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Capital Metro has never had the consistent leadership needed to establish sound basic procedures for management, budgeting, and accountability. The authority's managers have rarely been held accountable for their decisions and actions, despite the undeniable fact that they have done a poor job of running a basic bus operation.
At present, many of Capital Metro's senior management positions are held by "acting interim" managers. Until a new general manager is hired, the new board has little choice but to help manage the daily affairs of Capital Metro, given the authority's history and present state.
TPR proposes that Capital Metro simplify its management structure with one more reorganization-timed to coincide with the hiring of a new general manager-and then stay with this configuration for at least 18 months to stabilize the organization and begin solving the basic problems facing the authority.
Another goal of this reorganization would be to reduce administrative costs and hold the line on their future growth. Based on 1995 data, TPR found that Capital Metro's administrative costs are 23 percent higher than the average of 18 comparable transit authorities. A 1997 performance audit found that Capital Metro spends more than $500,000 annually for temporary administrative help. Duplicated functions represent part of the problem; for instance, Capital Metro has many stand-alone planning functions that should be consolidated, including strategic and business planning, route and ridership planning, and statistical analysis.
Strategic planning lacks commitment
Capital Metro lacks an effective annual business plan and long-term strategic plan. A few employees have devoted considerable effort to developing a strategic plan methodology, and they should be commended for their efforts, but Capital Metro's managers as a whole have not demonstrated much interest or involvement in the process.
Without commitments from the board, the general manager, and other key managers, a strategic plan will not prove useful except as a starting point for future discussion. Without such commitments, money spent for outside strategic planning and "total quality management" training is largely wasted.
Budgets without teeth
Capital Metro's budget preparation and disclosure procedures have been and continue to be fragmented and weak. Budgeting is a low-priority item for many managers within the authority. Few managers have been inclined to use monthly budget-to-actual reports to identify problems, prevent runaway project costs, and hold middle managers and supervisors fiscally accountable for their actions.
Most importantly, TPR found that the authority's past general managers and board members simply have not enforced budgets, and this practice continues today. The chief financial officer position has not been given sufficient authority to enforce sound budget preparation procedures and has not been held accountable for overseeing budget activity during the course of a year. The chief financial officer also lacks the professional staff needed to monitor revenues and expenditures on a daily basis and provide checks and balances over the financial performance of each department.
Capital Metro does not need expensive or complex budget policies and procedures; it simply needs accurate budgets that properly disclose assumptions and forecasts. The authority should prepare coherent short- and long-term business plans that are understandable to the board and public, and directly link annual budgets to those plans. Once budgets are approved, Capital Metro needs strong budgetary monitoring and enforcement mechanisms to hold all managers accountable for their actions.
Ineffective use of consulting services
Since 1985, Capital Metro has contracted for numerous expensive studies and services concerning bus ridership, total quality management, procurement audits, and light-rail planning, among other topics. But the authority has repeatedly failed to act on the recommendations produced by these studies. The new board, wishing to obtain some value from past light-rail research commissioned by the authority, recently found it necessary to spend $57,000 for a week-long session with many of Capital Metro's past consultants to discuss their previous research and provide a context for future decision-making.1
Capital Metro needs procedures to ensure that consulting studies are actually used to solve a specific problem. It should track consultants' recommendations and put them to the best possible use. It should reduce expenses by limiting the use of consulting services and making sure that new studies do not duplicate past work performed by staff or consultants. Consultants should be hired only when they are absolutely vital to devising solutions to specific problems facing the authority.
Stronger external audits
State law requires Capital Metro to undergo annual audits of its financial statements and to contract for performance audits of its entire operation every four years. State law also requires the State Auditor's Office to file comments on Capital Metro's annual financial audits, and the Texas Sunset Advisory Commission to perform an organizational review of the authority every 12 years.2 In addition, Capital Metro undergoes periodic scrutiny by federal agencies, primarily the Federal Transit Administration (FTA) and the Federal Railroad Administration.
Despite these external reviews, Capital Metro has experienced a continual series of fiscal and managerial misadventures. TPR believes that the Capital Metro board should make better use of these outside audits by holding the general manager responsible for taking the corrective actions they suggest. The board also should request stronger and more detailed outside audits, at least until it corrects basic business practices and establishes adequate monitoring controls.
Heavy legal costs
Capital Metro also has high outside legal costs, averaging at least $340,000 every year. From fiscal 1995 through April 1998, Capital Metro spent more than $1.7 million for contracted legal services. Capital Metro recently filled the new position of chief legal counsel. This person should be responsible for holding the line on the costs of outside legal contracts.
Solutions at hand
TPR's recommendations in this chapter would reorganize Capital Metro, consolidate administrative functions, and increase accountability for managers' actions. In particular, TPR recommends that the authority's scattered planning functions be consolidated in a single department with direct access to the general manager. TPR also proposes that spending on administrative staffing be reduced immediately to bring Capital Metro's administrative costs in line with those of other transit authorities.
The new general manager should work with the board and the consolidated Planning Department to spearhead Capital Metro's first comprehensive strategic planning effort; the success of this effort should be a major factor in the general manager's performance evaluation. This planning effort should be aided by uniform budget policies and procedures for all departments.
To help rein in administrative costs, TPR also proposes that Capital Metro discontinue or postpone a series of major consulting contracts until the authority devises mechanisms to ensure that these costly reports are put to good use. Still another recommendation calls for the authority's external auditors to begin a more detailed annual scrutiny of the authority's internal controls and expenditures. Finally, TPR recommends that Capital Metro use its newly hired legal counsel to help reduce the substantial cost of outside legal aid.
In all, the recommendations in this chapter would achieve net savings to Capital Metro of $1.4 million in fiscal 1999 and $7.1 million over the next five years.
Reorganize Capital Metro to reduce administrative overhead and increase accountability.
Capital Metro's current organizational structure clearly does not work. The problem goes straight to the top: the general manager and other senior managers have rarely been held accountable for their actions. Capital Metro lacks clear accountability and performance expectations for both managers and staff. The problem is well-known within the organization, yet remains uncorrected.
Capital Metro needs to establish clear lines of authority and accountability for each manager. Ironically, part of the problem is the authority's repeated reorganizations, which shuffle managers back and forth between departments and between Capital Metro and StarTran. These constant shifts make it difficult to track managers' actions and decisions and hold them accountable for results.
In June 1997, Capital Metro began a public relations program called "Back to the Basics" which promised public accountability by "streamlining the organization to be flat and lean" and by "limit[ing] hiring to critical positions."3 So far there is little evidence to suggest that Capital Metro has made any serious attempts to streamline its organization and reduce costs.
The new board has spent months working to restrain the growth of Capital Metro's operating budget, and has set aside a quarter of its sales tax revenues for future
projects. The board has enacted good first steps at fiscal discipline, but Capital Metro's administrative costs still are too high and management accountability still is too weak.
Capital Metro has a number of planning functions scattered among various departments. The largest of these, the Planning Department, is budgeted for 15 full-time employees and five part-time workers, with a departmental budget of $982,465 for fiscal 1998.4 The department is responsible for transit service planning, including ridership and route studies, and for recommending desirable bus route changes twice each year.
Planning and analysis functions are found in other departments of the authority as well. These include statistical analysis and transit performance measurement, as well as planning related to alternative transportation, properties and facilities, engineering and construction projects, and Capital Metro's extensive railroad properties. As discussed throughout this report, Capital Metro also enters into many expensive consulting contracts for strategic planning, route and ridership plans, and other special studies including light rail. For example, the Planning Department is managing an outside consulting contract worth $457,419 for a bus system performance assessment and transit network development. Among other deliverables, this study will for the first time establish some hard baseline numbers for Capital Metro's ridership and geographic ridership patterns.
The study's results will be useful only if all of Capital Metro's planning and policy functions work together. The Planning Department does not have the authority to make sure the study is put to use after the consultants complete their work, and TPR sees no evidence that Capital Metro as a whole is preparing to rethink its long-term strategies for bus routes and services. Similarly, the Planning Department conducts its own route and ridership studies, each typically requiring 10 months, but sometimes taking up to 18 months to complete a basic study of a single proposed route change. But the results of these route and ridership studies often are not heeded by other departments of the authority.
Vacant administrative positions
According to a report by the Human Resources Department, as of April 1998 Capital Metro's combined workforce included 150 Capital Metro employees and 810 StarTran employees. In addition, the authority had 59 vacant full-time positions and 29 vacant part-time positions. Out of the vacant full-time positions, 22 Capital Metro and five StarTran vacancies were administrative positions, while 32 vacancies were front-line transit positions such as bus operators, van drivers, and mechanics. Out of the part-time positions, five were administrative positions and 24 were front-line transit positions.5
Capital Metro's administrative costs are significantly higher than the average of 18 comparable peer transit authorities identified by TPR. Capital Metro staff and managers themselves repeatedly mentioned high administrative costs and staffing in interviews.
According to fiscal 1995 statistics furnished by Capital Metro, 19.7 percent of its operating costs go to administration. This is 23 percent higher than the average administrative costs (16 percent) reported by 18 "peer group" transit authorities throughout the U.S.6 More recent statistics furnished by Capital Metro show its administrative costs at 18.1 percent, more recent comparative data for other transit authorities are not available. Administrative costs can be difficult to control and are prone to escalate even in tightly managed organizations. In February 1998, Capital Metro began trimming administrative staffing by eliminating 30 filled and vacant positions. While this seemed like a useful effort to reduce administrative costs, Capital Metro blunted its effect by simultaneously promoting at least 12 other managerial and professional positions and adding four new positions.7 The net savings from these moves were minor in proportion to total administrative costs.
