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Hampton Roads Transit 2010-211

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					                      COMMONWEALT~I                                 of VIRGINIA
                                     DEPARTMENT OF TRANSPORTATION

                                             140 1 EAST BROA D STREET

                                          RICHMOND. VIRGINIA 232 19 2000

Gregory A. Whirley

Con unissioner

December 14,2010

Philip A. Shucet, President and CEO

Hampton Roads Transit

3400 Victoria Blvd.

Hampton, VA 23661


RE : Hampton Roads Transit-Norfolk Light Rail Special Review, FINAL Report No. 2010-211

Dear Mr. Shucet:

Attached, please find the FINAL report detailing the Virginia Department of Transportation
("VDOT"), Office of Inspector General's ("OIG") review of Hampton Roads Transit ("HRT")
and the Norfolk Light Rail Project ("Tide"). The review was performed with agreed upon
objectives to:
      •	 evaluate management preparation, timing and disclosure of budget, actual, and cost-to­
         complete analysis for the Tide ,
      •	 evaluate HRT's consultant selection practices, and
      •	 evaluate revenue operations cash control policies and procedures.
Overall , we determined that prior HRT Management:
      •	 Did not provide accurate and timely disclosure of budget, actual , and cost-to-complete
         analysis for the Tid e to key stakeholders,
      •	 Did not maintain effective internal control over the consultant selection practices, and
      •	 Did not maintain effective cash control policies and procedures.
In addition to the above, our review identified other areas of concern involving both HRT and
Tide operations that should be reviewed by current HRT Management. We are available at your
convenience to discuss this review.


J\inc'r~\;-\Jb
                                ~w~
~~H. Wells                      Bradley W. Gales

Inspe ctor General              Director, Internal Audit                    Director, Investigation



C:	      The Honorable Sean T. Connaughton

         Gregory A. Whirley

         Thelma Drake                   VirginiaDOT.org

                                      WE KEEP VIRG INIA MOVING
           SPECIAL REVIEW
Hampton Roads Transit - Norfolk Light Rail
      REPORT NUMBER 2010-211


             December 2010




  COMMONWEALTH OF VIRGINIA
DEPARTMENT OF TRANSPORTATION
 OFFICE OF INSPECTOR GENERAL
                           VIRGINIA DEPARTMENT OF TRANSPORTATION
                                       SPECIAL REVIEW
                       HAMPTON ROADS TRANSIT - NORFOLK LIGHT RAIL
                                              REPORT NUMBER 2010-211


                                                  TABLE OF CONTENTS

SECTION                                                                                                                         PAGE




EXECUTIVE SUMMARY .......................................................................................................... 3

SCOPE AND OBJECTIVES ....................................................................................................... 4

CONCLUSIONS ........................................................................................................................... 4

DISCLAIMER............................................................................................................................... 7

HAMPTON ROAD TRANSIT-DETAILED BACKGROUND ............................................... 9

NORFOK LIGHT RAIL TRANSIT (TIDE)-DETAILED BACKGROUND ....................... 11

FINDINGS AND RECOMMENDATIONS ............................................................................. 15

APPENDIX A-CHRONOLOGY-DISCLOSURE OF COST TO COMPLETE
INFORMATION......................................................................................................................... 61

APPENDIX B-REVENUE OPERATIONS EXHIBITS 1-7 ................................................. 120

APPENDIX C-TABLE OF ACRONYMS .............................................................................. 121

APPENDIX D-SUMMARY OF RECOMMENDATIONS................................................... 123
                          EXECUTIVE SUMMARY
Introduction and Background
Hampton Roads Transit (“HRT”)

HRT is a regional transit operation providing services including buses, trolleys, vans, and ferries
to seven cities covering both the Southside and Peninsula areas of southeastern Virginia. HRT is
the operating entity of the Transportation District Commission of Hampton Roads, TDCHR,
(“Commission” or “TDCHR”). TDCHR was established on September 23, 1999 in accordance
with Chapter 45 of Title 15.2 of the Code of Virginia, and HRT was formed on October 1, 1999,
after a merger between the Peninsula Transportation District Commission (“Pentran”) and
Tidewater Regional Transit (“TRT”). The legal name is TDCHR (governing board) doing
business as HRT. 1 HRT derives revenue from fare collections and subsidies from federal, state,
and local sources (“public funds”), which was budgeted to exceed $60 million in FY2010.
Based on a legal opinion issued by Commission legal Counsel (Williams Mullen), the
Commission “…is a body corporate and politic…” with “…the power and authority to act as a
private corporation …subject to some restrictions applicable to a public body….”

Norfolk Light Rail Transit/Tide (“LRT/Tide”) Construction Project

In addition to the transit services described above, HRT is the primary entity responsible for
construction and operation of the LRT/Tide, a 7.4 mile light rail transit project currently under
construction in Norfolk. The original cost-to-complete established in February 2007 was $232
million, including approximately $167 million of federal, $32 million of state, and $33 million of
local funding. In February 2010 the cost-to-complete was revised to $338 million, including
approximately $192 million of federal, $70 million of state, and $77 million of local funding.
Total LRT/Tide project expenses incurred through August 31, 2010 are reported at $243.3
million. Revenue operations are scheduled to begin in May 2011.

