and receive the Auditor General's report on the VTA Extension of BART to Silicon Valley Project Construction Schedule Assessment. 6. VTA Procurement and Contracting Process Assessment Mr. Hagan provided an overview of the report highlighting the findings of the assessment and noted VTA s overall level of risk was Medium. He recommended VTA fully utilize the SAP Procurement module to automate the procurement process and enhance communication and training. Mr. Hagan stated VTA Management agreed with all the Auditor General s recommendations and is committed to their implementation. Staff will follow up in three to four months and report what changes have been implemented. Members of the Committee discussed the following: 1) software training; 2) transparency through e-procurement; and 3) contract terms. Nuria I. Fernandez, General Manager, noted the procurement process reform is multi-tiered with audit review and recommendations as part of the process followed by a peer review through the American Public Transportation Association (APTA). VTA will create a website Dashboard listing all VTA contracts, company names, contract amount, and change order information. VTA will also develop e-procurement standards and policies. M/S/C (Woodward/Chavez) to approve submitting a recommendation to the Board of Directors to review and receive the Auditor General's report on the VTA Procurement and Contracting Process Assessment. 7. Review Status of Internal Audit Work Plan Corey Saunders, Deputy Auditor General, provided a brief overview on the current status of projects and activities completed as well as future projects scheduled. On order of Chairperson Price and there being no objection, the Committee received an update from Auditor General Office staff on the status of projects contained in the current Internal Audit Work Plan. OTHER ITEMS 8. Items of Concern and Referral to Administration There were no items of Concern and Referral to Administration. 9. Review Committee Work Plan Ms. Fernandez noted the next Audit Committee meeting is scheduled on Thursday, August 28, On order of Chairperson Price and there being no objection, the Committee reviewed the Committee Work Plan. Audit Committee Page 2 of 3 May 1, 2014

6 10. Committee Staff Report There was no Committee Staff Report. 11. Chairperson s Report There was no Chairperson s Report. 12. Determine Items for the Consent Agenda for future Board of Directors Meetings. August 28, 2014 VTA Board of Directors Meeting CONSENT: Agenda Item #5. VTA s Extension of BART to Silicon Valley Project Construction Schedule Assessment; Agenda Item #6. VTA Procurement and Contracting Process Assessment. REGULAR: None 13. ANNOUNCEMENTS There were no Announcements. 14. ADJOURNMENT On order of Chairperson Price and there being no objection, the Committee was adjourned at 5:15 p.m. Respectfully submitted, Anita McGraw, Board Assistant VTA Office of the Board Secretary Audit Committee Page 3 of 3 May 1, 2014

7 AUDIT COMMITTEE Thursday, August 28, 2014 CALL TO ORDER MINUTES The Regular Meeting of the Audit Committee was called to order at 4:30 p.m. by Vice Chairperson Woodward in Room 157, County Government Center, 70 West Hedding Street, San José, California. 1. ROLL CALL Attendee Name Title Status Cindy Chavez Member Present Rose Herrera Member Absent Gail Price Chairperson Absent Perry Woodward Vice Chairperson Present A quorum was not present and a Committee of the Whole was declared. 2. PUBLIC PRESENTATIONS There were no public presentations. 3. ORDERS OF THE DAY There were no Orders of the Day. CONSENT AGENDA 4. Regular Meeting Minutes of May 1, 2014 On order of Vice Chairperson Woodward and there being no objection, the Committee of the Whole deferred the Regular Meeting Minutes of May 1, REGULAR AGENDA 5. Annual Financial Audit Services FY 2014 Grace Ragni, Fiscal Resources Manager, introduced Ahmad Gharaibeh, Partner, Vavrinek, Trine, Day & Company, LLP (VTD), who presented a brief overview of the staff report. On order of Vice Chairperson Woodward and there being no objection, the Committee of the Whole reviewed and received the scope of work for Annual Financial Audit Services for Fiscal Year VTA/ATU, Local 265 Pension Plan Program Internal Audit Patrick Hagan, Auditor General, provided a brief overview of the staff report. He indicated all pension options offered by the VTA/ATU Pension Plan were tested. One hundred percent of all records reviewed were determined to be properly calculated and had accurate payments North First Street San Jose, CA Administration Customer Service