Transit system managers have some degree of influence over fares, services, federal and local subsidies, and internal operational costs. Of these, managers have the greatest control over operating costs, yet this area often receives the least attention. According to one recent management study, if "transit authorities applied the same level of energy they spend trying to secure more subsidies from reluctant funding sources and turned it instead to tackling administrative and operating costs, we suspect they would be gratified by the dramatic results."8 TPR concurs.
Temporary services can be valuable to help with peak work loads or short-term needs for specific expertise. For example, Capital Metro's Planning Department, which is responsible for route and ridership planning, needs part-time workers to assist with periodic field checks. Temporaries also make sense in one-time projects, such as the implementation of a new computer system. But in general, Capital Metro's use of temporary services is excessive.
In examining expenditure records from fiscal 1997 and the first four months of fiscal 1998, TPR noted that the majority of expenses for temporary services were for administrative clerical or professional help, rather than for assistance with front-line transit operations. While temporary or part-time vehicle maintenance staff and drivers may be needed at times, it is far less easy to justify the extensive use of temporary administrative workers, given that Capital Metro's basic mission has remained essentially the same for more than a decade.
According to a consultant's report released in July 1997, Capital Metro spent about $1.8 million for temporary services from 1992 to 1996, including $516,000 in 1996 alone. More than half of this amount was for purely administrative functions. Few of the temporaries hired in transit operations, moreover, were drivers or mechanics but instead were clerical workers and other administrative help. Capital Metro significantly increased its use of temporary services during a period when permanent staffing also increased by more than 30 percent, from 746 full-time equivalent employees in 1992 to 975.5 in 1996. The consultant's study recommended that Capital Metro limit individual managers' use of temporary services, and make sure that full value is received from such services.9
Other problems have arisen from Capital Metro's use of temporary services. A 1995 audit of Capital Metro's contracting and procurement practices found that the authority spent $339,245 in 1994 on temporary services, and that controls over orders for these temporary services were extremely weak. The audit stated that "an exceeding[ly] large number of these orders were placed after the fact by the Human Resources project manager, without any competition whatsoever."10 Some of these control problems were subsequently addressed; temporary service contracts with employment agencies now are bid out by Capital Metro and approved by the board in public meetings.
All of Capital Metro's policies and procedures over the use of temporary services are outlined in a section of Capital Metro's Human Resources manual.11 According to Human Resource Policy HRC-160, temporary services generally are charged not to individual managers' budgets, but instead to the Human Resources Department. Only temporary employees that fill a longer-term need, such as work on one-time special projects, are included in the budget of the department in question.12 For example, in fiscal 1997, the authority's total actual expenditures for temporary services were $488,882, but only two departments budgeted for a total of $90,200 in temporary services. In fiscal 1998, the situation improved somewhat, with 13 departments approved $171,340 for temporary services.13 But this still leaves about $270,000 in temporary services unaccounted for in the budgets of Capital Metro's departments. According to the authority's contract log for May 1998, $443,776 is budgeted for a renewal of temporary labor services.
Since managers can make heavy use of temporary services with less than half of the cost charged to their own budgets, they have little incentive to be frugal. Existing policies require managers to submit a temporary labor request form to the Human Resources Department for approval, but the Finance Department does not provide any ongoing budget oversight.
Capital Metro relies so heavily on temporary services in part to fill gaps in the skills and experience of its own employees. A common theme mentioned by managers and staff was that, while most Capital Metro employees are dedicated and try to work hard, their efforts often are undermined by poorly planned job assignments. As one manager noted, many managers simply do not know their own talent pool. Employees are promoted or otherwise assigned to new tasks without the experience and skills needed for those tasks. For example, one supervisor complained that when he requested an experienced statistician to perform sophisticated analyses, he was assigned a former bus driver who lacked the necessary skills and experience.14 In a confused work environment such as this, Capital Metro has fallen into an expensive habit of overreliance on temporary services.
A. The board should reorganize Capital Metro to consolidate administrative functions and increase accountability for managers' actions.
TPR proposes that the board implement a new organizational structure by October 1, 1998 (Exhibit 5).
This reorganization offers a number of advantages. First, it consolidates all management, transit, and statistical planning functions into a single Planning Department that would answer directly to the general manager. Consolidating these functions in this way should allow for stronger management of planning projects and more effective use of staff resources. A unified Planning Department should allow the authority to get better value for money from its consulting contracts, ultimately lessen its need for such contracts, and ensure that all managers across departments agree in advance on the expectations for work delivered.
Moreover, as discussed in Chapter 6, the traditionally weak Contracts and Procurement Department also would be elevated in status, reporting directly to the general manager. This would give the department the authority it needs to enforce sound procurement practices at last. And, as discussed in Chapter 4, the trouble-plagued Human Resources Department would come under the umbrella of the chief financial officer, and work more closely with the budget, accounting, and payroll functions. Finally, all facilities-related functions, currently scattered in different areas of Capital Metro, would be consolidated into a single department.
TPR's Proposed Reorganization of Capital Metro
Source: Texas Performance Review.
B. Capital Metro should consolidate its planning functions into one department that would include strategic and business planning, route and ridership planning, and statistical analysis and reporting.
A senior manager should be placed in charge of the authority's planners to improve the coordination, quality, and usefulness of their plans, and to make planning a high-profile function.
The new Planning Department would report directly to the general manager and would provide planning services and support to all other departments within Capital Metro. The manager of the Planning Department would be responsible for coordinating the various planning functions and delivering planning data and assistance to other departments in the authority as needed. The Planning Department also would provide information and statistical support for the board.
After the consolidation, the board, general manager, and manager of the new Planning Department should examine Capital Metro's planning needs, rethink the purpose of these activities, and draft detailed job descriptions to ensure that the new department contains the right skills.
C. The board and the general manager should immediately reduce administrative costs.
A combination of strategies should be explored to reduce administrative costs and contain their future growth. The goal should be to bring Capital Metro's administrative costs into line with those of the similar transit authorities studied by TPR, through staff attrition and without disruption to the authority's daily business. Administrative tasks that do not substantially contribute to the authority's goals should be dropped. The first strategy would be to eliminate the budgets for all vacant administrative positions or reduce administrative staffing through attrition. The annual budget should be used to realistically project staffing needs to meet annual objectives, and provide the fiscal discipline needed to keep staffing costs under control.
The second step is to restrain the growth in managerial positions to a rate no greater than that for the entire authority workforce. The board should set criteria and targets for a desired ratio of managers to staff, with two manager-to-staff benchmarks, one for Capital Metro's administrative functions and another for transit operations. As a suggested reference point, the State of Texas has enacted a goal of limiting the number of managers and supervisors to a ratio of one for every 11 front-line employees. The federal government's goal is a management-to-staff ratio of one to 15. Capital Metro could control costs by setting similar management-to-staff ratios for each major function of its organization and using these as performance measures. Capital Metro then would need to accumulate data on all managerial, coordinating, and other supervisory positions, and then track the data from year to year. This information would be used to limit the growth of departmental budgets.
D. The board should direct the authority to immediately reduce its use of temporary services for administrative work by 25 percent and require Budget and Accounting to approve requests for temporary workers.
Given Capital Metro's rapid growth in employment during the 1990s, the authority should have enough administrative employees on hand. Any workflow problems should be dealt with not by hiring temporary employees but by streamlining administrative processes, reducing duplicated work among departments, eliminating nonessential tasks, and improving the management of human resources.
Capital Metro must hold its managers responsible for their use of temporary services. The board should establish a policy regarding the purpose and use of temporary services, and effective budget controls over their use. Managers should be required to submit a written request to the chief financial officer's budget office before employing temporary staff. The requests should contain a detailed justification of the need for temporary services, describe the services and skills needed, and state whether the proposed expenditure is within the department's remaining budget for temporary services.
All temporary service costs should be charged to the departments requesting the services.
Consolidating all planning functions into one department would yield savings in staffing costs and administrative overhead and would reduce expenditures for outside consultants. As a modest strategy, the board should require overall budget reductions equal to 8 percent of the current Planning Department budget, or approximately $75,000 annually.
Savings would result from a reduction in Capital Metro's administrative costs from the current level of 18.1 percent of total operating costs to the 16 percent average of 18 other comparable transit authorities.15 In Capital Metro's fiscal 1998 budget, labor, fringe benefits, and materials and supplies total $48.9 million, or 70 percent of the operating budget. Capital Metro and StarTran together have an estimated 228 administrative positions.
Applying the 18.1 percent limit to the $48.9 million would make available $8.9 million in administrative expenses available for reduction. Capital Metro could reduce its administrative cost by $1,028,000 by eliminating 24 vacant administrative positions (reported as of April 1998) or through attrition by closing administrative positions that become vacant and reducing materials and supplies. A reduction of 24 positions should be easily achieved since this represents only 10 percent of the administrative workforce.
Estimated savings from reducing temporary services are based on an estimate of annual past usage of Capital Metro's temporary services of about $300,000 per year. A 25 percent reduction of these costs would conservatively yield $75,000 in savings annually.
Together, these three measures would save $1,178,000 annually.
||Change in FTEs
Refocus strategic planning efforts and related contracts for consulting services.
