TxDOT Internal Audit Local Government Project Oversight Function ( ) Department-wide Report

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Introduction Local Government Project Oversight Function (1201-11) Department-wide Report This report has been prepared for the Transportation Commission, TxDOT Administration and management. The report presents the results of the Local Government (LG) Project Oversight Audit which was conducted as part of the Fiscal Year 2010 Audit Plan. The objective of the audit was to determine if district oversight of Local Government Projects includes sufficient controls to ensure compliance with applicable Federal, State and department laws, rules and guidance. Background In the early years, when TxDOT built a new state highway through a city or county, the LG would review the plans and request modifications such as adding curb and gutter. To accomplish the modifications, TxDOT and the LG would negotiate a contract in which the LG would contribute money to TxDOT and in return TxDOT would include the modifications in the design, and then construct the road. Over the years TxDOT s role has changed from developing and implementing all transportation projects to providing oversight of projects contractually assigned to LGs. Various contractual instruments are used for assigning roles/responsibilities for project funding and performance of the work. The majority of these projects are federally funded. The projects may include both construction and non-construction projects; with the construction projects being both on the State Highway System (on-system) and off the State Highway System (off-system). Construction projects may include some or all phases such as right-of-way, utilities, environmental, design, construction and maintenance. In January, 2003 TxDOT published program guidance called the Local Government Project Procedures (LGPP) document. This document includes guidance on regulatory requirements and assigns roles and responsibilities to ensure compliance. The document is intended to be used by the LG, along with their consultant, if any, and by TxDOT staff. A requirement for local entities staff or consultant to attend LGPP training was added in April 2009. Annual Financial Reports for FY 2008 through 2010 indicate federal funding passed through to Other Entities grew 35% from $102,311,647 in FY 2008 to $138,447,989 in FY 2010. Scope Audit team members included Karin Faltynek (Lead Auditor), Cynthia Walker, Roger Stacy, Vivian Cohn, and Romy Grimmell (Staff Auditors), with oversight provided by Paula Bishir- Jensen (Auditor-in-Charge). The audit work was conducted during the period of February through December, 2010. All work was conducted in conformance with the International Standards for the Professional Practice of Internal Auditing of The Institute of Internal Auditors. Report 1201-11 1 of 13 May 10, 2011

Field work was performed in the following 12 districts: Abilene, Austin, Beaumont, Bryan, Corpus Christi, Dallas, El Paso, Fort Worth, Houston, Laredo, Pharr, San Antonio. Audit work included identifying LG projects with let dates between September 2008 and February 2010, selecting sample projects, and reviewing the districts oversight documentation for all project phases of the sample projects. Of the 349 projects identified, 83 were selected for review. Selection was based on current project status and an emphasis on selecting a variety of project types including non-construction projects and both on-system and off-system construction projects. The selection included a focus on projects with federal funding from FHWA. Audit field work consisted of evaluating the sample districts adherence to existing process guidance through interviews and examination of sample project oversight documentation. For the purpose of this audit, the audit program was divided in three parts: Pre-Award, During-the-Award, and Post-Award. Award was defined as the execution of an Advance Funding Agreement (AFA) or other contractual instrument. Audit work was limited to the review of oversight documentation maintained at the districts. Local government or TxDOT division documentation was not reviewed. Audit work did not include a review of CDA or Pass-Through Toll Projects. Projects reviewed and corresponding districts are listed in Attachment A. Opinion While the department has appropriate controls for district oversight of LG projects, the controls are weakened by process inefficiencies caused by policy mis- or non-communication between the districts and divisions. In addition, the current organizational structure does not include a centralized LG project oversight function to communicate policy and processes to the districts and divisions and to encourage compliance. Some existing controls could also be further strengthened by adding a small number of improvements. Summary of Findings No. 1: The LG project oversight performed by districts lacks coordination and communication among the various disciplines involved in the oversight. No. 2: One district misused the driveway permit process. No. 3: FIMs Segment 41, also known as the Miscellaneous Contract Information System, is being misused by some districts using it to track AFAs. No. 4: Some of the sampled AFAs/contracts did not include all federally required language. No. 5: The project scope and cost information in some AFAs was insufficient for project management. No. 6: Insufficient coordination and communication of DBE program requirements. Detailed Findings and Recommendations Report 1201-11 2 of 13 May 10, 2011