8 Member Chavez noted support for mandatory training and suggested staff be trained on new products that are introduced to the market. On order of Vice Chairperson Woodward and there being no objection, the Committee of the Whole reviewed and received the Auditor General's report on the VTA/ATU, Local 265 Pension Plan Program Internal Audit. 7. Auditor General's Report on the Trapeze OPS Pre-Implementation Review On order of Vice Chairperson Woodward and there being no objection the Committee of the Whole deferred the Auditor General s report on the Trapeze OPS Pre-Implementation Review. 8. Internal Audit Work Plan Cory Saunders, Deputy Auditor General, provided a brief overview of the staff report. On order of Vice Chairperson Woodward and there being no objection, the Committee of the Whole received an update from Auditor General Office staff on the status of projects contained in the current Internal Audit Work Plan. OTHER ITEMS 9. Items of Concern and Referral to Administration There were no items of Concern and Referral to Administration. 10. Review Committee Work Plan On order of Vice Chairperson Woodward and there being no objection, the Committee of the Whole reviewed the Committee Work Plan. 11. Committee Staff Report There was no Committee Staff Report. 12. Chairperson s Report There was no Chairperson s Report. 13. Determine Items for the Consent Agenda for future Board of Directors Meetings. There were no Items for the Consent Agenda for future Board of Directors Meetings. 14. ANNOUNCEMENTS Mr. Hagan announced he will be attending the American Public Transportation Association (APTA) meeting in October 2014, and will be participating in the Internal Auditors Subcommittee to share ideas and bring information back. 15. ADJOURNMENT On order of Vice Chairperson Woodward and there being no objection, the Committee was adjourned at 5:06 p.m. Audit Committee Page 2 of 3 August 28, 2014

9 Respectfully submitted, Menominee L, Board Assistant VTA Office of the Board Secretary Audit Committee Page 3 of 3 August 28, 2014

10 6 Date: October 22, 2014 Current Meeting: November 6, 2014 Board Meeting: December 11, 2014 BOARD MEMORANDUM TO: THROUGH: FROM: SUBJECT: Santa Clara Valley Transportation Authority Audit Committee General Manager, Nuria I. Fernandez Chief Financial Officer, Raj Srinath Comprehensive Annual Financial Report (CAFR) for the Santa Clara Valley Transportation Authority (VTA), and Financial Reports for the Amalgamated Transit Union (ATU) Pension Plan and Retirees' Other Post-Employment Benefits (OPEB) for Fiscal Year 2014 Policy-Related Action: No Government Code Section Applies: No ACTION ITEM RECOMMENDATION: Review and receive the audited CAFR for the VTA, and the Financial Reports for ATU Pension Plan and Retirees OPEB Trust (both referred to as Trusts) for Fiscal Year BACKGROUND: Pursuant to state law, Administrative Code of the Santa Clara Valley Transportation Authority (VTA), and provisions of the Trusts, Vavrinek, Trine, Day & Company, LLP (VTD), a Certified Public Accounting Firm, conducted an audit of VTA and its Trusts finances for the fiscal year ended June 30, 2014 (FY 2014). The auditors are required by audit standards to obtain reasonable assurance about whether the financial statements are free of material misstatement as well as assess whether the accounting principles used and estimates made by management are reasonable. Audited VTA financial statements are required to be submitted to the State Controller, Metropolitan Transportation Commission, federal and state agencies, and other parties such as the bondholders and financial rating agencies North First Street San Jose, CA Administration Customer Service

11 6 DISCUSSION: Audit Results VTD rendered an unmodified opinion on VTA s and the Trusts financial statements. The audit reports state that the financial statements present fairly, in all material respects, the financial activities of VTA and its Trusts as of June 30, 2014, in conformity with the accounting principles generally accepted in the United States of America. There were no material weaknesses noted in the internal controls over financial reporting and operations. The Independent Auditor s opinion addressed to the Board is on pages 2-1 through 2-3 of the CAFR, and page 1 of the Retirees OPEB Financial Report. In planning and performing the audit of VTA s financial statements, VTD considered VTA s internal control system and procedures. Based on the audit procedures performed, VTD noted no significant deficiency or material weakness as noted in SAS 114 letter (Statements on Auditing Standards relating to Auditor's Communication with Those Charged with Governance). Audited Financial Statements VTA uses the fund accounting system for financial reporting to ensure and demonstrate compliance with finance-related legal requirements. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. VTA s funds can be divided into three categories: proprietary, governmental, and fiduciary. The financial statements, related footnotes, and Management s Discussion and Analysis as presented in the CAFR were prepared in accordance with the reporting requirements recommended by the Government Finance Officers Association (GFOA). The GFOA awarded a Certificate of Achievement for Excellence in Financial Reporting to VTA for its CAFR for the fiscal year ended June 30, This was the 18 th consecutive year that VTA achieved this coveted award. The award provides affirmation that VTA s Comprehensive Annual Financial Reports are consistently prepared in accordance with generally accepted accounting principles and applicable legal requirements. The CAFR reports the results of operations for: Proprietary Funds VTA Enterprise - VTA Transit; 1996 Measure B Transit Rail Program; 2000 Measure A Transit Improvement Program; BART Operating; Express Lanes, and Joint Development Program Internal Service Fund - Workers Compensation; General Liability, and Compensated Absences Governmental Funds Special Revenue Fund - Congestion Management Program (CMP) Page 2 of 9