Why this Review was Performed
HRT is responsible for the stewardship of large amounts of public funding (federal, state, local)
in connection with both their routine transit operations and the LRT/Tide project. The
Commonwealth Transportation Board maintains oversight responsibility for public funds
distributed to transportation projects. The current budget for the LRT/Tide project includes
approximately $70 million in state funds.

Light Rail Transit was the subject of public scrutiny and media attention in the Hampton Roads
Region prior to the commencement of construction on the LRT/Tide project in December 2007.
Public scrutiny and media attention escalated in late 2009, when it became widely known that the
LRT/Tide project cost-to-complete (“CTC”) had exceeded both the original estimate of $232
million, a subsequently revised estimate of $288 million, and was estimated at that time to be in
the range of $326-$328 million. In early 2010, an alleged theft of passenger fare revenue from
HRT’s Virginia Beach Trolley Base operation also became publically known, adding to concern
over HRT operations.

1 References to “HRT” throughout the report relate to operations under the responsibility of the President and CEO,
whereas references to “Commission/Board” relate to the governing board members of HRT.
                                                         3
In February 2010, the HRT Board of Commissioners engaged Philip A. Shucet as the Acting
Chief Executive Officer of HRT. Shortly after becoming the HRT Chief Executive Officer, Mr.
Shucet requested that the VDOT Office of Inspector General perform a review. The audit
request was approved and it began in March 2010. The Commonwealth has an interest in the
outcome of this audit because of the investment of approximately $192 million of federal, $70
million of state, and $77 million of local funding, respectively (see page 15 for summary).

Scope And Objectives
Our review of HRT/LRT, as requested by Philip A. Shucet included procedures to:

   •   evaluate management preparation, timing and disclosure of budget, actual, and cost-to-
       complete analysis for the Tide,

   •   evaluate HRT’s consultant selection practices, and

   •   evaluate revenue operations cash control policies and procedures.

In addition to the above objectives, our review identified other areas of non-compliance and lack
of controls as well as opportunities to improve the efficiency and effectiveness of HRT’s
operations.

Conclusions
(The numbers in brackets reference the detailed report finding)

HRT Management Preparation, Timing and Disclosure of Budget, Actual, and Cost-to-
Complete Analysis for the LRT/Tide

A key principle to successfully managing the LRT/Tide project is to 1) develop a budget
reflective of the cost to build the project, 2) obtain approval of the HRT Commission and other
key stakeholders, 3) monitor/track the budget against actual cost, and 4) comply with Federal
Transit Administration (“FTA”) rules and regulations including those involving financial
reporting and disclosure. In reviewing HRT’s practice in developing and monitoring budgets,
the former HRT President and Chief Executive Officer and Senior Staff seemed to understand
the rules. However, the budget development, execution and process to obtain approvals for
significant project budget changes were insufficient and ineffective. The data suggests that on
many occasions HRT management was aware of significant changes in project budget status and
failed to notify the key stakeholders timely. The budget / monitoring process did not produce
accurate results. Further, there may be areas of non-compliance with FTA financial reporting
and disclosure requirements. The following examples and the audit report support the
conclusion: (1a – 1d)

HRT management developed internal financial reports, but the reports varied on format, and
content as shown below:

   o As early as January 2007, monthly LRT/Tide project financial reports were prepared by
     HRT staff. Since that time, the form and content of the reports were continuously
     modified to include/exclude various LRT/Tide project information including budget,
                                                4
       cost-to-complete data, and the inclusion/exclusion of a column labeled Cost or Budget at
       Completion.
   o Other examples of content modification are the inclusion/exclusion of certain estimated
     costs including, construction management, program/project management, construction,
     and estimated amounts to settle GEC contractor claims for out-of-scope work, the
     shifting of costs between cost categories, and the presentation of contingency funding. In
     addition, the documents reviewed suggest reports did not consistently incorporate all
     known probable costs/risks to the project.
   o The changes in format and what was included/excluded in a particular internal financial
     report caused the total estimate to fluctuate up and down and raise questions regarding
     the accuracy or completeness of the estimate at a given point in time.
   o These reports were developed internally and were distributed within HRT to a limited
     group. As presented later in this report, these reports were considered by HRT to be
     confidential.