An effective manager's role involves both strategic planning and business planning. A strategic plan, in essence, tells the organization and its stakeholders where it is going for at least the next five years. It states a broad mission for the future and sets concrete goals for achieving it. These goals cannot be vague hopes; they must be specific and realistic targets.16 Strategic plans and well-defined goals provide the context for the organization's year-to-year management.
To focus on achieving long-range goals, managers must prepare annual operational plans, also known as business plans. Managers set objectives, the expected results to be achieved at the end of the budget cycle. The annual business plan charts these objectives and assigns associated tasks and responsibilities to specific staff members. The manager then allocates available resources to accomplish the objectives. Business plans combine budget information, timelines, performance measures, and milestones.
Lack of basic management planning
By the admission of its own senior managers, Capital Metro lacks an overall strategic plan or strategic planning process. As one manager observed, there simply is no true authoritywide strategic plan that has the active support of the entire management team and the board.17
Capital Metro does have a formal mission statement, but it is quite broad by design and does not provide specific guidance for the organization's long-term direction and management. Likewise, Capital Metro has several documents titled "strategic plans," but these are merely the beginning outlines of a true plan. Some of these plans were initiated by the Capital Metro Strategic Advisory Committee, consisting largely of outside volunteer members with Capital Metro staff support, during the spring and summer of 1997.18 More recently, several managers and senior staff have worked on reviving a framework for a strategic planning process.19 But these efforts unfortunately are being made without the widespread support or involvement of the authority or its managers.
TPR also found that most of Capital Metro's departments have not had annual departmental business plans. In some cases, departments even lack basic process charts for their own operations. For example, until a new manager was hired in December 1997, the Contracts and Procurement Department could not provide TPR with a chart of its own purchasing process. The fiscal 1999 budget preparation process has shown signs of improvements in some departments. For example, the Maintenance Operations Department was one of the first departments to compile detailed business plans and process charts. Still, the authority has a long way to go.
Interim management, long-term planning
Capital Metro's Human Resources Department and System Performance Analysis Section have been attempting to prepare a strategic plan since fall 1997. However, this process has not been productive, primarily because of a lack of stability within Capital Metro. Capital Metro has undergone two major reorganizations since October 1997, with continuing secondary reorganizations of functions and staff transfers.
Another obstacle to the planning process has been the lack of clear "buy-in" by Capital Metro's department managers. These managers are understandably tentative, given that many are "acting" or "interim" managers, and have little confidence that a strategic plan created now will remain valid after a new general manager is hired. The board also has taken a wait-and-see position to this strategic planning project. According to the manager of Human Resources, the board has participated in very few of the recent strategic planning sessions facilitated by an outside consulting group.
Unfortunately, any strategic plan this group develops may not suit the next administration. Without the enthusiastic support of the board and department managers and a degree of public involvement, the current strategic planning effort seems doomed to fail.
Lack of interest in management training
For almost four years, the Human Resources Department has contracted with the University of Texas' Quality Center for total quality management training as well as management advisory services. Since fall 1997, the department also has used the center to facilitate the present effort to develop a strategic plan.
Capital Metro is not getting value from this contract. This is not a criticism of the quality of the vendor's work; it simply offers the wrong type of training at the wrong time. In military terms, Capital Metro is badly in need of a managerial "boot camp," not more advanced management training such as total quality management.
Much of the money spent on this contract clearly has been wasted. TPR noted a demonstrable lack of interest by managers and staff in this management training. If Capital Metro does not give the Quality Center a 30-day notice before canceling a session, it must pay for it anyway. In fiscal 1997, a wave of staff cancellations forced Capital Metro to pay for two sessions attended by no one.20 After departmental managers discovered that management training sessions were not mandatory, many stopped attending. According to Human Resources, only 12 of 25 invited participants usually attend each management training session.21
The board itself appears uninterested in the present strategic planning project. Early in fall 1997, two board members attended strategic planning sessions. The board since has been invited to other sessions, but no other members have attended. The manager of Human Resources recently stopped inviting board members to these planning sessions due to their apparent lack of interest.22
From August 1995 to September 1998, the cumulative value of the Quality Center contract was $450,000. Capital Metro also has entered into a similar interlocal contract with the University of Texas' Training and Development Department for an additional $144,000. This second contract covers a 29-month period from May 1998 to September 2000, partially overlapping the Quality Center contract for five months.23
Beyond the cost of the contracts, one also can question the relevance of the "total quality management" part of the contract. As recently reported by the Wall Street Journal, the national consulting firm Bain & Company, Inc. annually surveys corporate executives regarding the most and least useful management tools and techniques. Given the broad variety of management techniques being marketed, this well-regarded survey is intended to be a "consumer report" for managers. Bain has surveyed more than 3,300 respondents and conducted 245 interviews over the last four years. Its 1998 survey included responses by 4,137 managers, 80 percent of whom reported that the best management tools today involve strategic planning, benchmarking, and mission and vision statements. In contrast, total quality management was judged considerably less useful.24
Capital Metro has engaged in other strategic planning contracts and has contemplated future contracts for strategic plans. The most recent contract was with the consulting firm KPMG Peat Marwick LLP, which had previously completed a $139,000 performance audit of the authority in July 1997. After completing the audit, KPMG received an additional $49,983 for "consulting services of [sic] an annual Strategic Plan," according to Capital Metro's procurement records. The period for this contract was extended to March 16, 1998, and the work has been completed. The final product was a series of follow-up reports to the 76 recommendations contained in KPMG's July 1997 performance audit report. The final report consists of a strategic matrix of all original 76 recommendations, three interim action plans, and Capital Metro's written response to each.25
Unfortunately, this expensive report, like so many others, largely has been neglected. As of mid-April 1998, Capital Metro had no further plans to convene any meetings or make any more efforts to compile an updated status report on its implementation of KPMG's recommendations. In fact, after persistent attempts by TPR to get a current status report, Capital Metro could not even locate a copy of the last KPMG report; a copy was furnished to TPR directly by the consultant. Top managers at Capital Metro unequivocally told TPR that KPMG's findings, recommendations, and action plans are no longer active issues, and that they plan no further follow-up action. Capital Metro considered the KPMG recommendations to have been largely implemented, with no further actions needed on those recommendations Capital Metro disagreed with.26
So much, it seemed, for another $189,000 of the taxpayers' money. When presented with TPR's finding at a July 1, 1998 meeting, a senior Capital Metro manager updated the matrix to reflect the current status of KPMG recommendations. Capital Metro plans to give a more complete status report to the board in an open meeting sometime in August 1998.27 Originally, this was to have been delivered in April 1998. The fact remains, though, that one year after the KPMG report was issued, Capital Metro managers, as a team, have made no concerted attempt to address the report's recommendations.
Planning and employee "gainsharing"
As part of the Human Resources Department's strategic planning project, Capital Metro plans to hire a consultant to help the authority develop a broad-based compensation performance management study.28 Part of the consultant's work will be to develop a "gainsharing" plan, an older Capital Metro term for a program to compensate non-union employees for good job performance. Capital Metro recently renamed gainsharing as "performance-based incentives." According to Capital Metro's documentation of its budget process timeline, the gainsharing plan was scheduled to be presented to the board on August 31, 1998.29 Capital Metro's front-line union employees already are covered by a negotiated union contract, so any new employee rewards and bonuses would largely apply to administrative workers.
However, given its accountability and public credibility problems, it is premature for Capital Metro to even consider spending money on a study that concerns manager and employee bonuses; for that matter, it is also premature to spend money on any general study of the authority until a new general manager is brought on board and a new management team is established.
A. The board should immediately direct Capital Metro staff to postpone further strategic planning efforts until a new general manager is hired, a permanent management team is assembled, and the board and management come to a clear understanding as to the future direction of Capital Metro.
The current strategic planning effort managed by the Human Resources Department should be suspended until the board and the new general manager are able to form a joint strategic planning team.
For public agencies such as Capital Metro, strategic planning requires the involvement not only of staff members but also the board, local officials, community groups, ridership advocacy groups, and the business community. Strategic planning is vital, but Capital Metro simply has too much on its plate to do it justice for at least six months.
While an expensive, authoritywide strategic planning project should be postponed, it is worthwhile for a senior staff member to continue developing the framework and methodology for a planning process. Once a new general manager is hired, the framework and the basic homework will have been done. The board should review and approve the methodology before it is put to use.
B. The board should immediately postpone any consulting contracts for strategic plans and employee compensation studies.
All current and planned contracts related to the strategic planning effort of the Human Resources Department should be postponed or canceled. In addition, the use of the long-term UT contract for total quality management training should be sharply curtailed if not halted entirely, as this training is poorly attended and is of little relevance given the magnitude of the other problems facing Capital Metro.
Part of the contract with UT, however, is intended to provide Capital Metro managers with hands-on training and assistance in preparing business plans for the fiscal 1999 budget process. Business planning has been sadly lacking at Capital Metro, and TPR recommends that this aspect of the contract continue.
Before gainsharing or other administrative performance bonuses are considered, Capital Metro's first priority should be to establish sound management practices and restore public credibility. Once those fundamental issues are addressed, Capital Metro then needs an enforceable, performance-based system to hold its managers accountable for results in their assigned areas. Capital Metro should not even contemplate a system of administrative performance bonuses until its basic management problems are resolved.
C. The board should establish a policy and timeline outlining the strategic planning process and linking annual business plans, annual budgets, and capital budget projections to a strategic plan.