12 6 Capital Projects Funds - Congestion Management & Highway Program, and1996 Measure B Highway Program Fiduciary Funds Financial Highlights Proprietary Funds Trust Funds - VTA Amalgamated Transit Union (ATU) Pension Plan; ATU Spousal Medical and Retiree Vision/Dental Fund, and Retirees Other Post Employment Benefits (OPEB) Trust Agency Funds - Bay Area Air Quality Management District; 1996 Measure B Ancillary Program, and Senate Bill 83 Vehicle Registration Fee The Proprietary Funds account for activities that are reported using the full accrual basis of accounting. VTA maintains two types of proprietary funds: Enterprise Funds and Internal Service Funds. Enterprise Funds Enterprise Funds are used to account for functions of VTA that are principally supported by user charges, sales tax and intergovernmental revenues. There are six types of activities that fall under this category: VTA Transit, 1996 Measure B Transit Improvement Program, 2000 Measure A Transit Improvement Program, BART Operating, Express Lanes, and Joint Development Program. Statement of Revenues, Expenses, and Changes in Fund Net Assets A Comparative Statement of Revenues, Expenses, and Changes in Fund Net Position is included on page 2-91 of the CAFR. Highlights on the operating and non-operating revenues are as follows: For FY 2014, operating revenues (mainly from transit service fares, toll fees, direct service shuttles, and advertisement income) were $42.4 million, up 0.6 million (1.4%) compared to FY2013. The increase was primarily due to more toll fee collections from Express Lanes and direct service shuttle revenues. Passenger fares and advertising revenues also increased in FY 2014 due to improved system ridership and increase in contract negotiated amount, respectively. VTA s large revenue sources for operating and capital funding, the 1976 Half-Cent Sales Tax, 2000 Measure A Half-Cent Sales Tax, and BART Operating 1/8-cent Sales Tax, were $186.4 million, $186.3 million, and $44.8 million, respectively. For FY 2014, the 1976 Half-Cent Sales Tax, 2000 Measure A Half-Cent Sales Tax and BART Operating 1/8-cent Sales Tax were higher than the prior year by $9.7 million (5.5%), $9.8 million (5.5%) and $2.8 million (6.8%), respectively. Lower unemployment, as well as higher consumer and business spending, helped increase VTA s revenue base. Page 3 of 9

13 6 Operating grants, consisting mainly of Federal Section 5307 Urbanized Formula Grants, federal planning grants, State Transportation Development Act (TDA), State Transit Assistance (STA) grant, and state vehicle license fees (AB434), were $6.1 million or 4.3% higher than the prior fiscal year. Investment income, a non-operating revenue, was $9.5 million; $9.3 million higher than FY Improved investment results were largely the outcome of declining interest rates and mark-to market-gains. Total operating expenses in FY 2014 were $27.6 million or 7.2% higher than FY2013. Significant activities on the operating and non-operating expenses are as follows: Labor and benefit costs increased $8 million or 3.0% in FY 2014 due to increase in labor rates and service hours. This increase was offset by an increase in costs allocated to capital of $2.0 million, which represents a credit for labor and non-labor costs capitalized as construction in progress. Other major expense categories which increased in FY 2014 were materials and supplies, services, leases and rents, as well as casualty and liability. The rise in materials and supplies was the effect of intensified revenue vehicle maintenance in preparation for Levi s Stadium transportation requirements. Service increase was primarily a result of switch replacements and overhead contact system maintenance at the light rail substations along Guadalupe Corridor. Leases and rents increased as a result of more costs incurred during the relocation of Downtown Customer Service Center. Cost of repairs on the old location was expensed as part of leases and rents. Casualty and liability increased due to General Liability reserve adjustment based on actuarial disclosure of the class action lawsuit affecting Employment Practices Liability. For the non-operating expenses, major variances were in Caltrain Subsidy which decreased $6.4 million; and Capital Contributions to/on behalf of Other Agencies which decreased $44.8 million primarily due to waning activities in the following projects: Capital Expressway Light Rail Pedestrian Improvement, Kato Road Grade Separation and Lower Berryessa Creek. There were project expenditures associated with the Hayward Maintenance Center in FY 2013 that were not incurred again in FY Interest expense and other bond charges (net of capitalized interest) decreased $4.6 million due to more interest being capitalized as more taxable bonds are drawn down. Other non-operating expenses were $11 million, $5.2 million higher than prior year. Certain project studies were expensed relating to light rail efficiencies and new rail corridor projects. Total Enterprise Fund net position was $3.7 billion, an increase of $275.8 million over FY Of the total net position increase, $215.5 million was related to the 2000 Measure A Transit Improvement Program Fund. The remaining increase in net position was as follows: VTA Transit ($13.9 million), 1996 Measure B ($4 thousand), BART Operating ($45.4 million), Express Lanes ($505 thousand) and Joint Development Program ($432 thousand). VTA accounts for the 2000 Measure A Transit Improvement Program as part of its Enterprise Fund. Even though the 2000 Measure A program revenues and related capital expenses are reported as part of Enterprise Fund financial statements, they are restricted for capital programs and operating Page 4 of 9