HRT management did not timely advise LRT/Tide key stakeholders (City of Norfolk, FTA, HRT
Commission, etc.) that projected project cost was rising above the approved $232 million. The
following was observed:

   o In June 2007, the City of Norfolk entered into an agreement with FTA to assume the
     obligation for completing the LRT/Tide project in the event that the total project cost
     exceeded the baseline cost estimate of $232 million. However, an internally prepared
     HRT financial report for May 2007, reflected a “Total HRT Budget” of $240,788,369.
     As such, it appears that HRT had information prior to the City of Norfolk’s signing of the
     FTA agreement that the project cost would be more than $232 million (See Table on
     Page 18 and Appendix A).
   o The documents reviewed demonstrate that prior to the execution of the Full Funding
     Grant Agreement (“FFGA”) between HRT and the FTA on October 1, 2007, HRT
     management continued to develop in-house data which indicated the $232 million
     budget, established in February 2007, was in jeopardy. VDOT Inspector General staff
     found no evidence that this information was shared with the FTA or the City of Norfolk.
   o VDOT Inspector General Staff found no evidence that HRT shared any estimate that
     exceeded $232 million with FTA prior to February 2008, as required by the FFGA.
   o In November 2008, HRT management publically disclosed that the project budget would
     exceed $232 million. In December 2008, HRT management publically disclosed a
     project budget of $288 million.
   o By March 2009, HRT staff realized the $288 million estimate was inadequate. In
     October 2009 an internal analysis initiated in August 2009 was completed which
     reflected a cost-to-complete of approximately $325 million. Subsequent to validation by
     an external consultant, a revised cost-to-complete estimate of approximately $335 million
     was publically released in early 2010.

HRT management did not effectively oversee/monitor components (right of way acquisition,
utility relocation, FFGA requirements, compliance with City of Norfolk design standards, etc.) of
the LRT/Tide project.



                                               5
   o HRT management did not secure right of way property rights/easements necessary to
     construct the LRT/Tide (as originally designed) through the Norfolk State University
     Campus, through written agreement. The alignment was subsequently changed to a
     different location on the NSU campus. The change in alignment and associated station
     modifications added approximately $9 million of additional cost and delays to the
     project.
   o HRT management did not ensure the maintenance of the required level of project
     contingency reserves (i.e., reserve for unanticipated project costs) in accordance with the
     FTA guidelines.
   o HRT management did not effectively monitor the LRT/Tide project to ensure compliance
     with the terms and conditions specified in the Full Funding Grant Agreement (“FFGA”).
     Specifically, HRT staff could not demonstrate “written” approval from the FTA
     extending the Revenue Operations Date (“ROD”) of the LRT/Tide project beyond
     January 1, 2010, as required in Sections 5 and 14 of the FFGA. Non-compliance with the
     terms and conditions detailed in the FFGA could result in default and implementation of
     “REMEDIES” specified in Section 19 of the FFGA including, but not limited to, the
     demand for return of all federal funds, which approximate $192 million, $128 million of
     which is provided through the FFGA. Such non-compliance could also “…be a factor
     considered before a decision is made with respect to the approval of future Grants
     requested by the Grantee….”
   o The City of Norfolk and HRT management had multiple discussions regarding issues
     involving utility relocations for the LRT/Tide project and adverse impacts to the
     schedule, as well as whether the design of the LRT/Tide project considered Norfolk
     standards and how those standards had been monitored and/or considered in the design of
     the project.

HRT Consultant Selection Practices

HRT did not comply with applicable procurement laws as well as internal procurement policies
and procedures.

   o Our review disclosed HRT improperly procured consultant/vendor services without
     seeking competition in 16 (67%) of 24 procurements reviewed.
   o Although competition was generally sought for solicitations of the higher dollar value
     consultant/vendor service contracts, procurement files reviewed were generally
     incomplete and did not always establish an impartial and comprehensive evaluation of the
     offerors’ proposals. (2)

Revenue Operations/Cash Control Policies and Procedures

HRT management did not maintain adequate internal controls over passenger fare collections.

   o Our review indicated that the most basic control over cash collection, the reconciliation
     of actual fares collected to the amount recorded in the automated collection system, had
     not been prepared for over two years.
   o Management was aware of significant staffing changes/turnover in the revenue operations
     section, but did not maintain enough oversight of the section to identify this significant
     lapse of control.


                                               6
   o We believe that this lack of internal control contributed to the alleged theft of fare
     revenue. (3)

During our review, the current Chief Executive Officer separately identified and proactively
implemented corrective action (when necessary) in connection with matters involving both HRT
and the LRT/Tide project including, but not limited to the following:

