STATE OF CALIFORNIA

OFFICE OF THE INSPECTOR GENERAL

AMERICAN RECOVERY ACT FUNDS
LAURA N. CHICK
INSPECTOR GENERAL

October 27,2010

The Honorable Arnold Schwarzenegger

State Capitol
Sacramento, CA 95816

Dear Governor Schwarzenegger:

In April, the California Bureau of State Audits (BSA) released a report on the High Speed Rail
Authority detailing 10 recommendations for improvement. Since the Authority has been
awarded $2.25 billion in Federal Recovery Act funds my Office decided to review their progress
in implementing these recommendations.

The Rail Authority's new management has made significant progress in implementing changes
and improvements in a very short period of time. They have fully addressed five of the audit's
recommendations and are currently working to implement the other five.

The Authority is now checking the terms of their contracts more carefully since, earlier this
year, they hired a contract manager, who has renegotiated contracts resulting in a potential
$2.6 million savings. Just think how much money could be saved if all state contracts were
negotiated in this way from the get-go!

California needs more tough negotiators who protect taxpayer dollars the same way as their
own. Companies compete energetically to get business (Le. contracts) from state government.
We should be dealing out of strength and not be afraid to drive a hard, but fair, bargain ...just as
a private sector business would.

The days of paying bills that show no deliverables, no progress reports, no tasks performed and
no timesheets must end. For example, my auditors found over a four month period, $72,000
paid without any back-up documentation to public outreach consultants. The invoices simply
billed for the exact same amount each month with no details given on work performed. During
this same four month period, Ogilvy Public Relations hired in February as the overall
communications consultant, was paid $1,005,097.

1400 TENTH STREET, SACRAMENTO, CALIFORNIA 95814

(916) 322-3003· FAX (916) 322-3013

....
IG@INSPECTORGENERAL.CA.GOV

~
High Speed Rail is so important for all of California...and even the nation. The BSA findings
showed the Authority as not ready to do serious business. Our report reveals an organization
that took that audit seriously. With new top management now in place, and additional
personnel resources on their way, the Rail Authority is better poised to make its next round of
decisions.

cik-/1~

LAURA N. CHICK

Inspector General

 STATE OF CALIFORNIA

OFFICE OF THE INSPECTOR GENERAL

AMERICAN RECOVERY ACT FUNDS

LAURA N. CHICK

INSPECTOR GENERAL

Transmitted via e~mail

October 27, 2010

Mr. Roelof van Ark, Chief Executive Officer

California High Speed Rail Authority
925 L Street, Suite 1425
Sacramento, CA 95814

Dear Mr. van Ark:

Final Review Report-Review of the California High Speed Rail Authority

The State of California, Office of the Inspector General (IG), American Recovery and Reinvestment Act
Funds (ARRA) reviewed the California High Speed Rail Authority's (Authority) readiness to receive
ARRA funds and their progress in implementing the recommendations from the Bureau of State Audits'
(BSA) April 2010 report.

In 1996, the Legislature created the Authority to develop and implement intercity, high,speed rail service
that is fully integrated with existing intercity rail and bus networks. The Authority's mission is to plan,
design, build, and operate a high~speed train system that provides an efficient, safe, sustainable, and
reliable transportation option for the people of California. The Authority's nine~member board has the
exclusive responsibility for the planning, construction, and implementation of a high~speed passenger
train network within California, with trains traveling at speeds exceeding 125 miles per hour.

In November 2008, voters approved the sale of $9.95 billion in general obligation bonds for the Safe,
Reliable, High,Speed Passenger Train Bond Act for the 21st Century (Proposition lA). Proposition lA
allows $9 billion for the construction of a high~speed rail network and $950 million for improvements to
other rail systems connecting to it. The Authority cannot use more than 10 percent of the proceeds for
environmental studies, planning, and preliminary engineering activities and not more than 2.5 percent, or
not more than 5 percent with legislative approval, for administrative purposes. Additionally, proceeds
shall not be used for more than 50 percent of the total cost of construction of each corridor or usable
segment of the high~speed train system.

