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Office of Performance Evaluations Audit Response - Idaho

By Keith Cox,2014-12-29 00:42
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Office of Performance Evaluations Audit Response - Idaho

    Idaho Transportation Department

    Response to Office of Performance Evaluation Audit

    1/13/09

Audit theme Transportation funding cannot keep pace

Department response Agrees

    The Idaho Transportation Department agrees with the finding.

    The department has been working over the past four years to provide

    information on transportation funding; to outline the need for increased

    funding for the operation; maintenance and improvement of Idaho’s roads

    and bridges; and to collect comments from the public and elected officials.

Department action/plan

    The department will continue to provide the Governor’s Office and Idaho

    ho’s transportation system, Legislature information on the condition of Ida

    investment required to operate, maintain and improve it, and options to

    address these needs.

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    Audit theme Department lacks a comprehensive statewide strategy for capital improvements and operations

Department response Agrees

    The Idaho Transportation Department agrees with the finding.

Department action/plan

    October 2008 through September 2009 The Transportation Planning

    Division’s Annual Work Program for October 2008 through September 2009

    includes the statewide transportation system plan as an identified work

    product.

    November 2008 Significant reorganization of the Transportation Planning

    Division refocused duties related to statewide planning within the division.

    June 2010 Significant steps are underway to complete a statewide

    transportation system plan by June 2010.

Scope of plan

    The plan will allow Idaho’s transportation system to be managed over short-

    and long-term timeframes by planning and forecasting improvements and

    strategies under various funding scenarios.

    The plan will link the department’s strategic plan, transportation vision, the

    State Transportation Improvement Program and corridor plans.

    Districts will remain responsible for project nomination, while the Idaho

    Transportation Board will select projects.

    The plan will include clear project selection and prioritization criteria and

    specific performance eligibility requirements, including deficient location

    data/criteria to justify the funding priority and project benefits over the

    short and long term.

    Decisions will be based on policy goals that connect strategies to the annual

    Capital Investment Program update. Strong technical and analytical

    justifications will be required for project managers, department managers

    and local agencies when recommending a project.

    An internal tracking and monitoring system will be developed for strategic

    action items that will clearly translate policy goals into both operations and

    decision-making.

     2

    Audit theme The department should strengthen its

    performance measures

    Department response Agrees

    The Idaho Transportation Department agrees with the finding.

    Department action/plan

    Significant steps are under way to identify performance measures.

    November 2007 Leading Through Agency Performance (performance measures) was identified as one of four major focus areas in department’s strategic plan.

     Formed a performance management team to develop December 2007

    strategies, goals, and possible measures needed for making the cultural shift to performance management.

    April 2008 The implementation plan was completed and presented to the Idaho Transportation Board with recommended strategies and action plans, and an inventory of typical transportation measures. A recommendation to establish a performance management office was included in the plan.

    September 2008 Director Pamela Lowe re-organized financial, budget and capital investment programming functions into a single unit under the Administration Division to prepare for the eventual establishment of the performance management office. Within this new structure, the performance management function can be managed department-wide and linked to the department’s major financial management processes.

    December 2008 In a presentation to the Idaho Transportation Board, the department identified 24 possible measures that could be used to demonstrate performance in four vital areas:

    ; Sustaining Idaho’s transportation systems to ensure mobility of

    people and goods.

    ; Improving the experience of customers who use our systems.

    ; Improving the effectiveness of transportation management.

    ; Demonstrating return on investment when making transportation

    decisions.

    Ongoing and near future implementation activities include: January 2009 Stakeholder review and input on Idaho Transportation Board approved measures.

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    March 2009 Department-wide review and input on suggested measures. March/April 2009 Board members, headquarters and district leadership training in performance management.

    June 2009 Assign internal and external measures to key personnel for the responsibilities of: highest direct-line accountability for performance and measurement expertise, policy guidance and quality assurance. June 2009 Formalize a performance management office that will be responsible for department-wide integration of performance management, measurement and continuous quality improvement procedures.

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    Audit theme Department does not have necessary systems and tools to run most cost-effective highway program

Department response Agrees

    The Idaho Transportation Department agrees with the finding.

Action required

    The audit recommends the Idaho Legislature appropriate approximately $6

    million for the department to acquire integrated maintenance, pavement and

    project management/scheduling systems.