   1) Alleged Trolley Base Theft - Cooperated with law enforcement authorities regarding the
       alleged Virginia Beach Trolley Base theft and pursued recovery of funds through HRT’s
       fidelity bond insurance carrier.
   2) Employee Health Benefits - Identified and implemented corrective action to eliminate
       inconsistent application of paid health benefits for certain members of HRT management.
   3) Permanently Assigned Vehicles - Identified and implemented corrective action to
       eliminate personal usage of HRT owned vehicles, to include negotiating a settlement
       agreement with the former HRT President and Chief Executive Officer terminating all
       future car allowance payments.
   4) Contract Procurement - Identified and implemented corrective action to eliminate a
       non-compliant duplicative security contract.
   5) Consultant Contracts - Identified and eliminated redundant and/or overlapping services
       provided through consultant contracts.
   6) Credit Card Purchases - Implemented controls over credit card purchases to increase
       cost savings of volume purchasing.
   7) Change Order Authorization - Identified and implemented corrective action to
       eliminate unauthorized vendor initiated contract change orders using HRT letterhead.
   8) Temporary Employee - Identified and implemented corrective action to eliminate
       unnecessary costs associated with a long-term temporary employee, including associated
       reimbursement for travel and housing expenses.
   9) Donations of Furniture/Fixtures to Community Groups or Sponsoring
       Activities/Publications – Identified and terminated membership in an international
       organization. Directed all surplus property to be sold at auction.
   10) HRT and LRT/Tide Data and Information Disclosure - Dashboard implemented to
       provide public transparency for both HRT and LRT/Tide project information.

In certain instances the above matters were also included in our review.


                                        DISCLAIMER

During the course of conducting this review, data and other information was provided to us and
accumulated through both records review and interviews conducted with current and former
HRT and HRT consultant staff. Our review, conclusions, and recommendations are based on the
data provided to us and gathered during the review. Irrespective of the data and information
referenced in this report, we acknowledge that other sources of data and information may exist
that were not included in this review. To the extent that there is other information which was not
included in our review, the conclusions and recommendations contained in this report may be
impacted.




                                                7
             OBSTACLES THAT DELAYED OR LIMITED OUR REVIEW

Our review of matters relating to both HRT and the LRT/Tide project were delayed and/or
limited due to a variety of unanticipated events including, but not limited to the following:

   •   Many critical aspects of the cost-to-complete objective, which was the first item included
       in the review scope, could only be answered by detailed review of former employee
       email accounts. Such review is labor intensive and time consuming to perform and added
       significant time to the review.
   •   The LRT/Tide project has been the topic of discussion and studies for many years. In
       order to evaluate the LRT/Tide project evolution, it was necessary to obtain and review
       numerous studies and reports. It was difficult and time consuming to identify and obtain,
       often from external parties, all of the reports necessary to complete our review
   •   To perform reviews of consultant selection, it was necessary to identify and obtain
       supporting procurement files. While all files were provided for review, in some cases
       they were incomplete, which required additional effort to obtain and review the
       information necessary to complete our review.
   •   We requested data on regular expenditures, expenditures related to the LRT/Tide project,
       information related to grants and grant accounting, etc. from HRT staff. Obtaining that
       data was time consuming and challenging because we often had to submit multiple
       requests before being provided with necessary information. We acknowledge that our
       unfamiliarity with HRT contributed to this matter. However, by the end of this review,
       we observed that much of the data is fragmented and maintained by the perceived owner
       of the data, rather than logically filed in the project files. This was a major roadblock in
       obtaining necessary data to complete this review.
   •   The evaluation of LRT/Tide project financial reports was difficult as the form and
       content of the reports were continuously modified to include/exclude various LRT/Tide
       project information.
   •   HRT is a unique entity subject to a variety of federal, state, local statutes, and/or HRT
       policies/procedures. To establish the applicability of the various laws, policies and
       procedures applicable to HRT it was necessary to obtain a legal opinion from the HRT
       legal counsel, which indicates that HRT “…has the power and authority to operate as a
       private corporation …subject to some restrictions applicable to a public body….”
   •   Simultaneous with the initiation of our review, the Virginia Beach Commonwealth’s
       Attorney initiated a separate review into various aspects of HRT operations. As a result,
       we were requested to delay and/or terminate some of our planned procedures pending
       completion of the separate review.
   •   Revenue reconciliations for HRT cash collections related to passenger fares had not been
       performed for at least the prior two years.
   •   Employees did not always provide complete and timely responses to our requests for
       documents and information. As such, we often needed to submit multiple requests to
       multiple HRT staff to obtain all pertinent documents and information required to perform
       our review.
   •   The lack of HRT internal supporting documentation and information on key events
       relative to the LRT/Tide project required correspondence with the Federal Transit
       Administration.




                                                8
             ACKNOWLEDGEMENT OF HAMPTON ROADS TRANSIT STAFF

The documents and information required to complete our review required considerable effort on
the part of many HRT staff. To that end, we acknowledge and appreciate the efforts of all HRT
staff that provided information in connection with our review.


               HAMPTON ROADS TRANSIT – DETAILED BACKGROUND

Operations

Hampton Roads Transit (“HRT”) is a regional transit operation providing service to seven cities
covering both the Southside and Peninsula areas of southeastern Virginia. HRT is the operating
entity of the Transportation District Commission of Hampton Roads, TDCHR, (“Commission”
or “TDCHR”). TDCHR was established on September 23, 1999 in accordance with Chapter 45
of Title 15.2 of the Code of Virginia, and HRT was formed on October 1, 1999, after a merger
between Pentran (Peninsula Transportation District Commission) and TRT (Tidewater Regional
Transit). Metro Magazine ranked HRT as #53 of the 100 Top Transit Bus Fleets in 2009. The
legal name is TDCHR (governing board) doing business as HRT.