14 6 activities included in the ballot measure. The BART Operating fund was established when the tax measure was approved and took effect on July, 1, 2012, for a period not to exceed 30 years. The tax is dedicated to operate, maintain, improve and take care of future capital needs of the BART extension. Reserves The Enterprise Fund has a restricted and unrestricted reserve balance of $1.1 billion. Restricted funds are intended for specific purposes, bound by legal agreements, or ballot measure provisions as approved by county voters. This includes debt service reserve fund ($51.7 million), SWAP/lease collateral ($76.3 million), contract retention payment ($4.7 million), Measure A Transit Improvement fund ($538.1 million), Measure B Transit fund ($1.6 million), and BART Operating ($87.1 million). As of June 30, 2014, VTA Transit Fund reports a total operating reserve balance of $59.8 million. The VTA Board has established an operating reserve goal of 15% of the subsequent year's final operating budget to meet emergency needs that cannot be funded from any other source. This is meant to ensure that funds are available in the event of unanticipated revenue shortfalls or unavoidable expenditure needs. As of June 30, 2014, the reported operating reserve balance is at 15% of the FY2015 final operating budget. Other unrestricted reserve balance includes local share of approved capital funding that VTA must provide toward Board-approved capital projects ($113.6 million); Debt Reduction Fund ($101.9 million); Joint Development Program ($10.6 million); Sales Tax Stabilization Fund ($35 million); Express Lanes ($1.7 million); and Inventory and prepaid expenses ($21.3 million). VTA Transit Fund made an irrevocable transfer of $20.65 million to the Other Post Employment Benefit (OPEB) Trust Fund in FY 2013 to reduce unfunded accrued actuarial liability. This was reflected as a Net OPEB Asset and unrestricted net position in the VTA Transit Fund. Budgetary Comparison As shown on the Budgetary Comparison Schedule for the VTA Transit Fund (pages 2-96 & 2-97), the FY 2014 actual results for revenues were favorable compared to both the Adopted and Final Budget. Similarly, total operating and other expenses were also favorable compared to both the Adopted and Final Budget. The FY 2014 Adopted Budget projected a net budgetary positive balance of approximately $12.5 million. In June 2013, VTA Board of Directors adopted a biennial budget for Fiscal Years 2014 and 2015 which was developed with the specific goals of increasing ridership, preserving and enhancing service, maintaining and improving VTA s infrastructure, and advancing VTA s longterm capital programs. Based on the FY 2014 actual results, VTA Enterprise Fund reported a positive balance, on a budgetary basis, of $33.2 million, a $20.8 million favorable variance when compared to the Final Budget. Internal Service Funds Internal Service Funds are set up to account for services to other funds, departments or to other governments on a cost-reimbursement basis. General Liability, Workers Compensation, and Compensated Absences programs are accounted for in the Internal Service Funds. Page 5 of 9