Department action/plan maintenance and pavement management systems

    Significant steps are under way to address the need for maintenance and

    pavement management systems.

    Fall 2007 A pilot project started evaluating a Pavement Management

    System in one of the department’s operational districts.

    September 2007 The department began a research project to evaluate its

    current maintenance and pavement and management systems and to make

    future recommendations.

    Summer 2008 The draft final report was completed. It recommended the

    acquisition of new systems to allow the department to better and more

    efficiently evaluate pavement and maintenance needs and conditions.

    August 2008 The department recognized the need to track maintenance

    costs on an interim basis until a long-term system could be obtained. An

    interim team was formed to develop a Web-based application to track

    maintenance activities. The system will not be able to forecast future

    activities and will require dual-entry of timesheets.

    January 2009 The estimated cost of the recommended systems is

    approximately $6 million. The final report will be presented to the Idaho

    Transportation Board at its Jan. 21, 2009, meeting.

    February 2009 Testing will begin on interim maintenance management

    system.

    July 2009 Interim maintenance management system will be implemented.

    TBD Select method of funding and acquiring maintenance and pavement

    management systems.

    TBD Test and implement systems.

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    Department action/plan project management system

    2007 A pilot project is evaluating project management software in one of the department’s operational districts. The project team is coordinating with

    the GARVEE Program Manager and Connecting Idaho Partners to learn from their experiences in using project management tools.

    2009 A project management system will be implemented to manage one district’s transportation program by the end of 2009. Upon completion of the pilot project, a recommendation will be made for a department-wide system.

TBD Select method of funding and acquiring system.

TBD Test and implement system.

    Department action/plan geographic information system

    Substantial progress has been made to supplement and reorganize the department’s geographic information system (GIS).

    July 2008 Created Geographic Information System Section and hired a manager. The new manager visited all department offices to identify needs for GIS technology.

    Fall 2008 The initial focus of the section is using existing GIS software licenses more effectively.

2009-2012 Department-wide GIS technology training.

    Fall 2010 Develop Web-based GIS applications for initial use late in the year.

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    Audit theme Improve the department’s financial

    planning process

    Department response Agrees

    The Idaho Transportation Department agrees with the finding.

The department’s financial system, upgraded in 2006 and updated again in

    2008, meets all state and federal financial reporting and planning requirements.

    The department’s financial planning process generates the following reports for management’s use:

    ; Projected revenues based on current tax structure and reflecting the

    impact of economic forecasts.

    ; Projected costs (by fund source, class of expenditure, one-time and

    on-going) based on:

     Costs of current operating program outputs.

     Reasonably expected rates of price escalation for operation

    costs (labor, fuel, energy, supplies, etc.).

     Planned operation initiative costs (one-time, and on-going).

    ; Remaining funding available for construction (after deducting

    operations costs from projected revenues).

    ; Identified increases in maintenance costs for GARVEE projects (road

    striping: increased paint & bead volumes).

    ; Revenues restricted for use on road equipment purchases, trustee and

    benefit payments, Planning and Public Transportation operations

    costs.

    ; GARVEE bond proceeds, GARVEE project costs, and debt service.

    ; Projected annual funding shortfalls in meeting programmed

    construction levels under the existing tax structure (after addressing

    projected operations costs including inflation, identified volume

    increases and planned initiatives). The funding shortfalls identified by

    the existing multi-year financial plans were central in highlighting and

    identifying the need for revenue enhancements.

    Department action/plan

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    The department’s financial tools are insufficient to address the level of sophistication called for in many of the audit recommendations. An enhanced financial planning system will need to be purchased and/or developed.

    The department, using its existing financial system, is improving financial planning by:

    nder ; Uway Developing and routinely reporting meaningful

    performance measures for core programs.

    ; June 2010 Integrating strategic plans and performance management

    to more specifically reflect funding commitments to operating

    programs and infrastructure investments.

    ; June 2010 Identifying imbalances between targeted performance

    levels and available resources.

    ; June 2010 Providing metrics to key decision-makers for purposes of

    evaluating, prioritizing and selecting construction projects.

    ; June 2010 Providing meaningful information to key decision-makers

    for use in making revenue enhancement decisions.