The seven cities serviced by HRT have a combined total population of 1.3 million and include
Chesapeake, Hampton, Newport News, Norfolk, Portsmouth, Suffolk, and Virginia Beach. HRT
services include buses, trolleys, vans, and ferries and provide 70 regular fixed bus routes, shuttle
service serving downtown Norfolk, Portsmouth, and Virginia Beach, and ferry service between
Norfolk and Portsmouth. HRT operates 310 buses (of which 14 are trolleys), 83 Para transit
vans, 3 ferries, and 101 other type of vehicles (for example, service vehicles, tow trucks, and
sedans).

HRT bus service programs include the Norfolk Electric Transit (“Net”), the Metro Area Express
(“Max”), the Loop, the Virginia Beach (“VB”) Wave, and Handi-Ride services. The Net is a
complimentary downtown bus service provided by the City of Norfolk and operated by HRT to
accommodate employers and employees in the downtown area. The Max is a regional express
service connecting all of Hampton Roads as an inexpensive means to commute. The Loop
provides complimentary bus service in downtown Portsmouth. The VB Wave provides bus
service for the Virginia Beach oceanfront. Handi-Ride provides Para transit services using lift
equipped vans. Handi-Ride service is available within ¾ of a mile of regularly scheduled bus
routes and has been operated by a third-party vendor since 2003. HRT’s Paddlewheel Ferry is a
system of three 150-passenger paddle-wheel ferry boats and provides service between the
Portsmouth and Norfolk waterfront.

HRT employs approximately 891 staff, which include 238 administrative positions, 450 bus
operators, 72 mechanics, and 131 other staff. As of August 4, 2010, there were 775 full-time
employees and 116 part-time employees. 564 of these employees (bus operators, cleaners,
servicers, mechanics, building and grounds staff, and storeroom clerks) are considered
“bargaining unit employees” and are represented by Local #1177 Amalgamated Transit Union.
The union, on behalf of its members, negotiates wages, hours of employment, and other
conditions of full-time and part-time employment.




                                                 9
Funding

HRT receives federal, state, and local funding as well as operating revenues, from such services
as passenger fares and vanpool rentals, to fund its operating, financing, and capital programs.
The majority of their funding is not generated from internal operations as demonstrated in the
chart below, which focuses on operating activities. (Source: HRT Consolidated Financial
Statements for the Years Ended June 30, 2009 and 2008)


Source of HRT Funding

                                       In Millions

  $25
  $20
  $15
  $10
   $5
   $0
         Local Funding     Federal        Passenger    State Funding   Other Internal
              30%        Funding 30%     Revenue 23%        16%        Operations 1%


Through a Cost Allocation Agreement, dated October 1, 1999, all seven participating cities
agreed to pay an equitable share of the costs incurred by the Commission on a fiscal year basis.
Specifically, these costs include 100% of administrative expenses and the portion of operating
and capital expenses not covered by operating revenues or eligible federal and state funding.
Based upon the transportation services to be received, a city’s equitable share of
operating/capital expenses are estimated and billed quarterly to each city. In FY 2009, the total
local contribution, including capital funding, equaled approximately $24 million.

As reflected in HRT’s financial statements (see the below chart), HRT’s operating revenues are
not sufficient to cover its operating expenses. These operating losses are funded by federal,
state, and local funds.

                                                                FY09           FY08           FY07
Operating Revenues                                          $ 17,675,190 $ 16,363,530 $ 16,024,133
Operating Expenses                                             84,575,490     76,263,340     70,015,058
  Operating loss before subsidies and grants                $ (66,900,300) $ (59,899,810) $ (53,990,925)

Entity

HRT was created at the local level pursuant to Virginia Code §15.2-4500. HRT operations are
subject to oversight by the Commission. Based on legal opinion rendered by Commission legal
Counsel, Williams Mullen, the Commission “…is a body corporate and politic…” with “…the
power and authority to act as a private corporation …subject to some restrictions applicable to
a public body….” In accordance with Virginia Code §15.2-4506, the Commission was created
“…to manage and control the functions, affairs and property of the corporation and to exercise
all of the rights, powers and authority and perform all of the duties conferred or imposed upon
the corporation….” As such, HRT can make and enter into all contracts or agreements, as the
Commission may determine, which are necessary or incidental to the performance of its duties.