OnJanuary 28, 2010, the Federal Railroad Administration (FRA) awarded $2.25 billion in ARRA funds
to California for the high speed train system. Of this amount, $1.85 billion will go to the Authority with
$194 million for Phase I planning (San Francisco to Anaheim) and $1.656 billion will be distributed
among the four approved construction applications; funds to be matched by Proposition lAo The
Authority has entered into the $194 million agreement with FRA for the period August 17, 2010 to
December 31, 2012, and they have until September 30, 2011 to enter into agreement(s) with FRA for the
remaining funds.
The IG conducted a review of the Authority for the period ending june 30, 2010. The review's objectives
were to determine if the Authority has proper controls and procedures in place to oversee and administer
the ARRA funds in accordance with ARRA requirements and applicable laws and regulations.
Additionally, the review evaluates the Authonty's progress in implementing the BSA recommendations.

The Authority's management is responsible for ensuring accurate financial reporting and compliance
with applicable laws, regulations, and program requirements, as well as evaluating the efficiency and
effectiveness of the program. Unless identified during our review of ARRA funds, we did not assess the
efficiency or effectiveness of program operations. See Appendix A for the Review's Methodology.

Summary of Review

The Authority is not fully prepared to distribute and monitor ARRA funds. Currently, the Authority
does not have funding plans approved by the Director of Finance as required by Proposition lA, which
would be used to match ARRA. Additionally, the criteria to select a corridor or segment for funding has
been drafted, but not approved by the High Speed Rail Authority's Board. Furthermore, policies and
procedures to ensure the appropriate expenditure of ARRA funds have not been detailed, and reqUired
language is not included in contracts. .

While the Authority has not fully implemented all the recommendations included in the BSA's April 2010
report, they have made significant progress on the majority of them in a relatively short period. The
Authority continues to lack written policies and procedures for day~to~day activities such as contract
administration, information security, and fiscal and human resources administration. The weaknesses in
the Authority'S processes, policies, and controls have resulted in the following issues observed during our
review:

• The Authority paid for $3,440,776 (38 percent) in expenditures, out of $8,942,229 reviewed,
without obtaining adequate supporting documents.
• The Authority paid $90,000 for unsubstantiated and potentially duplicative public outreach
efforts from February 2010 to june 2010.
• The Authority has a $700,000 memorandum of understanding to pay for a consultant who works
for the Gateway Cities Council of Governments and is not responsible for doing work on behalf
of the Authority.

Review Findings

The Authority Is Not Fully Prepared to Distribute and Monitor ARRA Funds

The Authority Does Not Have Approved Funding Plans or Selection Criteria

The Federal Railroad Administration (FRA) approved four corridors (San Francisco to San jose, Merced
to Fresno, Fresno to Bakersfield, and Los Angeles to Anaheim) to receive funds for final design and
construction; however, funding will be awarded to only one corridor. The Authority has drafted criteria
that will be used to determine the corridor to receive ARRA funding for final design and construction
and is awaiting Board approval. The AuthOrity has until September 30, 20ll, to enter into an agreement
with FRA for the remaining ARRA funds.

._--_.._---­ 2
If the Authority can obtain Proposition 1A matching funds, the Authority will have $3.312 billion
available for final design and construction. In order to obtain the Proposition 1A funds the Authority will
need an approved funding plan that identifies the funding sources and amounts to be used that will
result in a usable segment or corridor that will generate adequate revenue to maintain itself. At this time,
the Director of Finance has not approved funding plans, as required, for any of the proposed corridors
seeking Proposition 1A funds as a match to ARRA. Without the Proposition 1A funds matching the
ARRA funds, the Authority may not have enough funding to design and construct an operationally
independent segment and may be ineligible to receive ARRA funds.

Contracts Need to be AmOlded to Include All ARRA Requirements

The Authority's contracts do not include language to address the ARRA requirements, such as:

• Tracking ARRA expenditures in a separate account.

• Complying with ARRA Section 1512 reporting reqUirements.
• Disallowing funding of casinos or other gambling establishments, aquariums, zoos, golf courses,
or swimming pools (ARRA Section 1604).
• Complying with tenants of "Buy American" when purchasing iron, steel, and manufactured
goods (ARRA Section 1605).