No. 1: The LG project oversight performed by districts lacks coordination and communication among the various disciplines involved in the oversight. The review of sampled projects indicates a number of common deficiencies in the oversight of LG projects. These deficiencies were primarily found in connection with policy interpretation and application, particularly in the sampled projects Pre-Award and During-the-Award phases for off-system projects. In some cases interpretation of policy and practice varied significantly among the districts, although written policy and training are available to district staff. Attachment B illustrates occurrences of deficiencies by category and district. Criteria: Federal funding of transportation projects requires adherence to federal compliance standards. These standards come in the form of laws and policies, and are sometimes further detailed in agreements between the Federal Government and the recipient of funding. In the case of transportation projects, federal funding is received by the State who may come to an agreement with a LG for use of some of these funds. The ultimate responsibility for ensuring that the use of the funding complies with the federal standards remains with the State. Language to this effect can be found in the following: SAFETY-LU Section 1904, Oversight Program states: The States will be responsible for determining that sub-recipients of Federal funds have adequate project delivery systems TxDOT s responsibility to perform oversight of federally funded projects is detailed in the Federal Oversight Agreement between TxDOT and FHWA TxDOT is required by Office of Management and Budget (OMB) Circular A-133, Section 400, to monitor sub-recipients to ensure compliance with federal rules and regulations. Furthermore the FHWA s report on The Administration of Federal-aid Projects by Local Public Agencies, dated 12/2006, includes the following recommendation that State Transportation Agencies (STA) oversight of LG projects include a staffing plan for providing appropriate monitoring of LPA projects by the STA and administration of projects by LPA personnel. In order to ensure compliance, TxDOT developed internal policies and guidance which can be found in the following: The LGPP document identifies in detail and by process both TxDOT and LG responsibilities for the oversight/administration of sub-recipient projects. The Construction Contract Administration Manual, Chapter 16 provides guidance to TxDOT staff performing construction contract oversight of LG projects. Cause: In recent years LG projects grew to include larger and more complex projects without an accountability mechanism to ensure that required oversight was performed in accordance with applicable laws, rules, and policies. While there are various divisions responsible for policy, procedures and guidance, they do not have staff that specialize in LG projects which makes it difficult for district staff to receive consistent guidance. Effect: District field work indicates numerous issues in the area of LG project oversight. See Attachment B. Report 1201-11 3 of 13 May 10, 2011