                                                       10
   NORFOLK LIGHT RAIL TRANSIT (“LRT/TIDE”) – DETAILED BACKGROUND




The Project

HRT’s Light Rail Transit (“LRT”) project has undergone several revisions. The original project,
the Norfolk-Virginia Beach LRT system, was defined as an 18-mile transit system connecting
downtown Norfolk to the Pavilion area of Virginia Beach. The current Norfolk “Tide” project is
a 7.4 mile dual-track electric light rail line, with a fleet of nine (9) light rail vehicles, eleven (11)
station stops, and a vehicle storage and maintenance facility. Six of the stops will include bus
drop-off areas, one of the stops will be walk-on only with no bus transfer area, and the remaining
four stops will have park and ride areas. (See footnote2)




2 The number of light rail vehicles determined necessary to sustain operation has varied. During our review
concern was expressed that the current number of light rail vehicles (9) may not be sufficient to sustain an
acceptable level of operation during periods when 1 or more of the light rail vehicles is out of service.
                                                    11
The initial baseline capital cost estimate developed for the LRT/Tide project was established at
$360,482,000 and documented in the “Capital Cost Results Report” dated November 2001. This
estimate was subsequently reduced through two major cost reductions exercises. In both capital
cost reduction exercises, the Federal Transit Administration (“FTA”) directed the project team to
explore potential capital cost reductions to lower the Cost Effectiveness Index (“CEI”) down to a
point acceptable to FTA.

The CEI is used by FTA to measure the incremental cost per new passenger attracted to transit as
a result of the “New Starts” investment. The CEI calculation is one of the key criteria in the
New Starts evaluation process that was used by FTA at the time to rate and rank projects for
potential funding. FTA applies the results of the New Starts evaluation and ranking to make the
determinations required by federal statute to: 1) decide whether a proposed project may advance
into preliminary engineering or final design phases of project development, 2) develop funding
recommendations for the Administration’s annual budget request, and 3) determine which
projects are eligible for eventual funding commitments under a Full Funding Grant Agreement
(“FFGA”).

FTA stated the LRT/Tide project should meet a minimum threshold of $23.00 per new transit
rider in order to be competitive with other similar sized New Starts transit projects under
evaluation. An overall ranking of “medium” is needed in order to obtain a “recommended”
rating by FTA. A CEI of under $23.00 per new rider, combined with other FTA criteria, would
achieve a recommended rating.

The first cost reduction exercise was held in April 2002 and resulted in reduced capital costs of
$278,532,000. The second exercise, held in August 2002, resulted in a cost estimate of
$221,932,000. Both of these revised capital costs were reported in the “Capital Cost Results
Report” dated October 2002.

FTA approved the abridged project into Preliminary Engineering (“PE”) in November 2002.
Upon completion of the Supplemental Draft Environmental Impact Statement (“DEIS”), a
revision to the alignment was made to shorten the track by 0.6 miles. A revised capital cost
estimate was prepared for the shortened (7.4) seven-point-four mile segment equaling
$198,491,000. This estimate was documented in the “Supplement to the October 2002 Capital
Cost Results Report” dated August 2003. Additional revisions to the baseline capital cost
estimate were made from June 2005 to February 2007 (see table below).

 Name of Report            Prepared By      Date of Report        Cost-to-         Length of
                                                                 Complete           Project
 Light Rail Transit        Parsons          November 2001       $360,482,000        8 miles
 System Capital Cost       Brinckerhoff                                          (Norfolk LRT
 Results Report            (“PB”)/BRW,                                              Project)
                           Inc. (“BRW”)
 Norfolk Light Rail        PB/BRW            October 2002       $278,532,000        8 miles
 Transit Capital Cost
 Results Report
 Norfolk Light Rail        PB/BRW            October 2002       $221,932,000        8 miles
 Transit Capital Cost
 Results Report



                                               12
 Name of Report             Prepared By     Date of Report        Cost-to-          Length of
                                                                 Complete            Project
 Norfolk Light Rail        URS                August 2003       $198,491,000        7.4 miles
 Transit Supplement to     Corporation
 the October 2002          (“URS”)/PB
 Capital Cost Results
 Report
 Norfolk Light Rail        URS/PB              June 2005        $194,463,000        7.4 miles
 Transit Final Capital
 Cost Results Report
 Norfolk Light Rail        CH2MHill          June 15, 2005      $204,000,000        7.4 miles
 Transit Project Value
 Engineering Report
 Norfolk Light Rail        CH2MHill          June 30, 2005      $203,615,000        7.4 miles
 Transit Project
 Probabilistic Risk
 Analysis
 FTA Application for       PB/HRT staff       February 16,      $232,100,000        7.4 miles
 FFGA                                            2007

NOTE: VDOT Inspector General staff did not validate analysis of the “value engineering”
      exercises that were performed to reduce the LRT/Tide project costs and make the
      project eligible for federal funding, as it was outside the scope of the review. However,
      our review disclosed some examples of elements of the project that had been removed,
      as a result of the value engineering exercises, and then added back to the project (these
      related to safety upgrades subsequently requested by the State).

Examples of items eliminated from the $360,482,000 cost-to-complete estimate to reduce the
estimate to an acceptable cost level included things such as alteration of stations and platforms,
elimination of parking facilities, changes to the vehicle storage and maintenance facilities, etc.