Without the ARRA requirements in the contracts, the Authority will not have a mechanism to ensure
contractors are in compliance with ARRA.

The Authority Lacks Detailed Policies and Procedures to Oversee ARRA Funds

The Authority has updated their Contract Administration Manual to include a section on compliance
procedures related to ARRA funds. This section states that the Authority will implement provisions of
the Recovery Act Bulletins, including reporting requirements for receipt and expenditure of funds, job
creation and retention, and all other relevant data elements required by ARRA. The Authority states that
they will report required data elements using the California ARRA and Accountability Tool (CAA T).
There are no further procedures detailing how these actions will be carried out, such as how information
will be collected in a timely manner to meet the reporting deadlines or how information will be reviewed
for completeness and accuracy. Without detailing specific procedures to follow, the Authority may have
difficulty reporting accurate information in a timely manner each quarter.

Status of BSA Recommendations

The AuthOrity has fully implemented five of the ten BSA recommendations and continues to address the
remainder.

BSA Recommendation I-Publish Alternative Funding Scenarios

BSA recommended that the Authority develop and publish alternative funding scenarios that reflect the
possibility of reduced or delayed funding from planned sources and detail the implications of the
variations on the program and its schedule. The Authority is completing the request for proposal process
to select a financial consultant. Once a contract is executed, the financial consultant will be able to begin
working on implementing the recommendation. This recommendation has not been implemented.

----~- ,-----------,-,---­ 3
BSA Recommendation 2-Specify Details ofPlanned Revenue Guarantees

BSA recommended that the Authority further specify the potential costs of planned revenue guarantees
and who should pay for them. The Authority's legal consultant will be working with the financial
consultant to better clarify and define the planned revenue guarantees to be used, how they will not be in
conflict with the requirements of the bond act, and specify the costs and possible funding sources. This
recommendation has not been implemented.

BSA Recommendation 3-Implement Planned Actions for Managing Risk

BSA recommended that the Authority implements planned actions related to managing risk. The
Authority contracted with a risk insurance manager consultant in February 2010 to provide technical
and managerial advice in regards to risk management, project insurance, and related industry issues. The
consultant has completed a report detailing the specifics of project insurance. The Authority states that
it plans to hire a Project Control and Risk Management Manager to replace the consultant. Additionally,
the Program Management Team has revised the risk register and development protocol, which provides
guidance to regional teams for preparation of lists of uncertain future events that have the potential to
impact project objectives. Finally, the Authority is in the process of establishing an internal audit office.
This recommendation is partially implemented.

BSA Recommendation 4- Determine IfOpen Meeting Act Applies to Peer Review Group

BSA recommended the Authority ensure that the peer review group adheres to the Bagley~KeeneOpen
Meeting Act (Act) or seeks a formal opinion from the Office of the Attorney General (AG) regarding
whether the review group is subject to the Act. The Authority received an informal advice memorandum
from the AG stating that "it is considerably more likely than not that a court would find that the peer
review group is not subject to the provisions of the Open Meeting Act;n the Deputy Legal Affairs
Secretary of the Governor's Office agreed with this memorandum. Also, the AuthOrity sent a letter to the
author of Assembly Bill 3034 asking for further clarification of the peer review group and awaits a
response. This recommendation has been adequately addressed.

Additionally, BSA's report identified that three of the eight peer review group members had not been
appointed as reqUired by Public Utilities Code Section 185035(b). Currently, two members still need to
be appointed by the State Controller and the Secretary of Business, Transportation, and Housing.

BSA Recommendation 5-Track Expenditures by Type and Develop Long~ Term Spending Plan

BSA recommended that the Authority track expenditures for administrative and preconstruction
activities and develop a long~term spending plan for them. The finding was that the Authority had no
way to track expenditure categories to ensure the limits set under Proposition lA would not be exceeded.
The Authority contracted with an information technology consultant to develop a comprehensive
database to store and track all documents and information related to the high speed rail project. The
consultant is ensuring all necessary fields for the database are included before the Authority begins
scanning documents and inputting information. Once completed, the Authority will be able to track
each expenditure type by funding source as well as run a report that will develop a spending plan based
on historical information. The Authority expects the database to be fully operational by April2011. This
recommendation has been partially implemented.