15 6 The Statement of Revenues, Expenses and Changes in Fund Net Position (page 2-26) reported an increase in net position of $213 thousand. The fund liabilities were adjusted to be in line with the actuarial valuation report. As reflected in the Statement of Fund Net Position, page 2-25, Internal Service Fund column, the total net deficit amounted to $8.1 million as of FY This represents primarily compensated absences liability associated with ATU employee s accrued vacation leave which is funded by VTA Transit s FY 2015 operating budget. Governmental Funds Governmental funds are reported using modified accrual basis of accounting. This means that revenues are recognized in the accounting period in which they become measurable and available. VTA s Governmental Funds are divided in two categories: Special Revenue Funds and Capital Projects Funds. Special Revenue Funds are set up to account for revenues from specific taxes or other earmarked revenue sources which, by law, are designated to finance particular activities of government. The Congestion Management Program falls under the Special Revenue Fund category. Capital Projects Funds are set up to account for resources used for acquisition or construction of major capital assets by a governmental unit. VTA reports the Congestion Management and Highway Program, and 1996 Measure B Highway Program under the Capital Projects Funds category. Congestion Management Program (CMP) The CMP Special Revenue Fund is used to account for the congestion management, planning, and programming and development services within the geographic boundaries of Santa Clara County. The Statement of Revenues, Expenditures and Changes in Fund Balances (page 2-30) reports a $438 thousand increase in fund balance due to revenues exceeding expenditures in the current fiscal year. Total fund revenues, which mainly include member assessment and grants, were $5.2 million in FY2014; $827 thousand higher than the prior year due primarily to an increase in federal operating assistance grant. There was also a growth in other revenues associated with transportation modeling and ridership forecast services charged to other governmental agencies. Total expenses of $4.8 million were up by $500 thousand compared to FY 2013 due to increased labor in support of increased CMP activities. The CMP fund balance was $2.0 million as of June 30, Congestion Management & Highway Program (CM&HP) CM&HP Capital Projects Fund is used to account for the acquisition of capital assets and construction of highway projects administered on behalf of state and other local governments (other than those accounted for in the Measure B Highway Capital Projects Fund). The CM&HP administers highway projects on behalf of other agencies. As reflected on page 2-30, the CM&HP expended approximately $38.7 million on project costs during FY The primary expenditures were for US101/Capitol Expressway/Yerba Buena Interchange, I-880/280/Stevens Creek Boulevard Interchange, I-880 HOV Widening SR237 to US101, and Silicon Valley Express Lanes projects. The bulk of the funding for these projects came from federal, state and Measure A Swap funds. In total, CM&HP reported total revenue of Page 6 of 9

16 6 approximately $38.7 million in FY 2014; consisting of $4.3 million from federal grants and $34.4 million from state and local grants/assistance ($7.5 million from Measure A Swap funds, $0.6 million from Measure B swap, and $26.3 million from state and other sources). Measure B Highway Program Measure B Highway Program Capital Projects Fund is used to account for acquisition of capital assets or construction of 1996 Measure B Highway projects. The Measure B Highway projects consist primarily of widening highways and improvements that become the property of the State. As shown on page 2-30, VTA expended approximately $249 thousand during FY 2014 for Measure B Highway projects. Fiduciary Funds The Fiduciary Funds are used to account for assets held by VTA as a trustee (in a trust fund) and as an agent for others (in an agency fund). These assets cannot be used to support VTA s programs. VTA s Fiduciary Funds consist of trust and agency funds. The trust funds include the VTA ATU Pension Plan, ATU Spousal Medical and Retiree Vision/Dental Fund, and the Retirees Other Post Employment Benefits (OPEB) Trust. The VTA ATU Pension Plan Report is discussed on page 8 of this report. Bay Area Air Quality Management District, Measure B Ancillary, and SB83 Vehicle Registration Fee programs are reported as agency funds. Bay Area Air Quality Management District (BAAQMD) The BAAQMD Agency Fund accounts for the activities that relate to the Transportation Fund for Clean Air (TFCA) Program. The TFCA is generated by a $4 surcharge on vehicle registrations in the county. The BAAQMD administers these funds in the nine-county Bay Area. Funds are available for allocation to alternative fuels, arterial management, bicycle, and trip-reduction projects that reduce vehicle emissions. Assets in the BAAQMD fund are held by VTA in a custodial capacity; therefore, they are reported in the Agency Fund. As of June 30, 2014, BAAQMD s total assets were approximately $4.9 million, as reflected on page Senate Bill 83 Vehicle Registration Fees (SB83 VRF) In November 2010, the voters of Santa Clara County approved a measure which called for the enactment of a $10 motor vehicle registration fee to pay for transportation projects. The SB83 VRF fund was established in FY2011 to account for activities related to the implementation of the measure. For FY 2014, the fund received $15.5 million of DMV fees. As of June 30, 2014, the fund has total assets of $20.7 million. Measure B Ancillary Program The Measure B Ancillary Program was established to administer the 1996 Measure B funds. During FY 2013, VTA received and expended County contributions for Ancillary Program projects such as Measure B and Fund Swap projects, as well as pavement and bikeway paths. The County contribution represents funding received and passed on to other governments, commonly referred to as pass-through grants. As of June 30, 2014, the total assets of this program were $143 thousand (page 2-100). Page 7 of 9