    Implementation of the enhanced financial planning system is dependent on the complexity of system requirements and the ability to secure the funding needed to acquire and/or develop it. An initial implementation timeline estimate is:

    ; June 2009 Identify detailed system requirements.

    ; September 2009 Identify alternatives for acquisition/costs.

    ; October 2009 Select method for acquiring/identify funding source.

    ; TBD Install/test new system (pending funding).

    ; TBD Ongoing use of new system (pending funding).

To fully integrate a new financial system maintenance, pavement, project

    scheduling systems, performance measures and a statewide transportation plan must first be in place.

     8

    Audit theme Improving GARVEE financial planning

    “The audit identifies an estimated $19.6 million in negative arbitrage (the difference between the cost of debt and the reinvestment of bond proceeds) during construction.”

    Department response Understands

    The Idaho Transportation Department understands the audit issues surrounding the financing of the GARVEE program.

Background on GARVEE financing program.

    ; The Idaho Transportation Board established a philosophy to secure

    long-term financing in advance of awarding contracts.

    ; This philosophy has been the guiding principal for securing GARVEE

    bonds. This approach meets the legislative requirement as stated in

    House Bill 336 Section 5 of the 2007 Legislative Session which states;

    “The bonds issued under the authority provided in Section 1 of this

    act shall be issued…in amounts necessary to ensure that: the funds are

    necessary to meet program obligation requirements.”

    ; Working with its contract GARVEE program manager, the department

    developed a project-financing schedule including advertising date,

    award date, first cash expenditure date and a cash flow projection by

    month for the duration of the GARVEE projects.

    ; This detail is aggregated to program totals for which bond sizing, the

    timing of issuing debt, and total program cash flow is used to manage

    the financial aspect of the program.

    ; The department also worked with the Idaho Housing and Finance

    Association (IHFA) and its investment banking partners to develop

    program total debt service estimates by state and federal fiscal year.

Audit finding of negative arbitrage.

    ; The audit identifies an estimated $19.6 million in negative arbitrage

    (i.e. the difference between the cost of debt and the reinvestment of

    bond proceeds) during construction.

    ; The estimated cost of negative arbitrage is equivalent to the cost of

    raising the permanent financing rate by 0.4% to 0.5%. Remedies

    recommended to the negative arbitrage include: shorter term

    borrowing at lower rates (current bond issues have an 18-year final

    maturity); structure borrowing to more closely match cash flow

    requirements; and the possibility of issuing bond anticipation notes.

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    ; The $19.6 million identified in the audit is a largely hypothetical figure based on deliberately conservative short-term and long-term interest rate assumptions in the financing model for planning purposes as of July 2008. There is no assurance that negative arbitrage will exist on future transactions, as was the case for the Series 2006 borrowing.

    ; An updated model indicates that the estimated amount of negative carry for the remaining bond issues would be approximately $15.7 million. However, if negative carry did achieve a $19.6 million level, it would equate to an additional .15% to .20% increase in overall inancing cost, not the .40% to .50% as stated in the audit. f

    ; It is important to note that the construction fund life is only approximately three years, while the long-term borrowing is for 18 years. The long-term borrowing cost is a much larger driver of overall financial performance than the shorter construction fund reinvestments.

    The audit report recommends three ways to mitigate negative arbitrage. 1. Short-term borrowing.

    ; Section 40-315, Idaho Code set limitation that debt service

    cannot exceed 30% of Idaho’s federal-aid apportionment

    starting in state fiscal year 2012 and for each succeeding state

    fiscal year.

    ; The department worked with its finance partners, consulted

    with bond rating agencies and used conservative future federal

    fund assumptions to establish the current 18-year maturities

    for debt that is issued. The department used a flat federal

    funding assumption at federal fiscal year 2009 levels.

    ; Federal authorization for highway funding is historically for

    six-year time periods. In consultation with the department’s

    financing partners and the rating agencies, with the unique

    pledge of only federal funds (no state funds are pledged which

    is unique to Idaho) for debt service, it was determined that an

    18-year bond term would yield favorable bond ratings.

    ; With an 18-year maturity on bonds, a 30% limitation on debt

    service and a flat federal funding assumption would provide

    financing for a GARVEE program of $998 million. Shortening

    the term of the bonds to something less than 18 years would

    reduce the total amount that could be borrowed.

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