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BSA Recommendation 6-Board Should Increase Participation and Follow Policies and Procedures

BSA recommended that the Authority's Board participate in the development of key policy documents
and members should adhere to their policies and procedures, including those outlining how they may
communicate with contractors. The Board was involved in the review and approval process for the April
2010 Business Plan Addendum and the May 2010 Strategic Plan. InJuly 2010, the Board amended their
policies and procedures to include the Business Plan and Strategic Plan as key policy documents that
they are responsible for developing and approving. Lastly, Board members have been reminded to follow
all poliCies and procedures in place and in May 2010 the Board updated their policies and procedures
related to communications. This recommendation has been adequately addressed.

BSA Recommendation 7-Review Progress Reports for Accuracy and Consistency

BSA recommended that the Authority amend the Project Management Oversight Consultant's work plan
to include a critical review of the progress reports for accuracy and consistency. The recommendation
further suggested that the Program Manager revise its progress reports to include information on the
status of contract products and services. The Authority has included in the Project Management
Oversight Consultant's work plan a task detailing the requirement for critically reviewing progress
reports. Additionally, the progress reports now include key developments and accomplishments, key
meetings held, issues and areas of concern, and action items and planned work for the next month for
each task listed in the annual work plan. This recommendation has been adequately addressed.

BSA Recommendation 8-StaffShould Follow Procedures for Processing Invoices

BSA recommended that the Authority'S staff follow controls for processing invoices such as not paying
invoices from regional contractors until they receive notification from the Program Manager that work
has been performed or until they have conducted an independent verification. The Authority has
addressed this recommendation by creating a new invoice template that requires signatures from the
contractor, the Program Manager, the Authority's staff analyst, and the Authority's management. The
signatures confirm that services were rendered or goods were received and expenditures were reviewed
to verify they were supported and allowable in accordance with the scope of work and annual work
program. This new process is to go into effect with expenditures incurred after July 1, 2010. This
recommendation has not been fully implemented since no expenditures could be paid without an
adopted state budget afterJuly 1, 2010.

BSA Recommendation 9- Follow Conditions ofContracts and Include Amendments in Writing

BSA recommended that the Authority follow the conditions of its contracts and work plans and make
any amendments and modifications in writing. The Authority has amended AECOM USA, Inc.'s scope of
work to include the tasks related to the "Vision California" project and Parsons Brinckerhoff Quade and
Douglas' contract to allow their staff to use the Authority's office space and furniture in exchange for
using a lower overhead rate when charging staff time to the Authority. Furthermore, IG staff reviewed
11 invoices from various consultants totaling $8.9 million and verified that all expenditures were part of
the contract's scope of work, annual work plans, and budgets. This recommendation has been
adequately addressed.

5 --------------------------------------------------
BSA Recommendation lO-Policies and Procedures Need Sufficient Detail for Invoice Processing

BSA recommended that the Authority ensure its written policies and procedures reflect intended
controls over invoice processing and offer sufficient detail to guide staff. The Authority's Contract
Administration Manual was revised in August 2010 to include a flowchart and detailed procedures for
the invoice payment process and review and verification of invoices. This recommendation has been
adequately addressed.

Other Observations

The Authority Has Renegotiated Contracts Resulting in Potentially $2.6 Million in Savings

Since hiring a contract manager earlier this year, the Authority has been able to develop and implement
better controls over the invoice review process and the negotiations of annual work plans with each
consultant. During the negotiation process for the 201O~11 work plans, the Authority decreased the
10 percent fee many consultants and subconsultants were charging on the direct labor and overhead rates
to 9 or 9.5 percent for consultants and 8.5 or 9 percent for subconsultants. Additionally, the Authority
has executed amendments eliminating the 3 percent fee on all subconsultant contracts that four
consultants had been claiming. The decrease and elimination of these fees will save the Authority
approximately $2.6 million for fiscal year 201O~ 11.