Capital Metro already has begun studying strategic planning methodologies, but much more work is needed. Since the early 1990s, the Legislature has required state agencies to prepare and update strategic plans before each budget cycle. TPR has furnished Capital Metro with materials and contacts it can use to modify the extensive strategic planning, performance measurement, and budgeting methods developed by Texas state government for its own purposes.
Capital Metro should draft a thorough framework and a methodology for its strategic planning process by October 1, 1998. This framework should be discussed by the board, all managers of the authority, and outside stakeholders such as local officials, other transportation organizations, community groups, ridership advocacy groups, and the business community. A finalized strategic planning framework and a solid timeline for completing the planning process should be approved by the board by December 31, 1998.
D. The board should establish a process to evaluate the performance of its general manager toward the goals of the strategic plan and the annual budgets and business plans.
The board should explicitly make planning a priority for its new general manager, and should use these standards in evaluating his or her performance. The general manager, in turn, should evaluate all department heads and other senior managers by the same standards.
The contracts with the University of Texas's Quality Center and Training and Development Department would be discontinued except for hands-on assistance with departmental business plans for the fiscal 1999 budget process. The costs for assistance by the Quality Center have already been budgeted in 1998, and no additional costs would be incurred.
Savings would result from a cessation of further spending on the newly issued contract with the University of Texas Training and Development Department until such time as a new general manager reassesses the whole issue of management training. The $144,000 contract is for a 29-month period or $59,000 annually.
Capital Metro also could achieve savings in fiscal 1999 by postponing and reexamining the need for contracts for outside strategic planning and compensation studies.
Strengthen the budget preparation process and enforce budgetary controls.
Many of Capital Metro's highly publicized problems relate to inadequate controls over financial matters. To restore public trust, Capital Metro must demonstrate tight fiscal restraint while simultaneously delivering a higher quality of transportation services. Ideally, Capital Metro's annual budget should be used to communicate its goals for service delivery and the efficient use of resources. Capital Metro must demonstrate to itself and the public that it can accurately prepare and clearly explain its annual budgets and ensure that funds are spent in compliance with these budgets.
Beginning in September 1997, the new board's first priority was the preparation of a greatly improved fiscal 1998 budget. The board and Capital Metro's financial staff succeeded in this task, though the process was long and labor-intensive. The board and staff worked five months into fiscal 1998 before finally enacting a budget that met the board's standards and expectations. Now Capital Metro-which has already begun its fiscal 1999 budget process-needs to act quickly to institutionalize an efficient budget process and establish tight budget controls for monitoring managers' performance and spending.
Why budget controls are important
Budgets and budgetary controls form one of the cornerstones of effective management. Budgets translate an organization's plans and expectations into concrete financial terms, and budgetary controls are essential to prevent wasteful and improper expenditures.
According to the U.S. General Accounting Office, budget control techniques include the continual monitoring of results against plans and budgets and the linking of long- and short-range plans to the budgets to ensure that organizational goals are carried out according to clearly communicated plans.
The preparation of an annual budget allows all departments of an organization to compare and reconcile their plans and budgets to achieve the organization's goals. The ongoing monitoring of budgets assesses how well departments use their resources throughout the year, and whether expenditures comply with the terms of the budget. Budget monitoring is an important tool for identifying wasteful spending and cost overruns before they become major problems. Finally, clear classifications of budget accounts are essential to capture and report the information board members and managers need to manage effectively.30
Causes of Capital Metro's budget problems
The primary reason for Capital Metro's poor budgetary control boils down to the authority's consistent failure to enforce basic management accountability. Managers generally do not face any consequences for substandard performance. This long-standing problem, heavily documented in past studies and audits, is well-known to Capital Metro's managers.
Other problems have contributed to Capital Metro's substandard budget process. A continual turnover of general managers and board members has made it difficult to establish and maintain a decent budget control process. With its growing stream of local tax revenues, Capital Metro has had the luxury of complacency; it has not had to face the hard budgetary limits common to most governmental organizations. Other causes include a lack of uniform budget standards throughout the authority's departments, and a badly outdated financial information system. These causes also are well-known within Capital Metro, and have been disclosed in previous studies.31
The solution, then, involves competent management, not continual outside consulting studies and expensive technologies. As explained in Chapter 9 of this report, Capital Metro does need to replace old financial software systems facing "year 2000" problems, but upgrading these systems will not solve its budgetary control problems. At best, new systems will prove a useful budget tool after new management attitudes, policies, and controls are established.
Barriers to improvement
One of the biggest obstacles to the preparation of Capital Metro's annual budget is simply that, for many managers, budget preparation traditionally has been a low priority. During TPR's preliminary set of interviews with Capital Metro staff in November 1997, some high-level managers were unable to recall the total amount of their own departmental budgets. Some project managers could not cite the budgets for projects they were managing. As one senior manager observed, many of Capital Metro's managers simply are not motivated, interested, or trained in preparing and monitoring budgets.
In recent years, the general manager has delegated considerable budget authority to departmental managers, but has not held them accountable for managing those budgets carefully. As result, too much budgetary responsibility has been placed, by default, with the Finance Department, which has been responsible for assembling the authoritywide budget. But Finance lacks the authority to enforce compliance with basic budgetary procedures.
Departments rarely submit credible documentation of how budget line items are derived. The Finance Department must rely on each department to gather accurate and timely budget information. Finance cannot force other departments to prepare budget materials on time or to fully explain and justify their budget assumptions, projections, and calculations.
The Finance Department barely has the resources to simply compile the budget, and certainly lacks the resources needed to effectively question and monitor the budget. The Finance Department lacks a budget director and has only one budget analyst to serve the entire organization.
In addition, Capital Metro has no central files detailing how each line item on the annual budget was calculated, what methods or assumptions were used, or the detailed purposes of budgeted amounts. Without a central budget file, the Finance Department cannot provide meaningful budgetary oversight during the course of the fiscal year.
Budget process defects
Several Capital Metro senior managers cited a "bunker" mentality on the part of management. This affects all areas of Capital Metro's operations, particularly the budget function. One manager complained of having to perform budget analyses in a vacuum.
Capital Metro as a whole has lacked business operating plans, which combine budget information, timelines, and performance measures, and provide the basis for each annual budget request. Moreover, department managers tend to keep information concerning their own operations to themselves and can be defensive rather than cooperative during the budget process. The Finance Department often lacks access to departmental data. Departments rarely perform any kind of cost-benefit analyses on their own, and when requested to do so by the board, often shift the job to the Finance Department, which has to work without accurate data on costs. In general, Capital Metro's financial management reporting is weak yet the system generates too many reports, many of which are unnecessary or of uncertain accuracy or value.
Capital Metro has begun to address this problem by requiring each department to prepare and submit departmental business plans as part of the fiscal 1999 budget process. This is a step in the right direction but much more needs to be done.
Key managers excluded
Despite strong intervention by the new board members, Capital Metro's top management team tends to lose sight of the need to instill fiscal discipline and cooperation throughout the authority. While it has produced a better budget under the board's prodding, the managerial mindset remains largely unchanged concerning budgeting and fiscal accountability. This is clearly illustrated by the fact that, while the authority was still under federal investigation for fiscal and procurement problems, key managers were cut out of the communications loop.
For example, the Finance Department worked closely with the board's Finance Subcommittee in preparing the revised March 1998 budget. But from December 1997 to March 1998, Finance was largely excluded from the daily deliberations of Capital Metro's management team. Other key departments excluded from regular management work-sessions included Contracts and Procurement, Risk Management, and Information Systems-all of whom play vital roles in managing Capital Metro's finances. The Finance Department's manager has occasionally been placed in the awkward position of having to explain budget items to the Capital Metro board without having discussed them with the manager who knew them best.32 Time and again, Capital Metro's senior managers have failed to make effective use of their own experts on financial, budgeting, and procurement problems.
Capital Metro's budget contains little in the way of detailed disclosure and analysis on some of its major components. One example is the category of employee fringe benefits, a significant part of the total budget. The fiscal 1998 budget contains little of the sort of analysis, trend data, and benchmark comparisons needed to explain the costs and demonstrate that they follow industry standards. The dollar amounts are not trivial. In fiscal 1998, fringe benefits are budgeted at $14,129,000, or 49 percent of all labor costs. Labor and fringe benefits together total $42,692,000, or 61 percent of all fiscal 1998 operating expenses.33 The budget report, however, does not offer a narrative explanation of this large expenditure category, or much else in the way of summary or analysis.
As another example, the fiscal 1998 sales tax revenue estimate of $92.5 million may be too low.34 The budget was approved almost halfway into the middle of the 1998 fiscal year, and it appears to have ignored actual growth rates in the tax. Actual Austin sales tax collections were up 14 percent for the quarter ending December 31, 1997, and 9.3 percent for the quarter ending March 31, 1998.35 Assuming these trends continue at an average annual 9 percent rate, Capital Metro's sales tax collections for fiscal 1998 could rise to about $97.5 million, or $5 million more than projected just a few months ago in the March 1998 budget.
Revenue projections are important for establishing budget control limits and for making policy decisions on spending and reserves for special projects. According to at least one board member, Capital Metro in past years has been unable to explain how it spent the sudden windfall from sharp growth in sales tax revenues.36 A basic accounting principle holds that, when actual revenues exceed budget projections revenue, the entire amount of excess should be held in reserve and not added to the operating budget baseline. TPR found little evidence to suggest that Capital Metro has followed this principle.