In February 2007, HRT submitted a Full Funding Grant Agreement (“FFGA”) application to the
FTA, setting the cost of building the LRT system at $232,100,000. On October 1, 2007, the FTA
formally signed the FFGA to appropriate $127,980,000 in Federal New Starts funding for the
construction of the network. Total project costs of $232,100,000 initially included contributions
of $33,039,181 from the City of Norfolk, $31,877,619 from the State of Virginia, and
$39,203,200 being contributed from other federal sources.

As a prerequisite for the FFGA, HRT demonstrated to the FTA that it could complete the project
within the amount of federal assistance set forth in the FFGA. HRT was also able to show the
FTA that the project was justified and that the City of Norfolk would be responsible for
providing the necessary funding, including overruns, to complete the project on schedule and to
operate and maintain it. In an agreement signed by the City of Norfolk, the City of Norfolk
committed itself to completion of the project, including financial responsibility for any costs in
excess of the $232,100,000 project budget as well as for shortfalls in funding by other funding
partners (subject to appropriation).

During the course of the LRT/Tide project, the Estimated cost-to-complete was officially revised
to $288 million on December 9, 2008 and then to approximately $338 million on February 18,
2010. See the table below for evolution of funding sources for the LRT/Tide project.

                                               13
Source                       Federal          State       City (Norfolk)   Total
FFGA Baseline Cost Estimate - October 2007
Section 5309 New Starts
Funds                        $ 127,980,000                           $ 127,980,000
STP Funds (Regional)            38,203,200 $ 9,550,800                  47,754,000
FHWA Discretionary               1,000,000                               1,000,000
State Mass Transit Fund                       2,257,740 $ 2,257,740      4,515,480
State Mass Transit Capital                    7,478,605    8,892,735    16,371,340
General Assembly Grant                        2,590,474    3,092,455     5,682,929
Governor's Budget Grant                      10,000,000    2,500,000    12,500,000
City of Norfolk Contribution                              16,296,251    16,296,251
            SUBTOTAL … $ 167,183,200 $ 31,877,619 $ 33,039,181 $ 232,100,000

Estimated Cost-to-Complete - December 2008
STP Funds (Flexible)                         10,353,543        431,398  10,784,941
State Mass Transit Fund                      12,508,734     17,358,450  29,867,184
State Mass Transit Capital                   12,369,818                 12,369,818
City of Norfolk Contribution                               2,878,057     2,878,057
            SUBTOTAL … $ 167,183,200 $       67,109,714 $ 53,707,086 $ 288,000,000

Current Estimate to Complete - February 2010
Section 5309 New Starts
Funds                             814,244                   203,561    1,017,805
STP Funds (Regional)-
Originally Allocated to
Peninsula Projects              2,400,000       600,000                3,000,000
STP Funds (Flexible)            8,627,953    (8,627,953)                       -
American Recovery and
Reinvestment Act               10,000,000                             10,000,000
CMAQ                            2,740,000       685,000                3,425,000
State Grant                                  10,000,000  10,000,000   20,000,000
City of Norfolk Contribution                             12,841,446   12,841,446
                 TOTAL ... $ 191,765,397 $ 69,766,761 $ 76,752,093 $ 338,284,251




                                        14
                          FINDINGS AND RECOMMENDATIONS

MANAGEMENT PREPARATION, TIMING AND DISCLOSURE OF BUDGET,
ACTUAL, AND COST-TO-COMPLETE ANALYSIS FOR THE TIDE

As described in the Executive Summary, the HRT Chief Executive Officer, Philip A. Shucet,
requested the VDOT Office of Inspector General to evaluate the management preparation, timing
and disclosure of budget, actual, and cost-to-complete data in order to answer the basic question
of “who knew what and when” regarding the Norfolk Light Rail Transit (“LRT/Tide”) project
cost-to-complete.

To answer this question, we interviewed several current and former HRT employees, reviewed
HRT Board of Commission meeting minutes, contacted FTA, reviewed the email files of select
current and former employees, and reviewed LRT/Tide project financial reports, project records,
and associated files. The vast majority of our support for “who knew what when” came from our
review of select email accounts. We included in our report excerpts of significant emails or
documents identified during our review and attempted to provide a brief summary of what we
believe these documents demonstrate.

There are many stakeholders vested in the timely (on-time) and cost efficient (on-budget)
completion of the LRT/Tide project, including but not limited to:

Hampton Roads Transit
Transportation District Commission of Hampton Roads (“Commission”)
Federal Transit Administration
City of Norfolk
Commonwealth of Virginia
Taxpayers (federal, state and local)

Hampton Roads Transit (“HRT”) was entrusted with the responsibility for the timely and cost
efficient completion of the LRT/Tide project, which included the stewardship of taxpayer
(federal, state and local) funds. Consistent, timely and accurate financial reporting and
disclosure is critical to sustaining project success (on time, on budget) and public trust.