Recommendation: Administration should dedicate staff as the LG project Office of Primary Responsibility (OPR) and place them at an organizational level with influence. This staff should be responsible for providing policy and procedure guidance and for monitoring the districts negotiation and oversight of LG projects. Currently, district or region staff that is involved in developing of AFAs or in project oversight must contact a variety of divisions for policy interpretation or guidance. The OPR function could be the clearinghouse for all applicable guidance by compiling, and updating it as necessary, and making it available in a user friendly form. The OPR could also seek interpretation when necessary, develop oversight tools, and be a general one-stop resource for district staff in matters of LG project oversight. In addition each division should also identify LG project subject matter experts in each division to assist the OPR with policy and procedure questions. Management Response and Action Plan Responsible Party: John A. Barton, P.E., Assistant Executive Director for Engineering Operations Implementation Date: May 2012 Management concurs with this recommendation. The organizational structure recommended in the Restructure Council s report submitted to the Commission on January 5, 2011, included the creation of a Major Project / Local Government Project Development Office. This office would serve as the OPR for providing policy and procedure guidance on developing and managing local government (LG) projects, as well as providing oversight of the negotiation and management of these projects. It is anticipated that this office will be created as part of the ongoing TxDOT Modernization initiative and is anticipated to be operational by May 2012. In the meantime, additional guidance regarding the oversight of Pass Through Finance (PTF) projects, a specific group of LG projects, is being developed by the Turnpike Authority division (TTA) which is the OPR for the PTF program. This guidance includes a oversight tool (checklist) that may be used to ensure LG compliance with all applicable requirements on PTF projects as well as a list of contact persons from each associated division and office to assist the districts and regions in managing these and other LG projects. This checklist will also be made available to all districts as a tool for their LG project oversight. These new tools and guidance will be provided to the districts and regions, along with training sessions conducted through webinars by September 1, 2011. No. 2: One district misused the drive way permit process. In accordance with the Texas Administrative Code, TxDOT s practices include an on-system access management plan. This plan facilitates the granting of access and the design, materials, and construction of driveways connecting to the State Highway System. This plan allows TxDOT to issue a Permit to Construct Access Driveway Facilities. The use of these permits is limited to driveways. In October 2005, the Houston district issued this type of permit for a driveway on FM 359. Correspondence associated with the initial permit indicates that there were some safety concerns and discussion about the need for turn-lanes. In June 2007 the district revised the original permit by including the construction of turn-lanes on the permit. Report 1201-11 4 of 13 May 10, 2011

The subsequent construction of those turn-lanes on an on-system roadway also failed to follow the competitive bid and project oversight process required by the Texas Transportation Code. The cost for the construction could not be established, since the district did not obtain this data from the private entity. In addition, there was also a donation of real property associated with the construction of the turn-lanes which was not brought before the Transportation Commission. Department staff charged 61 man hours to this project for a total of $2,945.54. Project records indicate that all PE charging will be to the overhead for permitting & ROW mapping, no AFA required. Criteria: TAC 43, Chapter 11, Subchapter C, Access Connections to State Highways, Rule 11.52 defines access connections as follows: a facility for entry and/or exit such as a driveway, street, road, or highway that connects to a highway on the state highway system. The rule allows the use of a permit to authorize a private entity to build a drive way that connects their property to a state highway. Transportation Code 223, Subchapter A, states the department shall submit for competitive bids each contract for a) improvement of a highway that is part of the state highway system or b) materials to be used in the construction or maintenance of that highway Government Code 2253 prescribes that performance and payment bonds are required on public work contracts of $100,000 or more or $25,000 or more if the contracting entity is not a municipality. 43 TAC, Chap 1, Subchapter G states that acceptance of a gift or donation made to the department under this subchapter must be approved by order of the commission, except that a gift or donation valued under $1,500 may be accepted with the approval of the executive director. Cause: Anecdotal information indicates that prior Administration did not object to the practice of building turning lanes by private entities via drive way permit. Effect: Setting precedence by allowing practices that violate the Texas Administration Code and the Transportation Code. Private property became part of the state highway system without Transportation Commission approval. TxDOT incurred $2,945.54 in labor and direct and indirect overhead costs that could have been charged back to the entity if this would have been handled as a Voluntary Project. Recommendation: Administration should consider developing and adopting alternative policy to facilitate timely construction of turn lanes in conjunction with drive way permits. Report 1201-11 5 of 13 May 10, 2011