Need for budget monitoring
TPR's review of Capital Metro's expenditure and invoice records uncovered an instructive example of Capital Metro's need for better budget monitoring. TPR found two fiscal 1997 purchase orders in the same amount made to an Austin hotel. According to a Capital Metro database of invoices and payments, one payment for $24,409.50 was recorded on January 30, 1997 for a "banquet and casino for 1996 employee holiday party." (This particular expenditure is discussed in more detail in Chapter 3.) Another payment for the same amount was recorded on February 7, 1997 for an "authority employee holiday event, banquet and activities 1996." A proper budget monitoring function would have spotted this discrepancy within a month of the latter entry. It was not detected or explained until TPR questioned it more than a year later.
TPR asked whether this was a duplicate payment or simply an accidental duplicate accounting entry. Answering this question required a great deal of research by Capital Metro. The contract for this event originated from the Human Resources Department for a total amount of $25,409.50. Capital Metro produced copies of the actual checks for a $1,000 predeposit in April 1996 and a $24,409.50 final payment in February 1997. Capital Metro records show that no duplicate checks were issued. The accounting problem occurred because the first purchase order was sent to the hotel's Atlanta-branch location; a later, correct purchase order was registered to the hotel's Austin location with the final payment made by check.
Budget improvements-first steps
The new board insists on better budget preparations, and the Finance Department has made a number of improvements that should be emulated by other departments. To its credit, the department has taken on additional responsibilities despite its lack of a chief financial officer and a chief budget officer.
The budget function for all of Capital Metro-an organization with almost 1,000 employees and a capital and operating expenditure budget of $129.4 million-is the responsibility of one analyst, with supervision and assistance from the manager of Finance. Beginning in April 1998, the interim chief operating officer of the Operations Division and the Finance manager assumed co-managerial responsibilities for the 1999 budget process, with regular meetings with the board's Finance and Budget Review subcommittee.
In addition to preparing the fiscal 1999 budget, the Finance Department is attempting to guide other departments in the preparation of meaningful budgets. As late as April 1998, Capital Metro lacked standardized written budget instructions for its departments. As a result, Finance is developing a set of budget instructions for each department's use.37 (TPR assisted by providing samples of budget preparation instructions.) The department also recently developed a standard budget spreadsheet format for all departments to use in preparing their fiscal 1999 budget requests. This is a useful first step at standardizing the budgeting process, but much more is needed.
For example, Capital Metro's departments typically submit high-level, summarized budget requests containing only a brief narrative description of the purpose of each budget item. A department may, for instance, submit a request for a lump-sum amount for "travel and training" without providing supporting documents explaining what kind of travel or training is planned; its purpose and expected value; or the number and types of participants.38 The Alternative Transportation Operations section now submits detailed budget documentation, but this is a rare exception rather than the rule. For large areas of the budget, including transit operations, Finance simply does not receive detailed information on individual line items.
The Finance Department proposes that all departments submit monthly budget-to-actual-spending updates, along with copies of supporting worksheets, calculations, and explanations. The department also proposes to conduct ongoing analysis of budgets and budget variances, but it currently lacks the staff needed to do so.
Finally, the department has developed a detailed timeline charting out the steps in the preparation of the 1999 budget, a process that is already under way.37 This timeline delineates the responsibilities of various departments, due dates of major budget submissions, and the dates of the board's finance subcommittee deliberations. The timeline includes dates for deliverables including operating budget submissions, capital budget submissions, and five-year capital forecasts. Finally, the timeline coordinates budget preparation with the preparation of departmental business plans and performance measures. For the first time, departmental managers are being assigned the task of developing business plans, which must be submitted before planned board budget work sessions in July and August 1998.40
These are all laudable actions. A major problem continues, however; while the Finance Department is responsible for presenting budget drafts to the board, it still has no authority to enforce timeliness or quality standards on the budget submissions of other departments.
Miscellaneous expense accounts
Capital Metro has six accounts in its accounting system that are not clearly defined. These include "Miscellaneous Expenses," "Other Miscellaneous Expenses," "Other Services," "Other Professional Fees," "Other Materials and Supplies," and "Other Supplies." These categories are too ill-defined and "generic" to provide sufficient disclosure to the board and the public, and the total dollar amounts are not insignificant.
For example, in fiscal 1997, "Other Miscellaneous Expenses" totaled $149,864; "Other Services," $249,608; "Other Professional Fees," $610,282; and "Other Supplies," $286,393. Each department has wide latitude in selecting among budget and accounting categories for charging its expenditures. The Finance Department does not have the resources to properly scrutinize budget items of this type, resulting in weak control over these accounts.
Other Texas transit authorities
TPR contacted several transit authorities in Texas to get a sense of their policies and procedures for holding managers and employees accountable for proper fiscal procedures. Houston Metro reported that failure to follow procurement procedures, for instance, is cause for termination. One case was cited in which a manager was demoted for not following appropriate procurement procedures. Houston Metro emphasized the importance of written policies to hold employees fiscally responsible.41
Dallas Area Rapid Transit (DART) provides written disciplinary policies to all employees. One case was cited in which an employee went directly to a board member with a procurement issue, instead of following the chain of command, and was dismissed for violating written purchasing policies.42
San Antonio's VIA also has detailed, written employee and board member policies and a code of ethics. VIA also has a three-level "positive discipline" policy that categorizes employee violations of policies and procedures into levels of seriousness.
Transit budgeting-a national perspective
Researchers with North Carolina A&T State University recently studied the budget practices of nine sizable rapid rail transit systems in the U.S., and this research provides information that could be applied at Capital Metro. The transit authorities included in this study were those of Atlanta; Baltimore; Boston; Lindenwold, New Jersey; Los Angeles County; Miami; Philadelphia; San Francisco-Oakland; and Washington, D.C.
All nine authorities had both annual operating budgets and long-range plans. Long-range plans typically cover five to 10 years. All of the transit systems have formal budget guidelines. All but one reported that top management "always" participates in the development of the operating budget, and that the budget is formally approved at all appropriate levels of management. All nine authorities report that their budgets are reviewed for completeness and timeliness before approval.
Four require written management approval for all budget changes; two accept written or verbal approval, while two require verbal approval only. All nine transits have a written process for identifying differences between actual and budget revenues, and eight have similar requirements for explaining expenditure variances. Almost all of the transit authorities have a monthly budget analysis and review process, and most require conference meetings to discuss variances between budgeted and actual expenditures and revenues.
Most importantly, all nine transit authorities investigate the reasons for budget variances, and take corrective actions as a result of these investigations. When asked how important budget meetings are to their organizations, eight responded that budget meetings are "very essential" and only one said that they are "somewhat useful."
The study made a number of useful recommendations, including the following:
Transit authorities should develop close ties between budget performance and the performance evaluations of transit managers.
Capital Metro must significantly improve its budget policies and procedures before it reaches the level of budget sophistication represented by the nine transits in this study.
Transit systems must have detailed budget procedures to prepare annual budgets.
The budget planning process itself should have review-and-approval points to manage the budget while it is being prepared, and not just afterward.
Significant budget differences must be identified throughout the year and discussed and explained by the appropriate managers.43
A. The board, general manager, and chief financial officer should establish uniform budget policies and procedures to be used by all departments of the authority.
A strong budget system is the foremost priority for controlling Capital Metro's growing costs, holding employees and managers accountable, and establishing a functioning management control system. Capital Metro desperately needs a smoothly functioning budgeting process that demands the participation of departmental managers, requires them to justify every dollar requested, incorporates performance measures in the budget, and relates business plans and performance goals to specific budget requests. Managers should be required to explain and justify all line items in their budget requests, including new positions, raises, travel, consultants, technology purchases, and capital items.
The board should hold department heads and managers responsible for explaining significant budget-to-actual differences at regular meetings of the board's finance subcommittee. In addition, the Budget and Accounting Department should present the board with independent budget analyses and forecasts and provide verification and quality control for budget information. Finally, department heads and managers should be held accountable for meeting timelines and submitting full documentation during the budget preparation process.
Once a new general manager is hired, the board should hold that person responsible for making sure that all departments within Capital Metro comply with uniform budget preparation, reporting, and control procedures.
The chief financial officer should be assigned the task of developing detailed budget policies and procedures, as well as a budget training program for all Capital Metro department heads and project managers.
The board should require the new general manager and chief financial officer to place a high priority on this project. The project should include written disciplinary policies and guidelines to handle violations of budget and fiscal procedures. The board should approve and formally adopt the new budget policies by December 1, 1998.
B. The board should authorize the Budget and Accounting Department to hire two additional senior budget analysts for ongoing, independent reviews of departmental budgets.
The Finance Department currently has only one budget analyst and no senior budget manager. Two more experienced budget analysts could provide both savings and an essential level of internal control that has been lacking in Capital Metro's overall budget process. Budget analysts, under the direction of the chief financial officer, should question expenditures to determine not merely whether they are technically legal, but if they are reasonable and necessary, and contribute to Capital Metro's core mission.
The team of budget analysts should focus particularly on new, high-dollar projects that could be subject to budget overruns. The budget staff should examine long-term, life-cycle budget projections for any projects or commitments that require significant future funding. All requests for consulting contracts and temporary employees should be examined in advance by the budget analysts.
Finally, the budget analysts should provide staff support to the board's finance subcommittee.
C. The board's budget policies should require each department head to submit detailed budget justifications for key projects and expenditures periodically throughout each year.