The Authority Reimbursed Expenditures without Adequate Supporting Documents

During the review, IG staff selected 11 invoices from various consultants to determine if expenditures
were allowable under the annual work plan and budget and if they were adequately supported. Out of
$8,942,229 reviewed, the Authority paid $3,440,776 (38 percent) in expenditures without adequate
supporting documents. The expenditures were related to direct labor costs of consultants and
subconsultants and were not supported by timesheets or some other form of documentation to
substantiate the hours billed to the project. The Authority was able to obtain the missing documentation
from the consultants when IG staff requested it. However, without adequate documentation when
authorizing payment, the Authority cannot verify if the number of hours, and therefore the expenditures,
charged to the project is accurate.

Duplication ofEfforts for Public Outreach

In February 2010, the Authority contracted with Ogilvy Public Relations Worldwide and their "'strategic
advisory team" of 10 subconsultants to obtain communication and public outreach services. Prior to this
contract, public outreach had been fragmented and inconsistent among the various consultants with
Parsons Brinckerhoff's three subconsultants (Deutschman Communications Group, Townsend
Raimundo Besler &: Usher, and Lucas Public Affairs) providing most of the services. Beginning
February 2010, Deutschman became a subcontractor under Ogilvy and stopped charging costs to Parsons
Brinckerhoff. Towhsend and Lucas remained under Parsons Brinckerhoff and continued to charge
$8,000 and $10,000 per month, respectively. This amounted to $90,000 in charges from February 2010 to
June 2010, which were not supported by appropriate documentation. Since Ogilvy became the lead for
communications and public outreach, Townsend's and Lucas' work should have been conducted and
coordinated through them or ceased all together.

The Authority is Reimbursing aConsultant Who Works On Behalfof the Gateway Cities Council ofGovernments

One of the subconsultants under the Program Management Oversight Consultant (T. Y. lin) contract is
Jerry Wood, Professional Engineer (P.E.), who performs work related to the Gateway Cities Council of
Governments (COG). The Gateway Cities COG consists of 27 member cities located southeast of the
City of Los Angeles. These cities are interested parties along the proposed Los Angeles to Anaheim and
Los Angeles to San Diego corridors. The $700,000 Memorandum of Understanding (MOU) between
T. Y. lin anclJerry Wood is to provide administrative and technical review services for the high~speed
rail preliminary engineering and environmental work on behalf of the Gateway Cities COG.

The MOU with Jerry Wood, though authorized and paid for by the Authority, is managed solely by the
Gateway Cities COG. This is the only such agreement the Authority has that is wholly managed by a
third party. Such an arrangement is problematic for the Authority since it does not allow them to
provide effective oversight and accountability over this subconsultant. Also, it is not clear how the work
performed by this subconsultant will provide a benefit to the Authority. Furthermore, no such
agreement to provide funds for technical reviews of the Authority's work was awarded to assist other
local governments located along any of the other corridors.

The Authority Lacks Written Policies and Procedures

The Authority still has not completed policies and procedures for day~to~day work. As stated in their
2009 Financial Integrity and State Managers' Accountability (FISMA) report, they lack written policies
and procedures for their day~to~daywork making it difficult to maintain consistency and have adequate
internal controls. The areas that have been given priority for developing policies and procedures are
contract administration, information security, and fiscal and human resources administration. The
Authority has been making progress in writing detailed policies and procedures for contract
administration and continues working on developing other policies and procedures.

Conclusion

For fiscal year 2009~ 10, the Authority had a total of 1I.2 authorized positions to manage their $139 million
budget. With such a small staff, the Authority has had to rely on consultants to perform many of the
oversight functions they are responsible for, such as hiring a Program Management Team and Program
Management Oversight Consultant to monitor the progress of the regional contractors and review
invoices prior to payment. For 2010~ II, the Authority has been approved for an additional 29.5 positions
(40.7 total positions) to manage their $221.3 million budget. Until the Authority fills the new positions
and trains the new employees, they will have to continue to rely on consultants to prOvide the necessary
oversight of the high speed rail project.

Regardless of who is performing the oversight function, employees or consultants, the Authority's
management must ensure accuracy and accountability over the distribution and monitoring of ARRA
funds. To do so, the Authority must:
• Develop funding plans for each corridor.
• Approve criteria to select which of the four corridors approved by the Federal Railroad

Administration will receive ARRA funding for final design and construction.