The Right of Way (ROW) Division should coordinate the Minute Order based on information received from the East Region ROW office who has already reviewed ROW donation related documentation and forwarded the appropriate documentation to the ROW division. Management Response and Action Plan Responsible Party: David Casteel, PE Assistant Executive Director for District Operations Implementation Date: Sept. 1, 2011 Administration will develop and implement a standard policy. No. 3: FIMs Segment 41, also known as the Miscellaneous Contract Information System (MCIS), is being misused by some districts using it to track AFAs. The Contract Management Manual describes Segment 41 as follows: MCIS is a computerized management information system used to monitor and control miscellaneous contracts for expenditure which are not construction, maintenance, nor purchase of service contracts. The Office of Primary Responsibility for Segment 41 is the General Services Division, Contract Services Section (GSD-CSS) who uses the information in Segment 41 to compile consultant contract reports. Some of this reported information may be distorted because the existing MCIS is being used by two of the sampled districts to track AFA reimbursement and balances without coordinating this use with GSD-CSS. Cause: This practice has been incorporated in recently developed Regional Design Resource and Contract Management SOPs. Effect: If the use of the system is not coordinated with the OPR, General Services Division, it causes erroneous inclusion of contract information in miscellaneous contract reports distributed both internally and externally to the department. Recommendation: GSD should identify the impact of including LG project data in Segment 41 and should advise possible Segment 41 users whether and how districts can continue to use the Segment 41 or what alternative ways are available for tracking payments for AFAs. Management Response and Action Plan Responsible Party: Scott Burford, Director General Services Implementation Date: April 30, 2011 GSD Contract Services concurs with this finding. Contract Services has instructed each Regional Director that AFAs should not be entered into MCIS and to delete existing AFAs from MCIS. Contract Services has also reviewed MCIS data to identify possible Report 1201-11 6 of 13 May 10, 2011

AFAs. Contract Services will continue to monitor entries into MCIS to ensure that AFAs are not entered in the future. No. 4: Some of the sampled AFAs/contracts did not include all federally required language. Audit work was performed in 12 districts and the Rail Division. AFAs/contracts sampled in 8 of the 12 districts did not include Catalog of Federal Domestic Assistance (CFDA) numbers or other federal compliance requirements. The sampled AFAs/contracts showed execution dates between June 1998 and October 2008. The Rail Division contract template reviewed did not include pertinent federally required language. Also the AFAs/contracts do not require requests for reimbursement be submitted within a specific timeframe. Some LGs do not request reimbursement until the end of the project, and others bill without any specific frequency. Criteria: Federal Program requirements stipulate that certain information be included in all award documents that pass through federal funds to governmental/non-profit entities. In addition, federal awarding agencies also require specific federal language to be included in contracts where federal funding is utilized. Cause: The AFA templates were updated after the FY 2009 Single Audit. However, no previously executed AFAs were amended. The contracts developed by the Rail Division have not had the benefit of review by contract legal staff. Effect: Not including all federally required elements in pass through contracts will result in non-compliance and possible loss of funding. LGs not requesting reimbursements on a scheduled frequency make monitoring for compliance difficult and sometime impossible. Recommendation: GSD-CSS should include appropriate federal language in all pass through sub-recipient contracts. Divisions/Regions and Offices should route all pass through sub-recipient contracts through GSD-CSS. GSD-CSS should include language in the pass through sub-recipient contracts addressing reimbursement request requirements and detail the consequences if the requirement is not followed. Management Response and Action Plan Responsible Party: Scott Burford, Director General Services Implementation Date: December 31, 2011 GSD Contract Services concurs with the finding. Contract Services is reviewing its templates and other divisions' templates that are used for pass-through sub-recipient Report 1201-11 7 of 13 May 10, 2011