Capital Metro's departments should submit these justifications in a standard format to the chief financial officer. Detailed justifications should be prepared for all line items exceeding the prior year's budget. The chief financial officer should request updated budget justifications several times during the course of a year for the top three to five critical needs and projects of each department.
Each budget justification should answer the following questions:
What will the purchase allow you to do? What will be the consequences if the purchase is not made?
D. The chief financial officer should streamline Capital Metro's chart of accounts to ensure that all expenditures are properly recorded.
Will the purchase reduce or increase existing costs? If a reduction, how? If an increase, why?
Will the purchase improve quality? How?
Will the purchase increase output? How?
Will intangible benefits occur as a result of the purchase? What are they?
List the performance measures that would be directly affected by the purchase.
Do the department's performance targets, as submitted in your department's annual business plan, assume purchase of the item? If yes, will the targets require adjustment if the purchase is not approved? By how much?
If an existing item is being replaced, how old is it?
Will the existing item be retired or reallocated within the department?
If approved, what is the anticipated purchase date of the item?
Were alternatives considered? What are they? Why were they rejected?
The entire chart of accounts-the revenue and expense categories in the authority's financial and budgeting systems-should be reviewed, and vague or unnecessary accounts consolidated or eliminated. Capital Metro should clearly define the types of expenditures to be coded in each account category, and consider reducing the number of generic "other" budget accounts from six to one.
E. The board should authorize the Budget and Accounting Department to establish a central file of all departmental budget documents and supporting work papers.
To properly monitor the budget and quickly respond to requests for information from the board and general manager, Budget and Accounting needs a complete set of detailed budget records on hand. The department should begin a central file and the board should require all department managers to provide Budget and Accounting with full documentation for all budget requests.
Another benefit from this proposal is that, once Capital Metro reestablishes its internal audit function, the central budget files will provide information for effective internal audits.
These recommendations would produce additional costs to Capital Metro for hiring two additional budget analysts. The State of Texas' annual salary for the position of "budget analyst level III" ranges from $36,132 to $48,358. When benefits are included, a reasonable estimate for Capital Metro's costs for two senior-level budget analysts would be $119,000 annually.
Savings from an improved budget process and tight budgetary controls would be substantial. The preparation and review of detailed line-item budgets for each department within Capital Metro should yield savings with each annual budget. Strong budget reporting and ongoing budget oversight would help contain costs during the year. Cost overruns and budget variances would be cut short during the fiscal year. The precise savings resulting from these recommendations cannot be estimated, however, since they are contingent on the extent to which they are implemented by department managers and enforced by the general manager and the board.
||Change in FTEs
Reduce spending on consulting services and track the implementation of recommendations from previous consultant reports.
As already noted, Capital Metro has a long history of contracting for consulting and professional studies that seem to yield few real improvements in the authority. Over the past 13 years, Capital Metro has purchased numerous expensive studies concerning marketing and advertising, community relations, light rail planning, bus ridership and operations, total quality management, procurement audits, financial audits, specialized legal services, and general management consulting. The following is only a sample from Capital Metro's procurement project lists and expenditure records. Some of these contracts were completed during the past year, some are under way, and others are on hold awaiting further consideration.44
Federal legislative consulting services, $220,000 (two-year period)
Again, these are just some of the contracts listed on the current contract monitoring lists and in Capital Metro's plans. Dozens of other studies and services have been contracted for in the past. At any given time, Capital Metro is managing a large number of consulting projects and preparing to begin more.
Bus system performance assessment, $457,419
Strategic planning consulting, $49,983
Strategic financial planning, $130,000
Performance auditing, $138,711
Financial audit services, $80,256
Total quality management services, $450,000 (cumulative three years)
Risk management consulting, $288,000
Specialized legal services, $540,000
Advertising and marketing services, $1,765,695 (expenditures fiscal 1995-1998)
Program management and engineering-planning for rail transit improvements, $4,000,000 (estimate)
Given the changing nature of Capital Metro and its service area, there can be no question that the authority periodically needs outside studies and expertise. The problem is that Capital Metro does a very poor job of putting this expensive advice to practical use. As noted in a previous recommendation, the new board recently found the need to spend a week-long session with past consultants simply to consolidate and make sense of all the past research that had been done for Capital Metro.45
Capital Metro needs common-sense procedures to ensure that consulting studies are tracked and put to use. It also should reduce expenses by limiting its use of consulting services and making sure that new studies do not duplicate past work by staff or consultants. Consulting services should be purchased only when they are absolutely vital to furthering Capital Metro's strategic goals.
Repeated purchasing reviews
Since 1995, Capital Metro has paid for at least two management reviews that examined the authority's purchasing process. More recently, the Federal Transit Administration hired a third group of purchasing auditors who essentially reconfirmed the problems and recommendations found in past reviews. This situation is worth examining since it provides a good example of Capital Metro's pattern of paying for outside studies and then failing to use the advice it has paid for.
In 1995, one consultant hired by Capital Metro released his report on the authority's contracting and purchasing processes. The document, known as the "Fitzgerald report" after its author, bluntly cited the "absence of strong leadership in managing the procurement process." The report further stated that Capital Metro:
completely abdicated total responsibility for contract administration and management to project managers. There is a fatalistic attitude that `contractors can't be made to perform.' This has resulted in a severe loss of funds due to incorrect decisions and untimely action being taken.46
The Fitzgerald report contains 25 pages of detailed problems with controls, records, oversight, expertise, and lax management attitudes. The report also contains a nine-page action plan giving Capital Metro step-by-step instructions on how to implement its recommendations, measure progress made, and assign accountability for specific actions. While Capital Metro did change personnel within its purchasing department, it did not act on the recommendations of the Fitzgerald report.
Two years later, Capital Metro hired the consulting firm of KPMG Peat Marwick LLP to conduct an overall performance audit of Capital Metro; this audit covered a broad range of topics including purchasing. Although KPMG's conclusions were not as severe as the Fitzgerald report's, KPMG noted substantial delays in the processing of contract proposals, a lack of contracting expertise by both departmental project managers and purchasing personnel, and a lack of support and communication by the Contracts and Procurement Department with other department managers.47
In fall 1997, Capital Metro's new board asked the FTA to conduct a special audit of the authority's procurement practices and controls. This was requested in response to a continuation of severe management failures in the oversight of contracting and purchasing that ultimately resulted in a Federal Bureau of Investigation (FBI) investigation. The FTA hired a firm with extensive experience in auditing transit purchasing practices. The audit was intended to test compliance with 62 specific federal requirements promulgated by the FTA.48 The FTA has not yet issued a final report, but has discussed its preliminary findings with the authority.
FTA's auditors found that none of the contracts they examined in their audit sample included independent cost estimates to compare against bids, as required by federal regulations. The consultants also noted that Capital Metro had shown them one contract manual in August 1997 and another in January 1998, and that both were too old and disorganized to be useful. In general, the auditors mirrored the findings of the 1995 Fitzgerald report and stated that Capital Metro's purchasing system is grossly inadequate and subject to breakdowns. The main recommendation of the FTA's consultants was simply to return to the 1995 Fitzgerald report and implement its recommendations.49
The consultants' audit found one bright spot-that Capital Metro's new procurement manager, hired in December 1997, is knowledgeable in procurement management and has begun taking corrective action. This is good news, but it speaks volumes that it required three extensive audits in three years to prod Capital Metro into beginning to fix its purchasing practices.
Federal grant lobbying services
In March 1998, the FTA released a revised draft of its triennial review of Capital Metro. The FTA found Capital Metro was not complying with federal disclosure requirements on lobbying for federal grants. Capital Metro had hired a firm-Government Affairs Management Associates (GAMA), of Washington, D.C.-"to perform lobbying services" and that Capital Metro "had not filed a Standard Form LLL to notify the FTA that it had entered into a contract for professional lobbying services at the time of the site visit."50 The FTA later ruled Capital Metro to be in compliance, not because the lobbying contract was discontinued but because it was subsequently disclosed properly to the FTA.
The current contract with GAMA is for $110,000 per year; a flat $102,000 plus expenses up to $8,000. A prior contract for $110,000 ran through January 1998 and was extended to January 1999 for another $110,000. Payments are made on this contract in the form of a flat monthly retainer. Before the GAMA contract, Capital Metro had a similar contract with another firm, Bracewell and Patterson, LLP, for $115,000 plus expenses. The Bracewell and Patterson contract period ran from November 1994 to September 1996.
This contract raises several questions. First, does Capital Metro need a federal grant lobbyist to maximize federal funding, or does it have other expertise and resources it could use? Second, now that the federal transportation funding reauthorization bill has been approved by Congress, is there a continuing need for a Washington lobbyist? If there is such a need, can the contract be reduced to an hourly-fee basis for actual services provided instead of a flat $102,000?
Capital Metro already has extensive resources to maximize its federal funding opportunities. The authority has a manager of Government Affairs and a senior grants coordinator whose combined salaries, with benefits, are $141,928.51 Capital Metro has other internal resources as well, such as its board and general manager. The previous general manager traveled a number of times to Washington for federal funding purposes, and in April 1998, many board members also went to Washington during the critical last-minute negotiations of the transportation reauthorization bill. Board members concurred that their trip was productive in fostering communication and developing contacts to serve Capital Metro in the future.52 Capital Metro also has many external resources, most notably the Texas Congressional delegation and their staffs. Capital Metro also can coordinate with the Texas Department of Transportation, which had a full-time funding expert stationed in Washington throughout the reauthorization process.