• Amend current planning contracts and include in final design and construction contracts
standard language related to the ARRA requirements.
• Develop detailed procedures for monitoring project progress and ARRA expenditures and how
required data elements will be collected, tracked, reviewed, and reported.
• Implement BSA's recommendations.

 The Authority's response has been included in this report. In accordance with the IG's policy of
increased transparency, the final report will be placed on our website,
http://www.inspectorgeneral.ca.gov.

We appreciate the assistance and cooperation of the Authority. If you have any questions regarding this
report, please contact Mary Kelly, Chief Deputy Inspector General, at (916) 324~6665.

r?~fl~
LAURA N. CHICK,
California Inspector General

cc: Ms. Carrie Pourvahidi, Deputy Director, California High Speed Rail Authority

- - - - _ . _ . _ - _.._..__.. _-~-- .... _--_ _._

.. ... ~--
8
 Appendix A - Methodology

To determine whether the Authority has proper controls and procedures in place to oversee and
administer the ARRA funds in accordance with ARRA requirements arid applicable laws and
regulations, the following procedures were performed:

• Interviewed key personnel to gain an understanding of program-related internal controls.

• Reviewed the agreement between FRA and the Authority.
• Reviewed the Authority's Contract Administration Manual to determine if specific procedures
have been developed to monitor progress and expenditures and track required data elements.
• Reviewed contracts between the Authority and subcontractors to determine if additional
language is needed to comply with the ARRA requirements.

To determine whether the Authority has fully implemented the Bureau of State Audits'
recommendations, the following procedures were performed:

• Reviewed the April 2010 BSA Report and the AuthOrity's 60-Day Response to BSA.
• Interviewed key personnel.
• Reviewed various planning and risk management documents, such as the Business Plan and
Addendum, the Strategic Plan, and the Risk Register and Development Protocol.
• Viewed the database to be used for tracking expenditures and other required data elements.
• Reviewed Board meeting minutes to determine what corrective actions they have taken.
• Reviewed progress reports for accuracy and consistency.
• Reviewed contracts and amendments between the Authority and subcontractors.
• Reviewed the Authority's Contract Administration Manual to determine if specific procedures
have been developed for invoice processing and if it offers sufficient detail to guide staff.
• Reviewed accounting records and supporting documents to determine if revenues and

expenditures were properly recorded and supported.

• Selected a sample of expenditures reported for the period ofJanuary 1, 2010 to June 30, 2010 to
determine whether they were:
o Allowable per the annual work plan and budget
o Adequately supported
o Reasonable

 Response

--------- ---------- - - - - - 10

 CALIFORNIA
High-Speed Rail Authority

October 25, 2010

Ms. Laura N. Chick

California Inspector General
Office of the Inspector General
1400 Tenth Street, Suite 100
Sacramento, CA 95814

Dear Ms. Chick,

'Totnu....,..
ViCe-C hair
Draft Review Report - Review of the California High Speed Rail Authority

On behalf of the California High-Speed Rail Authority [Authorityjl would like to thank you for
the review your office performed on our program, and also for the opportunity to comment
on your draft report. Your review concentrated on two aspects of our program, namely our
ability to manage and control American Recovery and Reinvenstment Act [ARRAj funds as well
as the status of the Bureau of State Audits [BSAj recommendations. We refer to the draft
report dated October 19, 2010.

May we begin by stating that as your review was conducted for the period ending June 2010,
this only covered two months after the BSA report was published on April 29, 2010. We
appreciate your comment:

"While the Authority has not fully implemented all the recommendations included in the BSA's
April 2010 report, they have made significant progress on the majority of them in a relatively
short period"

and believe you understand that certain matters have been further improved as we moved
into the new fiscal year, however you have also acknowledged:

"For 2010-11, the Authority has been approved for an additional 29.5 positions (40.7 total
positions) to manage their $221.3 million budget. Until the Authority fills the new positions
and trains the new employees, they will have to continue to rely on consultants to provide the
necessary oversight of the high speed rail project."