federal funding. Revisions will be made to ensure that each template contains all required federal provisions and to incorporate the further suggestions made in the audit. No. 5: The project scope and cost information in some sample AFAs was insufficient for project management. The AFA is the base document for managing many LG projects. The current AFA format limits the project description and assigned roles/responsibilities to project phases funded by the AFA. If it does not include all project phases, whether funded under the agreement or not, then critical coordination and oversight of phases such as right-of-way, utilities, environmental, design and construction may not occur. The current AFA format limits the information on the budget page to the project phases that are being funded with state and federal funds. Criteria: The Stewardship Agreement between TxDOT and FHWA places the oversight responsibility for sub-recipient projects on TxDOT. Cause: The AFA is not viewed as an essential project management tool. There is no other document besides the AFA that provides a description of all project phases, compliance requirements and total project costs regardless of the funding source. Effect: Project managers cannot provide effective project oversight. TxDOT may also not receive complete reimbursement for direct costs associated with oversight costs related to nonfunded project phases. The review needs to occur even on non-funded phases since the deliverable will be incorporated into a project funded with state and/or federal funding. Recommendation: GSD-CSS should make minor revisions to the current AFA budget page to include line items for all project phases (right-of-way, utilities, environmental, design, and construction) even if they are not being funded through the agreement. These line items should include associated direct costs and should list the funding entity for these costs. Other pass through sub-recipient contracts should also be reviewed to ensure similar language is included. Management Response and Action Plan Responsible Party: Scott Burford, Director General Services Implementation Date: June 30, 2011 GSD Contract Services concurs with this finding. New AFA budget page templates will be posted on the Contract Services intranet page no later than April 30, 2011. They will be encouraged for all contracts immediately and will be mandatory for all contracts executed after June 30, 2011. No. 6: Insufficient coordination and communication of DBE program requirements. Report 1201-11 8 of 13 May 10, 2011

Condition: Federally funded projects require establishing of DBE goals. TxDOT s DBE Program is managed by the Office of Civil Rights DBE Section (OCR-DBE). When OCR-DBE becomes aware of a pending LG oversight project they use a Memorandum of Understanding (MOU) to advise the LG of the DBE goal suggested by TxDOT. This MOU is normally sent directly to the LG without any coordination through the district. For the sampled projects OCR only had a DBE goal for 14 of the 56 that met the criteria for a DBE goal. For one of these projects, the DBE goal differed from what was in the district project records, and other projects included a DBE goal unknown to OCR. OCR also does not normally coordinate a DBE goal for non-construction LG projects. Some district DBE coordinators are not notified of a LG project, which impedes the monitoring of the goals. Conversely, when a DBE coordinator monitors and reports goals that are not known to OCR, the information is not captured, because OCR does not have a record of the project. Criteria: The LGPP document, module 11, Section 3 states that all federal aid projects are subject to DBE requirements. USDOT letter dated September 21, 2010 states that FHWA recommends one single DBE program implemented by the primary recipient of federal aid funds, in this case the Texas Department of Transportation, applicable to any sub-recipient of those funds. FHWA/TxDOT Stewardship Agreement states: It is agreed that Title 23 requirements pertaining to contract bid proposal contents (including Davis-Bacon and Disadvantaged Business Enterprise program) and procurement procedures (competitive bidding) apply to project where required by the implementing Federal regulation. Cause: The standard process for identifying DBE goals for LG construction type projects is for the Design Division to forward one copy of the bid proposal to OCR to provide them an opportunity to comment on the need for a DBE goal. Also, since non-construction projects are not reviewed by DES, there is no mechanism to communicate the LG DBE goals for these projects to OCR. OCR developed a process that includes a MOU with the LG. OCR sends the MOU directly to the LG without the district s involvement. While this may at times remind the LG to include a DBE goal in a bid proposal/contract, they do not always respond back to OCR, but instead communicate with the district. The DBE goal should be established during the process of finalizing the bid proposal. This is normally done in the district TP&D section, while oversight of the construction portion of the contract and monitoring of DBE goals is performed by district construction staff. In addition, the standard AFA template does not includes any language under construction responsibilities that the local entity must conform to federal requirements, specifically including participation by DBEs. Report 1201-11 9 of 13 May 10, 2011

