California’s embattled high-speed rail project has been beset by “flawed decision making and poor contract management” that have led to billions of dollars in cost overruns and significant delays in construction in the San Joaquin Valley, according a report issued Thursday by state Auditor Elaine Howle.
Howle’s audit, requested earlier this year by the state Legislature, is a sharp critique of the California High-Speed Rail Authority, the agency tasked with planning and developing the state’s bullet-train system.
Among its key findings is that the authority, in an effort to beat the clock on a federal deadline for spending stimulus grant funds, awarded contracts for its first construction segments in the Valley long before it had finished planning, acquired enough land or fully assessed other potential risks to cost and schedule.
“Despite being aware of risks associated with beginning construction before completing critical planning tasks, the Authority began construction in 2013 – a decision that has led to contract changes, project delays and cost overruns,” the report states.
The audit also takes the authority to task for significant lapses in its ability to oversee its contractors and consultants, review invoices and approve changes to billions of dollars in construction and consultant contracts.
“Contract changes have resulted in significant time delays, and the Authority has had to continually extend expected completion dates, …” the report added. “Cost overruns for three active Central Valley projects reached $600 million in June 2018, and the Authority estimates an additional $1.6 billion to complete them.”
More than three-quarters of the change orders issued for construction in the Valley – about 120 miles of the rail route from Madera to Bakersfield – were initiated not by the contractors, but by the authority itself because of modifications to the project.
Assemblyman Jim Patterson, R-Fresno, a longtime critic of the rail authority who has persistently pushed for an audit of the project, said that while the report vindicates many of the concerns he’s voiced, “we have got to get past the politics, past the ‘I told you so’s,’ and past who’s right or who’s wrong.”
“This audit has shone the light of accountability on where the authority is now, and it’s in a state of collapse,” Patterson told The Bee on Thursday. “This audit is damning. … Central California is going to be left with a ‘rump railroad’” that he said he believes will never be connected “to anything beyond Madera or Bakersfield.”
The audit’s release came shortly before the rail authority held its November board meeting in Burbank. Authority board member Mike Rossi, who leads the agency’s finance and audit committee, issued a statement responding to the audit in which he acknowledged the difficulties and agreed with recommendations suggested by the auditor for improving oversight and performance.
“Our concurrence with all of the recommendations … does not signal agreement with all of its conclusions about the impact of past decisions by the authority,” he added. “We moved into construction aware of the risk of doing so while still early in the project development process … and some of those risks were realized.”
Lapses in schedule
Earlier this year, the rail agency estimated the cost at $77.3 billion to build its initial 520-mile phase from San Francisco to Los Angeles by way of Fresno and the San Joaquin Valley. And that’s before considering a future second phase that extends the lines north to Sacramento and south to the Inland Empire and San Diego – sections for which no cost estimates or schedule forecasts have been offered by the rail authority.
The decision to award construction contracts in the Valley before sufficient planning and land purchases had taken place was driven by a 2017 deadline for project completion that was originally contained in a grant agreement between the state and the Federal Railroad Administration for $2.6 billion in federal stimulus funds. The federal agency later agreed to modify the agreement to require only that the money be spent by the end of September 2017, but requiring completion by 2022.
“However, we determined that even with a grant deadline extension until December 2022, the Authority could miss the new deadline unless Central Valley construction progresses twice as fast as it has to date. Missing the deadline could expose the State to the risk of having to pay back as much as $3.5 billion in federal funds,” the report states.
But the audit also noted that the rail authority lacks the money it needs to connect the sections under construction in the Valley with electrified commuter-rail tracks on the San Francisco Peninsula between Gilroy and San Francisco.
Additionally, with the agency’s patterns of changing the project and modifying its cost estimates and schedule forecasts, there remains concern over the authority’s ability to accomplish its goals. “Looking beyond the Central Valley, the Authority’s precarious funding situation means it cannot repeat past mistakes,” the report notes.
Before beginning any additional construction beyond the three contracts already in progress, the audit calls for the authority to set up firm requirements “before executing its next construction contract to prevent avoidable cost overruns and project delays.”
Lapses in management
Other recommendations include providing detailed quarterly reports to the state Legislature on progress of construction in the Valley, and hiring additional state employees rather than consultants to monitor contract compliance and hold contractors accountable for their performance.
“The authority will need to do more to control the soaring costs of its contracts by improving its contract management,” the audit states. It adds that an over-reliance on consultants for contract management has, the audit suggests, resulted in “only weak and inconsistent oversight.”
“In fact, the contract managers’ lack of documented, independent review prevented us from reaching conclusions about the Authority’s effectiveness in assessing the quality, timeliness, or cost of the work performed under these contracts,” the report states. “Without such documentation, the Authority cannot demonstrate that the hundreds of millions of dollars it has spent to date on the selected contracts — including for cost overruns in the form of amendments — has been necessary or appropriate.”
Rossi said the rail authority is taking the audit to heart. “Our focus is and always has been to regularly identify and apply lessons learned as part of a continuous improvement process, …” he said. “We are moving swiftly to fully implement the recommendations of the California State Auditor” to more effectively meet its obligations and goals.
Brian Kelly, the rail authority’s CEO who is currently on a medical leave, told The Bee earlier this year that the agency may rethink its approach to how it deals with future construction contracts.
The first three contracts covering Madera, Fresno, Kings, Tulare and Kern counties are based on a “design-build” process in which the project is only partially designed, and then a contractor is hired to finish the design and handle the construction. It’s a method that the rail authority hoped would result in lower costs by giving contractors latitude to bring their own expertise to how the project is designed and built and reduce the need for change orders.
It’s different from more traditional infrastructure projects that are done as “design-bid-build,” where a project is completely designed before being put out for construction bids, and the cost for any later design changes are borne by the owner rather than the contractor.
Patterson, however, said he has little faith in the authority. “Everything that people like me have been warning about now has been officially confirmed by our independent state auditor,” he told The Bee. “The auditor has confirmed that this authority spent billions of federal dollars, misused them, shoved them out the door knowing they did not have the property” for construction in the Valley.
Patterson added that he fears a federal audit of grant agreements will have further financial consequences for the state.
“There is a price tag coming, and it’s going to be billions of dollars on top of the waste and mismanagement” should the Federal Railroad Administration seek repayment of the $2.6 billion in federal stimulus funds, he said. “There’s another shoe to drop here.”
Patterson renewed his call to bring the high-speed rail issue back to California voters, who originally approved Proposition 1A, a $9.9 billion high-speed rail bond measure, in November 2008.
“It started with the voters, it’s going to have to end with voters,” he said. “The only pathway that I see is to be truthful with where we are and ask the people what we do next.”