You should be aware that our inability to hire staff was linked back to the delay in the
approval of the state budget, a further hiring freeze instituted by the Governor, and the fact
that the Transportation Trailer Bill, (which included the approval for 6 exempt positions for
the Authority), was not passed. Although we accept that due to this, certain oversight will
need to remain in the hands of consultants, you are aware that this is not an optimal situation
and we have advised both the State Auditor and the Legislature that this does influence the
ability of the Authority to function effectively.

wwwutlICJ~.drallu.9OY ·925 L Strctet • 5Ult.1425 • sacramento. CA 95814 • 916-324-t541

The following comments relate to specific sections of your report:

On page 3 you state:

"In order to obtain the Proposition lA funds the Authority will need an approved funding plan
that identifies the funding sources and amounts to be used that will result in a usable segment
or corridor that will generate adequate revenue to maintain itself."

The Authority agrees that a funding plan identifying funding sources and amounts to be used
to build a corridor or "usable segment" is required to seek and use Proposition lA funds.
Further, the law specifies that, when complete, the high-speed rail system must operate
without a public subsidy. Given the size and complexity of constructing an 800-mile high­
speed rail system, the California High-Speed Train Project [CHSTP] will however, out of
necessity, be constructed in multiple stages and construction packages over a multi-year
period. High-speed trains will not be procured nor commence operations and thus generate
revenue, until sufficient works (including tracks, systems, stations and the trains
themselves) are completed to constitute either the full Phase 1 Los Angeles/Anaheim to San
Francisco system or a smaller Minimum Operable Segment [MaS]. Once trains enter revenue
service, the system must generate sufficient revenue to cover the cost of train operations and
maintenance. A requirement to operate without a public subsidy within each initial "usable
segment" is not applicable to a construction program of this complexity, where segments are
built in stages over several years before revenue service begins.

On page 2 you write:

• "The Authority paid for $3,440,776 (38 percent) in expenditures, out of $8,942,229
reviewed, without obtaining adequate supporting documents.
• The Authority paid $90,000 for unsubstantiated and potentially duplicative public
outreach efforts from February 2010 to June 2010.
• The Authority has a $700,000 memorandum of understanding to pay for a consultant
who works for the Gateway Cities Council of Governments and is not responsible for
doing work on behalf of the Authority. "

Our responses are as follows;

• It is confirmed that from July 2010 all controls have been in place to ensure that
invoices are paid only when adequate supporting documentation was available.
• The contract with Parsons-Brinckerhoff was amended as of July 1, 2010 so that they
no longer were responsible for any public outreach efforts as all these activities were
moved to Ogilvy from that date.
2
 • The procedure adopted to pay for these consultant's services will not be repeated.
The scope of work to be conducted by the consultant was however documented in
the MOU, and our PMO [TV Lin] has been involved to ensure that the consultant
delivers the services according to this agreement.

On page 3 you write:

"Contracts Need to be Amended to Include All ARRA Requirements

The Authority's contracts do not include language to address the ARRA requirements, such as:
• Tracking ARRA expenditures in a separate account.
• Complying with ARRA Section 1512 reporting requirements.
• Disallowing funding of casinos or other gambling establishments, aquariums, zoos,
golf courses, or swimming pools (ARRA Section 1604).
• Complying with tenants of "Buy American" when purchasing iron, steel, and
manufactured goods (ARRA Section 1605).

Without the ARRA requirements in the contracts, the Authority will not have a mechanism to
ensure contractors are in compliance with ARRA." .

Although we agree with these comments, we would like to mention that the contracts placed
to date are only for Engineering and Services and not for Materials and Construction, thus the
latter two conditions would in no way be applicable. Future material and construction
contracts clearly would need to have such conditions incorporated.

Once again we thank the Inspector General and her staff, for the cooperation and
professionalism shown during the period of this review. The Authority continues to prepare
itself to receive and monitor ARRA funds on this important project for the State of California.

Sincerely,

Roelof van Ark

Chief Executive Officer

cc: Carrie Pourvahidi

3
 Review of Response

The State of California, Office of the Inspector General (IG), American Recovery and Reinvestment Act
(ARRA) Funds issued a draft review report to the California High Speed Rail Authority (Authority) on
October 19, 2010. We received the Authority's response to that report on October 25, 2010.

We appreciate the Authority's response to our review report and willingness to take corrective action.

14 _._-._--------­