17 6 ATU Spousal Medical and Retiree Vision/Dental Funds These funds account for the ATU Spousal Medical Program, which is a medical insurance benefit for eligible pensioners spouses, and the ATU Retiree Vision/Dental Program, which is a vision and dental benefit for eligible pensioners. Both benefits are funded through employee contributions. As shown on the Combining Statement of Changes in Fiduciary Net Position for Retiree Trust Funds (page 2-99), total employee contributions to Spousal Medical and Vision/Dental were approximately $1.4 million and $349 thousand, respectively. Total benefit payments made on behalf of ATU Spousal Medical Fund totaled $1.5 million for FY Total changes in net position show a total increase of $3.3 million for both funds. Total net position was $12.7 million for Spousal Medical Fund and $8.7 million for Vision/Dental Fund. Amalgamated Transit Union (ATU) Pension Plan Report The Santa Clara Valley Transportation Authority ATU Pension Plan Fund reports on the activities of the pension benefit plan covering VTA employees represented by the Amalgamated Transit Union (ATU). The ATU Pension Plan is 100% funded by VTA s contribution. Audit Results VTD rendered an unmodified opinion on the ATU Pension Plan Report, a component unit report of VTA s CAFR. The audit report states that it presents fairly, in all material respects, the activities of the ATU Pension Plan for the year ended June 30, 2014, in conformity the accounting principles generally accepted in the United States of America. The Independent Auditor s opinion addressed to the Board is on page 1 of the component unit report. Financial Highlights As shown on the Statement of Changes in the Plan Net Position of ATU Pension Plan Report (page 7), net position increased by $58.6 million for the year ended June 30, The major contributing factor was the improved net investment earnings. FY 2014 reported a $38.0 million net appreciation in the fair value of investment and net investment income of $26.2 million, up by $14.7 million or 30% from prior year. VTA contributions to the Plan and net investment earnings were $89.9 million, while the benefit payments to retirees and administration expenses were $31.3 million during FY As of June 30, 2014, net position held in trust was $481.2 million. Report details are shown on pages 6 & 7 of the ATU Pension Plan component unit report. Other Post-Employment Benefits (OPEB) Trust Financial Report Audit Results VTD rendered an unmodified opinion on the Trust Financial Report, a component unit of VTA s Comprehensive Annual Financial Report (CAFR). The audit report states that it presents fairly, in all material respects, the activities of the Trust for the year ended June 30, 2014, in conformity Page 8 of 9

18 6 with the accounting principles generally accepted in the United States of America. The Independent Auditor s opinion addressed to the Board is on page 1 of the Audited Financial Report. Financial Highlights The Statement of Changes in Trust Net Position (page 7) shows a total increase of $42.7 million in Trust net position for the year ended June 30, In FY 2014, VTA contributed $14.1 million to the trust. Net investment income for the fiscal year was $38.9 million consisting of mark-to-market investment gains of $27.8 million and interest earnings, net of investment expense, of $11.1 million. Total expenses of the Trust, which mainly include the retiree medical premium payments, were $10.3 million. As of June 30, 2014, net position held in Trust amounted to $260.3 million. Details are shown on pages 6 & 7 of the Audited Financial Report. These financial statements can be viewed at < under Audited Financial Statements section. A hard copy may be requested by writing to Santa Clara Valley Transportation Authority, Finance & Budget Division, 3331 North First Street, San Jose, CA FISCAL IMPACT: There is no fiscal impact as a result of this action. Prepared by: Grace S. Ragni Memo No Page 9 of 9

19 7 Date: October 28, 2014 Current Meeting: November 6, 2014 Board Meeting: March 5, 2015 BOARD MEMORANDUM TO: FROM: SUBJECT: Santa Clara Valley Transportation Authority Audit Committee Auditor General, Patrick J. Hagan BART Silicon Valley Program Interagency Agreement Compliance Assessment Policy-Related Action: No Government Code Section Applies: No ACTION ITEM RECOMMENDATION: Review and receive the Auditor General's report on the VTA BART to Silicon Valley Extension Project Interagency Agreement Compliance Assessment. BACKGROUND: VTA s BART Silicon Valley Extension Project (BART Silicon Valley or BART SV) is the 16- mile extension of the existing Bay Area Rapid Transit District (BART) system to the Santa Clara County cities of San Jose, Milpitas and Santa Clara. This 2000 Measure A Transit Sales Tax project is being delivered through a phased approach. The first phase, the Berryessa Extension Project (SVBX), is the initial 10-mile segment from Fremont south through Milpitas to the Berryessa area of north San Jose. The SVBX project is currently under construction. A project contained in the Board-revised FY 2015 Internal Audit Work Plan is the BART Silicon Valley Interagency Agreement Compliance Assessment. Execution and management of interagency agreements had previously been identified as an area of higher risk for the program. A factor contributing to the rating is that the C700 design/build contract for construction of the major portion of the SVBX project requires VTA to coordinate third-party utility relocation and to coordinate the third-party review of design efforts by the design/build contractor. Failure to manage this coordination could lead to potential delay in project completion/implementing service as well as compensable delay to the design/build contractor. DISCUSSION: In May 2014, the Auditor General s Office initiated the BART Silicon Valley Interagency 3331 North First Street San Jose, CA Administration Customer Service