Now that the six-year, $204 billion transportation funding bill-now known as the Transportation Equity Act for the 21st Century (TEA-21)-has passed Congress (on May 22, 1998), there may be less need for a full-time lobbying firm to pursue federal dollars. Most of Capital Metro's federal funding comes from formula grants, specifically the Federal Transit Capital and Operating Assistance Formula Grant. TEA-21 has been enacted and the formulas that will automatically dole out most of Capital Metro's bus transit funding are locked for the next six years.
It is now up to Capital Metro to apply and compete for discretionary federal funds. According to past financial audit reports, Capital Metro usually receives relatively little in federal discretionary or special project grants. Capital Metro's Government Affairs manager reported that TEA-21 allocates $1.25 million to Capital Metro in 1999 for discretionary bus and bus facilities funding.53 While any federal funds are welcome, $1.25 million is a rather small amount compared to Capital Metro's budget and in light of the expectations created by the $204 billion TEA-21 budget.
Discretionary grants, by their nature, are highly competitive. Capital Metro states that even though TEA-21 is now law, it is still up to Congress to appropriate annual funds for discretionary transit grants, and therefore there is a need to lobby Congress. For example, according to the Wall Street Journal, the new transportation bill allocates $150 million annually for programs to help former welfare recipients travel to work, particularly inner-city workers with jobs in the suburbs.54 Austin Community College recently applied for welfare-to-work transit funding but was initially denied funding in May 1998. The college and Capital Metro will submit a joint grant application later this summer.
TEA-21 (Title III, Section 3030) also authorizes Austin to design and construct a new "fixed guideway system" (light rail) through fiscal 2003, though it does not authorize or earmark any specific funds for this purpose. Capital Metro will have to submit applications to the FTA; the authority plans on requesting $4.7 million from the FTA to conduct a study and design work on an Austin-area light rail system. If the Capital Metro board and the voters decide to proceed with any major new transit projects such as light rail, the authority will have a substantial need for additional federal funding and expertise to secure it. What may be needed, though, is specific expertise in preparing technical grant project plans and proposals, rather than general lobbying services.
Other Texas transit systems have used Washington, D.C. lobbyists at times. DART uses a Washington lobbyist, but claims that the lobbying is monitored to ensure that it is effective in obtaining extra federal funding.55 DART has a substantially larger operation than Capital Metro, and already has a light rail system. Houston Metro reports that it has used both Austin and Washington-based lobbyists and said that these services make sense if solid value is produced from the services. San Antonio's VIA also uses a Washington lobbyist and believes it is getting value for the money; VIA's contract is for $42,500 per year (a $85,000 two-year contract), compared to Capital Metro's $110,000 annual contract.56
Strategic financial planning?
While reviewing Capital Metro's fiscal 1997 expenditure and invoice records, TPR found that a $65,000 contract had been made with Public Financial Management, Inc. for "advisory services in developing long-term, strategic financial plans in connection with future transit systems."57 The contract period was originally through October 1996, but was extended one year to October 1997 for an additional $65,000. Capital Metro made four payments to this firm totaling $57,136 from May 1996 to October 1997. On December 18, 1997, Capital Metro extended this contract again to October 1998. Cumulatively, $130,000 is authorized for this contract, so $72,864 more may be spent on this contract before October 1998.58
TPR asked to see any interim and final strategic financial planning reports resulting from this contract. However, the project manager for this contract was Capital Metro's former chief financial officer, and apparently no other employee can locate or even determine the extent of work products delivered on this contract. The Finance Department could find only one product resulting from this contract, an eight-page spreadsheet titled "Financial Plan-20 Year Sources and Uses of Cash." According to the manager of the Finance Department, it appears to be financial data supplied by Capital Metro and put into a tabular spreadsheet to project figures 20 years away. It has no accompanying text explaining the sources of the data, the assumptions used for the 20-year projections, or how the data might be put to use by Capital Metro for strategic planning purposes.
It is possible that valuable information has been provided through this consulting contract, but if so, it is not available for use by Capital Metro's staff and board. No one at Capital Metro can determine what has been delivered in the past or how any products from the contract are being put to use.
Bus operator performance audits
Capital Metro's Internal Audit Department began contracting for annual bus operator performance audits in 1994. The chief internal auditor used an outside consulting firm specializing in quality control for transit services. These reports, together with comparative statistics over time and corrective action plans, are furnished to the general manager and the president of StarTran.59
These reports provide valuable independent information to Capital Metro concerning drivers' demeanor and customer service to passengers, drivers' abilities and safety practices, revenue collection practices, and bus conditions. Drivers obviously are the main customer service contact that both riders and non-riders have with Capital Metro, and any strategy to improve customer service must focus primarily on drivers.
Capital Metro receives many complaints from riders and the general public about rude drivers and other types of poor customer service. Independent audits are essential to confirm whether improvements are being made over time, to confirm the general validity of public complaints, and to develop strategies to improve customer service. For instance, the consulting firm observed 57 drivers during the first week of December 1997. The audit found customer service to be generally poor. The report found fault with 44 percent of the operators for courtesy, customer attitudes, and greeting customers. This is 9 percent higher than Capital Metro's customer service rating in its last inspection. The report also found 60 percent of the 57 operators committing moving traffic violations, a result 18 percent higher than in the last inspection.60
While such information is valuable, once again TPR found that Capital Metro has no active plan to do anything with it. Capital Metro has stated that it uses these audits to discipline individual drivers, but what is needed is a coordinated effort to continually improve services systemwide. With the exception of the chief internal auditor, whose position has been eliminated, TPR found no evidence that managers on either the administrative or operational sides of the authority have used these reports to systematically push for improved safety and better customer service. In recent discussions between TPR and Capital Metro, authority managers stated that they intend to ask the board to provide continuing and increased funding in fiscal 1999 for bus operator performance audits. This is a sound idea, but only if accompanied with a plan to make solid improvements in services overall.
A. The board should discontinue or postpone several consulting contracts until it can use their products effectively, and should establish a staff committee to monitor all consulting contract expenditures.
Capital Metro should only continue those contracts that are absolutely essential to its daily operations and long-term management. Contracts that can be discontinued for the time being include those for federal grant lobbying services, total quality management (see Proposal 5), and strategic financial planning. In addition, the board should look for opportunities to reduce the cost of current consultant's contracts by focusing and limiting the scope of services to work that is essential for Capital Metro's current operations.
During this time, the board's finance committee should establish a watchdog group consisting of the managers of Budget and Accounting and Contracts and Procurement, to make sure that costs on other consulting contracts are kept in line. In addition, staff project managers of any consulting contract worth more than $100,000 should meet regularly with the board's finance committee to report on the status of each contract deliverable and costs.
B. The board should require the Internal Audit Department to maintain a consolidated list of all findings and recommendations resulting from all outside reviews, whether from audits, reviews, or special consulting reports.
Consultant work is of no use unless the recommendations are put into practice or at least given careful consideration. Internal Audit should be held responsible for creating a tracking system to monitor the implementation of consultant recommendations and to provide status reports to the board and all Capital Metro managers before each of the board's monthly work sessions. In turn, the general manager should make assignments from the tracking list and hold managers responsible for completing action plans.
Before items are removed from the tracking list, Internal Audit should be required by the board's finance committee to verify that the item has in fact been implemented or otherwise cleared according to management's explanation. In particular, the Internal Audit Department should verify whether all savings identified in past consulting reports have been implemented and achieved, and if not, seek an explanation.
The consultants' tracking report should list all reports by date, consulting firm, total cost, and scope. In tabular format, the tracking report should list each finding, each recommendation, the managers responsible for corrective actions, the estimated fiscal savings or costs of each recommendation, and the current status of their implementation.
In particular, the board should require Capital Metro's senior managers to thoroughly update the current status of the KPMG recommendations and strategic action plans. Many of the findings and recommendations in the KPMG report concern fundamental, long-standing problems at Capital Metro. The report should be revised, updated, and tracked by authority staff. Monthly progress reports should be made at each board committee meeting and at the monthly work sessions of the full board. When the board reinstates the position of chief internal auditor, the internal auditor should verify to the board that all management actions described as "completed" on the KPMG report have indeed been implemented in actual practice.
C. The board should require the general manager and chief financial officer to prepare a consolidated list of all proposed consulting services and studies as part of the annual budgeting process.
During each budget preparation cycle, the board and the general manager should review a list of all anticipated consulting contracts worth more than $15,000 per year. This would force management to plan ahead and should provide ample advance disclosure to the board. The goal of this review would be to reduce expenditures for consulting studies, tighten the scope of consultants' work, and find opportunities to obtain the same information at a lower cost from other local, state, and federal sources.
D. Capital Metro's board should evaluate the general manager annually against the authority's progress toward implementing recommendations from audits, reviews, or special consulting reports.
This would be a useful and objective addition to the general manager's annual performance review.
Savings would be achieved by ending the contracts for federal grant lobbying services ($110,000 annually) and strategic financial planning ($65,000 annually). Both contracts have been annual, recurring arrangements. The contract for federal grant lobbying services is paid in monthly retainer fees, and if this board terminates or suspends the contract by August 1, 1998, two months of savings would accrue in fiscal 1998. If future needs for such services arise, the board can reconsider entering into contracts to meet the specific needs at that time.
