It appears that Metro’s cash-flow problems could linger for months to come, because federal officials are likely to continue restricting the agency’s access to grant money at least into next year, according to a report issued Wednesday.
The report, by the Government Accountability Office, focused partly on Metro’s progress in rectifying its grants-management problems, which were identified last year in a critical audit by the Federal Transit Administration. Because of those financial management problems, the FTA put tight limits on Metro’s access to federal grant money.
As a result, the transit authority has often wound up cash-strapped.
Although Metro “has taken positive steps toward addressing” 35 of the 38 corrective measures required by the FTA, federal officials won’t deem the problems to have been rectified until they “can verify that [Metro’s] corrective actions have been implemented and are functioning,” according the GAO report.
The FTA has declined to say publicly when it might lift the restrictions on Metro. But the GAO report said the FTA estimates that its verification process will not begin until “early 2016 at the earliest.” And that evaluation could go on for months.
“While FTA believes [Metro] has been generally responsive to FTA’s financial management recommendations, we found that the risk assessment and monitoring components of its internal control are not effective in assisting management in achieving its financial management objectives,” the GAO said.
The report said Metro still must develop “a policy and related procedures” for assessing flaws in its financial-management systems and must draft procedures for monitoring the effectiveness of its internal financial controls.
“In general, [Metro] concurs with the findings and conclusions presented in the report, and plans to implement the GAO’s two recommendations,” Metro interim General Manager Jack Requa told the GAO in a letter.
“These recommendations will serve to guide the improvements that are necessary to reestablish and maintain an effective internal control system and support Metro’s financial stability objectives,” Requa said.
Since Jan. 12, when a malfunction of track-based electrical equipment filled a Metro tunnel with smoke, killing one train passenger and sickening scores of others, the transit authority has been the focus of several outside inquiries.
The reviews have mainly dealt with Metro’s safety. The GAO, at the behest of Congress, began examining Metro in March. Besides delving into the grants-management problems, the GAO also looked at the transit agency’s progress in making safety improvements over the past several years.
Since 2008, the National Transportation Safety Board “has issued 29 safety recommendations” to Metro, the GAO said. The transit authority has completed 21 of the improvements “and 8 recommendations are still open,” according to the report.
As for the transit agency’s finances, the system for disbursing federal grant money to agencies such as Metro was designed to be fairly simple.
First, Metro applies to the FTA for money to finance a project. After the grant is approved, the project begins. Contractors doing the work submit invoices, and Metro pays the bills out of its own pocket. Then the agency normally would reimburse itself by electronically withdrawing money from a pool of grant money held by the FTA.
The FTA normally doesn’t require an agency to file supporting documentation every time money is withdrawn. It assumes that the agency has followed federal procurement and spending regulations and has kept proper records. To make sure, however, the FTA periodically conducts audits.
Metro was audited in early 2014, resulting in a scathing report describing extensive grants-related mismanagement that had gone on for several years.
The agency’s record-keeping was shoddy and confusing, the audit found. It added that Metro often spent money on projects before grants had been approved. In some cases, grants hadn’t even been applied for. Procurement and spending rules were regularly violated. And it said that Metro withdrew reimbursement funds for grant-eligible projects and improperly used the money for other expenses.
As Wednesday’s GAO report notes, Metro “did not maintain effective internal control over its compliance with FTA’s financial management system requirements.”
Although Metro has made progress in fixing the problems, the transit authority “has not established a policy and related procedures for conducting periodic assessments of its financial management-related risks,” according to the GAO. Metro also “is not currently monitoring the achievement of its financial management internal control objectives in a manner to achieve maximum results.”
That laxity of internal financial controls “increases the risk that the deficiencies” found by the FTA audit “will continue to exist or resurface in the future,” the GAO report said.
The report is “another stark reminder that there has been a serious failure of leadership at Metro,” Sen. Mark R. Warner (D-Va.) said in a statement.
He and others in the region’s congressional delegation have been sharply critical of Metro’s safety and financial shortcomings, including the transit authority’s protracted search for a new general manager to replace Richard Sarles, who announced his impending retirement in September and left the agency in January.
Metro’s board of directors “needs to work together with a sense of urgency to bring on a change agent as general manager who will shake up the system and prioritize safety, accountability and transparency,” Warner said. “Metro’s riders are tired of waiting for these problems to be fixed.”
Michael Czin, a spokesman for D.C. Mayor Muriel E. Bowser (D), said: “The report confirms what the mayor has been saying,” that the transit authority “needs a permanent general manager who can restructure the agency’s broken financial and managerial systems.”
Bowser was a member of the Metro board before becoming mayor.
Rep. Gerald E. Connolly (D-Va.) agreed, saying Metro “needs to get new leadership in place post haste.”
“We have seen a litany of concerns about Metro safety and management issues from oversight agencies, and this GAO report reaffirms those concerns,” Connolly said. “We are facing a perfect storm of problems. . . . The hiring of a new GM/CEO won’t solve Metro’s many problems overnight, but it will be an important step forward.”
After the audit last year, the FTA said that until Metro convinces federal officials that its grants-managements problems have been rectified, there will be no more quick, undocumented electronic self-reimbursements.
Instead, Metro has had to function under what the FTA calls a “restricted draw down.” After the transit authority pays its bills for grant-approved projects, it must submit documentation to the FTA before being reimbursed. The time-consuming process has left Metro with an ongoing cash-flow problem, forcing the transit agency to resort to heavy short-term borrowing.
As recently as April, Metro’s short-term debt exceeded $500 million. As of June 1, the figure had been reduced to $301 million. But it is likely to go up again.
A major challenge for Metro is how to permanently reduce those short-term debts.
One way would be if the FTA reopened the grants-reimbursement spigot. But that appears to be a long way off. Another solution would be selling long-term bonds to pay off the short-term debts. To do that, however, Metro would first have to publish a new financial report.
Like most big public entities, Metro is required to produce a “comprehensive annual financial report.” Done by an outside accounting firm, a new Metro annual financial report is due each October, four months after the close of the agency’s fiscal year.
However, because Metro’s records are so muddled, the McGladrey auditing firm, hired by the transit authority, has had difficulty trying to prepare a report for the fiscal year that ended in June 2014. It seems no one knows when that audit will be ready. Meanwhile, another fiscal year ended last month, meaning it is possible that in October, Metro will be two years behind on publishing financial statements.
In Wednesday’s report, the GAO said that adequate internal financial controls typically include five components.
“Based on our discussions with [Metro] officials and review of the documentation provided, we found that while [Metro] has established an Office of Internal Compliance to monitor adherence to financial management controls and related policies and procedures, this office is not designed to cover the five components of internal control,” the GAO said.
“The deficiencies we identified could contribute to FTA’s findings resurfacing in the future or hamper [Metro’s] ability to prevent, or detect and correct, on a timely basis a material misstatement of its internal or external reporting.”
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