20 7 Agreement Compliance Assessment. The purpose of this review was to determine if: (1) there is a sufficient process for establishing interagency agreements containing provisions that adequately protect VTA interests; (2) parties are complying with the various contract terms; and (3) costs are being monitored and reviewed for compliance with agreements. Based on the scope of our assessment and the work performed, VTA appears to be effectively executing and managing the interagency agreements. The agreements are being executed to adhere to the integrated project schedule and structured to manage the associated costs. The parties are generally complying with the agreements. Accordingly, we assessed an overall Medium level of risk regarding execution, management and compliance with BART SV interagency agreements, based on six identified areas of potential process improvement: one deemed as High risk, two as Medium, and three as Low risk. Most deal with enforcement of current provisions or including additional requirements in future agreements. VTA agreed with the Auditor General recommendations and has committed to implement the actions by the end of June Further explanation of the process improvement opportunities for management s consideration, along with management s responses and action plans, is provided in Section IV of the attached report. Recommendations for improvement or efficiency opportunities contained in this report are presented for the consideration of VTA management, which is responsible for the effective implementation of any action plans. FISCAL IMPACT: There is no financial impact associated with acceptance of this report. Prepared by: Pat Hagan, Auditor General & Stephen Flynn, Advisory Committee Coordinator Memo No ATTACHMENTS: A--BART SV Interagency Agreements Assessment (PDF) Page 2 of 2

21 7.a AUDITOR GENERAL REPORT No TO: Gail Price, Chairperson Audit Committee, VTA Board of Directors FROM: Patrick Hagan Auditor General s Office DATE: October 29, 2014 SUBJECT: VTA BART Silicon Valley Interagency Agreements Assessment Attached is our report for VTA BART Silicon Valley Interagency Agreements Assessment. Our engagement was performed in accordance with the terms of the agreement between Santa Clara Valley Transportation Authority (VTA) and McGladrey LLP (McGladrey) for Auditor General Services, Contract No. S13044 dated February 1, 2013, and in accordance with the Standards for Consulting Services issued by the American Institute of Certified Public Accountants. This report is provided for the use of VTA s Board of Directors, Audit Committee and management. Recommendations for improvement are presented for Management s consideration, and Management is responsible for the effective implementation of corrective action plans. Questions or concerns should be addressed to Patrick Hagan in the VTA Auditor General s Office at Auditor.General@VTA.org.

22 7.a Table of Contents AUDITOR GENERAL REPORT No VTA BART Silicon Valley Interagency Agreements Assessment October 29, 2014 I. Executive Summary... 1 II. Background, Objective, Scope and Approach... 3 A. Background... 3 B. Objective... 3 C. Scope... 3 D. Approach... 3 III. Ratings... 5 IV. Results... 6 Overall Risk Rating... 6 Individual Observations and Risk Ratings... 6

23 7.a I. Executive Summary VTA s BART to Silicon Valley Extension Project (BART Silicon Valley or BART SV) is the 16-mile extension of the existing Bay Area Rapid Transit District (BART) system to the Santa Clara County cities of San Jose, Milpitas and Santa Clara. This 2000 Measure A Transit Sales Tax project is being delivered through a phased approach. The first phase, the Berryessa Extension Project (SVBX), is the initial 10-mile segment from Fremont south through Milpitas to the Berryessa area of north San Jose. The SVBX project is currently under construction. In early 2014, a risk assessment refresh was conducted on the BART SV Program by the Auditor General s Office, in coordination with BART SV Program management, to consider various risks to the program as a whole. The risk assessment refresh identified the execution and management of interagency agreements with the VTA BART SV Extension project schedule as an area of higher risk for the program. The C700 design/build contract for construction of the major portion of the SVBX project requires VTA to coordinate third-party utility relocation and to coordinate the third-party review of design efforts by the design/build contractor. Failure to manage this coordination could lead to potential delay in project completion/implementing service as well as compensable delay to the design/build contractor. The VTA Board of Directors agreed that BART SV Extension project interagency agreements posed a higher risk for the program and thus approved inclusion of the VTA BART Silicon Valley Interagency Agreements Assessment in the approved FY 2015 Internal Audit Work Plan. The Auditor General s Office undertook the VTA BART Silicon Valley Interagency Agreements Assessment in mid The purpose of this assessment was to determine if: There is an adequate process for establishing interagency agreements; Interagency agreement requirements are adequately identified and determined; Parties are complying with the various contract terms; Determine if costs are being monitored and reviewed for compliance with agreements; and Determine if outstanding interagency agreements are being managed to adhere to the integrated schedule. Accordingly, the Auditor General s Office analyzed the BART SV master service agreements and amendments executed with utilities and municipalities. We also reviewed associated invoices received from municipalities and utilities. It should be noted that third-party utility relocations are a critical-path item for SVBX project completion. It should also be pointed out that developing and monitoring utility relocation agreements is a very challenging process since the utilities occupy their locations under various rights. Lastly, it is far more practical and cost-efficient for VTA to induce the owner to relocate their utility by agreement than compelling them through the exercise of complicated property rights. 1