In addition, the board and general manager could produce savings by eliminating or reducing the scope of future consulting work. Contracts that should be reviewed include legal services, risk management, advertising, marketing, community relations, transit and ridership studies, information technology, outplacement, and general financial and management advisory services. Savings resulting from better disclosure and advanced review of proposed consulting contracts cannot be estimated.
Expand the financial auditor's review of internal controls and compliance with applicable policies and laws.
State law requires Capital Metro to undergo an annual financial audit by an independent certified public accounting firm.61 Because Capital Metro receives millions in federal grant funds each year, federal law also requires a "single" audit by an independent outside auditor that combines financial, internal control, and grants management and compliance with federal grant laws and stipulations. Furthermore, state law requires that copies of Capital Metro's audit reports be delivered to the State Auditor's Office (SAO), which files comments about the audit with the board and the Texas legislative audit committee. SAO also has the authority to examine any work papers from the annual audit and to audit Capital Metro's financial transactions.62
None of these reviews have prevented Capital Metro from becoming involved in numerous fiscal and managerial scandals and misadventures. The board could make better use of these outside audits and hold the general manager responsible for corrective actions. The board also should ask for stronger and more detailed outside audits, at least until the authority corrects its basic business practices and establishes appropriate controls.
Annual financial audits
By design, financial audits focus primarily on the accuracy of an organization's public financial statements. To do this, the outside independent auditor reviews internal controls, tests for compliance with federal grant requirements, and assesses internal financial policies and procedures. Financial audits are not designed to ferret out detailed instances of fraud within an organization unless fraud or mismanagement is having a significant effect on its financial statements.
Past outside financial audits disclosed few of the financial and purchasing problems that subsequently proved embarrassing to Capital Metro. A number of past financial audits disclosed only a few internal control problems. Yet these "clean" audit reports were produced at a time when Capital Metro was facing the blunt findings of a highly critical 1995 review of its purchasing system, and later the attention of the local media, the FBI, and FTA. TPR's own review of Capital Metro documents and records found many problems with outdated financial software systems and inadequate management controls over purchases, invoices, farebox records, and receipts. TPR also found questionable expenditures in areas such as personal telephone use, in-town food expenses, and minimal controls over out-of-state travel.
More recently, Capital Metro's audit reports have improved. Capital Metro's fiscal 1997 audit, released November 1997, contained detailed findings of internal control and administrative problems. These findings touched on areas including late employee evaluations resulting in retroactive pay raises, the circumvention of contract and procurement policies, investment policies, and inventory controls. The audit report also commented on some non-financial areas, including a finding that Capital Metro should do a better job of using proper statistical sampling for reporting key transit performance measures to the FTA.63
Early warning systems for fraud
New professional auditing standards issued by the national public accounting audit standards board require certified public accountants (CPAs) to become a part of a comprehensive effort to reduce the risk of fraud. New professional auditing standards for detecting fraud become effective for audits of financial statements with a fiscal year ending December 15, 1997 or later. CPAs must follow the new auditing standards or risk being disciplined by state accounting licensing boards and being sued by investors, bond holders, or the client company itself. These requirements take effect for Capital Metro's fiscal 1998 financial audit. In the future, Capital Metro should expect more information on internal control weaknesses from its annual financial audits.
First, the auditor must evaluate the top management "control environment," on the premise that the attitudes of senior managers strongly influence those of all employees.
If top management is complacent about accountability and management controls, the possibility of fraud increases. Next, the auditor must assess the specific policies and procedures that govern an organization's accounting and management controls. An authority that has poor records, lax inventory controls, and weak financial reconciliation processes increases its chance of fraud and financial abuse. Finally, the new auditing standards require CPAs to be more probing and skeptical in their audits. Auditors must challenge management's explanations when discrepancies or weak controls are uncovered.64
For the next three years, Capital Metro's board should require a more detailed scrutiny of the authority's internal controls and expenditure compliance from its annual outside audit.
The board should include provisions in its auditor contract calling for more detailed testing of controls, contracts, and transactions. The board also should require more extensive narrative explanations of findings and control weaknesses and more detailed discussions of recommendations. This would require slightly more work than a financial audit conducted in accordance with the newly revised professional standards, and could add to the cost of the audit contract.
Each year, the board's finance committee should develop a list of priorities for its outside auditor. Two examples would be financial information systems and contracts and procurements, which have been major problem areas. The board should specify that the additional audit work concentrate on high-risk, high-profile areas. This could include an examination of internal controls over new information systems, rail property expenditures and revenue streams, investments, and controls over any particularly large or unique transactions.
This recommendation would phase out after the third year under the expectation that basic problems with financial controls and systems will have been corrected, and that Capital Metro's own internal auditors would provide sufficient audit coverage.
For each of the next three years, additional audit field work would be conducted as part of Capital Metro's contract for independent financial auditing. An estimated 250 hours of audit effort is assumed for each year; at $85 per hour for audit staff time, this would add about $22,000 per year to the annual financial audit cost. This is, however, a relatively small additional cost compared to the risks that Capital
Metro faces over the next few years, with major new information systems and ongoing management control problems from the past. This estimate assumes that additional outside audit work would be phased out after three years, once internal auditing is reestablished and better management controls are in place.
Use in-house legal counsel to reduce outside legal fees.
Good legal counsel is important to managing a large organization such as Capital Metro. Attorneys must advise managers and the board, review contracts, interpret state and federal laws and rules, perform legal research, and prepare written opinions. Such duties require a diverse legal background with specialized knowledge in many areas. Many organizations contract for specialized legal services to fill such needs. But even when it elects to do so, the organization must have the in-house expertise needed to select the appropriate services.
Between fall 1995 and summer 1997, Capital Metro briefly had two staff attorneys. However, each was employed for less than six months. The only employee with legal responsibilities who has been on the authority's staff for more than six months is a legal assistant originally hired to assist the staff attorney. This employee's chief function has been the management of open records requests and coordination of the use of outside counsel.65
From fiscal 1995 through April 1998, Capital Metro spent more than $1.7 million for contracted legal services (Exhibit 6). Of this, $1.2 million went to one law firm that provides the bulk of the authority's legal services.66
Expenditures for Contracted Legal Services
* October 1, 1997 through April 30, 1998.
|1998 to date*
Source: Capital Metro.
TPR did not attempt to evaluate the justification for or necessity of Capital Metro's legal services contract claims, but it is critical that the authority exercise good judgment in requesting outside legal assistance, particularly when rates can average $250 an hour. Although the open records coordinator told TPR that she is responsible for coordinating requests for outside legal assistance, TPR found that staff members often contacted law firms directly for legal advice without notifying this employee.
In May 1998, Capital Metro hired a chief counsel with extensive experience in transit authority law. The new attorney's responsibilities include advising staff and offering legal assistance for the procurement function. The job also requires the chief counsel to supervise the activities of outside counsel.67
For purposes of comparison, TPR examined the legal staffing of the transit authorities of San Antonio, Fort Worth, and Corpus Christi. San Antonio's VIA has a legal staff of four attorneys, including a general counsel, two general law attorneys, and a tort specialist. A VIA staff attorney indicated that the authority has had at least two attorneys on staff for quite some time. VIA still obtains outside legal counsel on occasion. However, expertise in transit authority law is relatively rare, and VIA's attorney noted that an in-house legal staff can develop specific transit expertise of particular value to the authority. In addition, in-house legal staff can coordinate and evaluate contracted legal services.68
Like Capital Metro, Corpus Christi's transit authority uses contracted legal staff exclusively and has never had a staff attorney. Unlike Capital Metro, however, a representative of Corpus Christi's authority indicated that its average annual legal costs range from $30,000 to $40,000.69
The Fort Worth transit authority relied on contract legal services since its creation in 1984.70 However, in March 1998, the authority hired a staff attorney to reduce contract expenditures. Over the past two and one-half years, Fort Worth's contract expenditures for legal services averaged a little more than $300,000, with about two-thirds of this amount going to fees for general counsel and a third going to contract negotiations and other legal assistance.71 Fort Worth's new staff attorney provides general legal services including legal advice to management staff and the preparation of written opinions on legal issues. The authority still expects to run into instances in which outside attorneys are needed for specialized services.72
The experiences of other transit authorities suggest that outside legal assistance is necessary from time to time, even when the authority has a staff attorney. When outside help of this nature is needed, the staff attorney should play an important role in selecting and monitoring the outside counsel.
The chief counsel should have the authority to approve any use of outside legal counsel in order to reduce spending for outside legal counsel.
The attorney has been given responsibility for overseeing the authority's contracts for legal services, and this responsibility should include a requirement that the chief counsel reduce spending for legal assistance. The authority's management should refrain from assigning responsibilities to the chief counsel that would overburden the position with tasks unrelated to the authority's legal needs.
The general manager and chief financial officer should review contract costs for legal services quarterly with the chief counsel to determine whether Capital Metro is making the best use of its in-house staff attorney as a gatekeeper of legal spending.
The chief counsel's responsibility for managing legal contract expenses should include not only a financial accounting of funds spent on attorney fees, but also an assessment of the quality of legal counsel the authority receives.
Estimated savings represent a reduction in spending for legal assistance by the authority. The reduction is equal to the value of the new attorney if approximately 1,000 hours (at $150/hour) of the attorney's time are used instead of contract legal counsel. The figure of 1,000 hours equals half of the hours in a standard 40-hour week over a year's period minus two weeks of vacation time (40 hours x 50 weeks = 2,000 hours). Substantial savings also may result from improved management and monitoring of contracts for outside legal services, but those savings cannot be estimated.