Effect: TxDOT may be perceived as negligent in their responsibility to ensure that the LG complies with DBE requirements for projects that include federal aid. Also DBE goal achievement is not captured and reported which dilutes the true contributions to the statewide goal by the LG partners. Recommendation: OCR should coordinate with the district when sending the MOU to the LG. GSD-CSS should include specific language about DBE goal requirements in the AFA. In coordination with TxDOT Administration OCR should consider developing a process to include evaluating non-construction projects for DBE goals. OCR should create a transmittal log of all LG bid proposals received and periodically compare this information with Design and Finance Divisions records. OCR should maintain a record of their review of these bid proposals, and provide appropriate comments about missing or inadequate DBE goals back to DES for their handling/communication back to the district/lg. OCR should research in-house options for electronic submission of DBE goal achievement information by the LG to TxDOT. Based on the outcome of the research, OCR should coordinate the development of an electronic process with the Technology Services Division. Management Response and Action Plan Responsible Party: Mr. George Ebert Implementation Date: OCR should coordinate with the district when sending the MOU to the LG. OCR has met with the GSD Contract Services Section (CSS) in April 2011 and suggested the language for the current MOU process be incorporated into the AFA process. OCR has provided the MOU language that will be incorporated into all contracts by GSD-CSS. GSD-CSS anticipates incorporating the language in new contracts at the beginning FY 2012. There will no longer be a need for the separate MOU process currently in place that has been established at the following link: http://www.txdot.gov/business/business_outreach/ mou.htm. September 1, 2011 GSD-CSS should include specific language about DBE goal requirements in the AFA. Report 1201-11 10 of 13 May 10, 2011

OCR has met with the GSD-CSS in April 2011 and provided the MOU language that will be incorporated into all contracts by GSD-CSS. This language addresses all federal DBE program requirements including the DBE goal requirements. September 1, 2011 In coordination with TxDOT Administration OCR should consider developing a process to include evaluating non-construction projects for DBE goals. FHWA has issued informal guidance indicating that DBE goals will not be required on nonconstruction projects including Congestion Mitigation & Air Quality Improvements (CMAQ) projects unless TxDOT chooses to. The new SOP documents will clarify the above and state no DBE goals required on non-construction projects. OCR should create a transmittal log of all LG bid proposals received and periodically compare this information with Design and Finance Divisions records. OCR is currently redefining and rewriting the SOPs for the District DBE Coordinators (DDC) and OCR office. Additionally, the SOPs will detail the coordination of the DBE Program on LG projects with all D/D/R/O with the new SOPs specifically addressing the transmittal log issue including the coordination of all bid proposals between D/D/R/O. The DBE Program SOP is scheduled to be submitted to FHWA for approval by 9/1/2011. May 1, 2011 September 1, 2011 OCR should maintain a record of their review of these bid proposals, and provide appropriate comments about missing or inadequate DBE goals back to DES for their handling / Report 1201-11 11 of 13 May 10, 2011

communication back to the district/lg. OCR is currently redefining and rewriting the SOPs for the District DBE Coordinators (DDC) and OCR office. The new SOPs will specifically outline the process of coordinating each aspect of the DBE Program on LG projects and address tracking and reporting requirements. OCR has identified CST, Design, Finance and GSD-CSS as key internal contacts to assist with identification of LG projects and OCR will work to develop a communication process similar to the process used on construction projects and incorporate this process in the SOPs. Further, the SOP will identify the DDCs and LG DBE contract managers as the central OOR for LG reporting with OCR providing audit oversight of the process. OCR will begin developing a in-house database that will be used to track LG project information until a technology solution can be established with TSD. September 1, 2011 OCR should research in-house options for electronic submissions of DBE goal achievement information by the LG to TxDOT. Based on the outcome of the research, OCR should coordinate the development of an electronic process with TSD. OCR will begin the process of a in-house automated solution in the form of a in-house database, goal shortfall report and excel spread sheets to collect, track and monitor LG project DBE achievement. OCR will continue to discuss with TSD an in-house solution for the electronic submission of Local Government information to track DBE goal achievement however establishing a completion date will be based on other TSD projects and priorities. September 1, 2011 Closing Comments In general district staff was very receptive to this audit and any suggestion for improvements. Many districts began putting corrective actions in place either during the audit field work or Report 1201-11 12 of 13 May 10, 2011

immediately following. Exit conferences were held with Division Directors or staff of CST, DES, ENV, GSD-CSS, OCR, TPP, TTA, TRF, RR, and OGC, and District Engineers and their staff for the sample districts. Report 1201-11 13 of 13 May 10, 2011