24 7.a Based on the scope of our review, VTA appears to be effectively executing and managing the interagency agreements. The agreements are being executed to adhere to the integrated project schedule and are generally structured to manage the associated costs. Generally, the parties are complying with the agreements. Accordingly, we assessed an overall Medium level of risk regarding execution, management and compliance with BART SV interagency agreements, based on six identified areas of potential process improvement: one deemed as High risk, two as Medium, and three as Low risk. Most deal with enforcement of current provisions or including additional requirements in future agreements. Further explanation of the process improvement opportunities for management s consideration, along with management s responses and action plans, is provided in Section IV of this report. VTA agreed with the Auditor General recommendation and has committed to implement the actions by the end of June We would like to acknowledge VTA staff for their cooperation and professionalism throughout the process. 2

25 7.a II. Background, Objective, Scope and Approach A. Background VTA s BART to Silicon Valley Extension is the 16-mile extension of the existing San Francisco Bay Area Rapid Transit District (BART) system to the Santa Clara County cities of San Jose, Milpitas and Santa Clara. The BART SV project is managed by VTA in cooperation with BART. The BART SV Project is being delivered through a phased approach. The first phase, the Berryessa Extension Project (SVBX), is the initial 10-mile, two-station extension that begins in Fremont, south of the future BART Warm Springs Station, and proceeds over the former Union Pacific Railroad (UPRR) right-of-way through Milpitas to the Berryessa area of north San Jose. VTA entered into a design/build agreement with the Skanska-Shimmick-Herzog Joint Venture (SSH) to construct Line, Track, Stations and Systems (LTSS) for the SVBX project, which constitutes the vast majority of the project. This agreement (C700) requires VTA to coordinate third-party utility relocation and to coordinate the third-party review of design efforts by the design/build contractor. The project also required VTA to enter into agreements with municipalities for various issues such as cost sharing. It should be emphasized that third-party utility relocations are a critical-path item for SVBX project completion because many sequential tasks cannot be undertaken until utility relocation is completed. Also, developing and monitoring utility relocation agreements is very challenging since the utilities occupy their existing locations under various property, franchise, and license rights, and there are limited tools available to VTA for inducing the owner to relocate their utility for VTA s benefit. B. Objective The purpose of this assessment was to confirm the adequacy of the processes and controls in place within the BART SV project management team to help ensure compliance with terms, conditions and cost constraints by all interagency parties to the agreements. In addition, we sought to identify the standard framework for interagency agreements and identify potential opportunities for process and control improvements. C. Scope The scope of this assessment was to review the interagency agreements from inception of the project through April 30, Our review included agreements executed with utilities and municipalities. The scope of the assessment did not include any current or pending agreements with BART. D. Approach In performing this assessment, we reviewed over 130 utility and municipality documents provided by VTA, including master service agreements, amendments, and notice to owners. A total of 48 documents (master service agreements and amendments) were catalogued detailing 3

26 7.a the purpose of the agreement, cost and billing requirements, VTA payment requirements, invoicing requirements, etc. and were used in support of invoice testing. In addition to the detailed review of agreements, a judgmental sample of invoices was tested for compliance to agreement terms and adherence to internal control requirements. VTA provided a universe of 123 applicable invoices, of which 61 (approximately 50%) were reviewed and catalogued in detail. Invoice testing included a detailed review of payment requirements, invoice supporting details by cost element, internal review and approvals, etc. To achieve the objectives of this assessment, we also performed the following: 1. Reviewed of policies and procedures related to the process 2. Conducted interviews related to the scheduling process 3. Reviewed master service agreements executed with utilities and municipalities, contract amendments, and notice to owners 4. Catalogued 48 master service agreements and amendments with utilities and municipalities 5. Reviewed 61 invoices of the 123 invoices provided by VTA 6. Analyzed the contracts in relation to the construction schedule 7. Analyzed the process for managing interagency cost for budgetary constraints 4