ITEM 1a– Knowledge and Disclosure of Cost-to-Complete Data
           (See Appendix A for detailed support)

$232 Million Estimate
Monthly LRT/Tide project financial reports were prepared by HRT staff as early as January
2007. The form and content of the reports were continuously modified to include/exclude
various LRT/Tide project information including, but not limited to, budget and cost-to-complete
data. One such modification was the inclusion/exclusion of a column labeled Cost or Budget at
Completion. Other examples of content modification are the inclusion/exclusion of certain
estimated costs, the inclusion/exclusion or presentation of contingency reserves, and the shifting
of costs between cost categories. In addition, the documents reviewed suggest reports did not
consistently incorporate all known probable costs/risks to the project.

Based on the receipt of the aforementioned monthly reports as well as other internal documents,
certain members of HRT management maintained information in mid to late 2007, indicating

                                               15
that the LRT/Tide project cost-to-complete was in jeopardy of exceeding the baseline cost
estimate of $232 million established in the Full Funding Grant Agreement (“FFGA”) executed
by and between HRT and the Federal Transit Administration (“FTA”) on October 1, 2007.

As a condition of FFGA execution, the City of Norfolk entered into a Funding
Commitment/Agreement, Ordinance No. 42,716 to “assume the obligation” to complete the
LRT/Tide project in the event that the total project cost exceeded the baseline cost estimate of
$232 million “subject to appropriation.” The assignment of the obligation by HRT, and
assumption of the obligation by the City of Norfolk was effected by agreement dated June 26,
2007. During this time period, an internal LRT/Tide financial report (DR002) was prepared for
the period ended May 31, 2007, which reflected a total “HRT Budget” of $240,788,369, which
exceeded the $232 million baseline cost estimate established in the FFGA. Such monthly
financial reports were distributed to certain members of HRT management. According to the
former HRT Chief Project Management Officer (preparer of the monthly cost reports through
October 31, 2007), the monthly cost reports were distributed to the former HRT President and
Chief Executive Officer and certain senior HRT staff via hard copy only, not by email. In
addition, our review identified email discussion (See Appendix A – Support Document 4) by
certain City of Norfolk staff that makes reference to “project realities” versus budget.

Although information on increased specific LRT/Tide project costs was shared with certain
external stakeholders, including the City of Norfolk, data gathered during our review supports
that external stakeholders were not provided full and timely disclosure of all known project
costs. The report will provide information supporting this conclusion.

The following table summarizes the date select LRT/Tide stakeholders first received indication
that either a specific cost category would be exceeded and/or in aggregate that the cost-to-
complete the LRT/Tide might exceed the initial Baseline Cost Estimate of $232 million included
in the FFGA.

                                                                                            Appendix A – See
                     Stakeholder                                       Date               Support Document(s):
                  $232 Million
        (FFGA Baseline Cost Estimate)                             February 2007

Hampton Roads Transit                                               June 2007                          1–4
(HRT Management)                                                   August 2007                         13-14
City of Norfolk
(Assistant City Manager)                                             June 2007                         1–4
City of Norfolk (Council)                                           Unknown *                      Unknown *
Federal Transit Administration (FTA)                              February 2008                         41
Commonwealth of Virginia (DRPT)                                   October 2008                        76 – 79
HRT Board of Commissioners                                      November 2008**                         80
Taxpayers                                                       November 2008**                         80
* - Documentation dated June 13, 2007 (Appendix A – Support Document 4) supports discussion of LRT/Tide project costs by
Norfolk City staff, which was subsequently scheduled for presentation to Norfolk City Council on June 26, 2007. However,
VDOT Inspector General staff was unable to verify the presentation due to lack of meeting minutes from the closed door
session. A FOIA request to the City of Norfolk disclosed there were no meeting minutes from this closed door session.
** - The Virginian Pilot ran a story on September 28, 2008, regarding cost over-runs for the $232 LRT/Tide project, but the
article did not include specific details.




                                                           16
The following table summarizes key reports from February 2007 to June 2008 that contain cost-
to-complete analysis and/or LRT/Tide project budget information identified during our review:

                                                                         Cost-to-
                                                                         Complete
                                                                            or
                                 Prepared                               Estimate at        Total HRT
           Source                     by           Report Date          Completion          Budget
                                PB/HRT
FFGA application to FTA         staff         February 16, 2007         $232,100,000           N/A
DR002 Cost Report (File
name of monthly internally
generated financial report)     HRT staff     May 31, 2007                   N/A          $240,788,369
DR002 Cost Report               HRT staff     June 30, 2007                  N/A          $242,589,311
Memorandum, dated August
2, 2007, including the June
                                HRT staff     July 31, 2007                  N/A         $242,589,311^
30, 2007 DR002 Cost Report
(Updated as of 7/31/07) ^

DR002 Cost Report               HRT staff     September 30, 2007             N/A         $232,294,614λ
                                PB/HRT
FFGA executed                   staff         October 1, 2007           $232,100,000           N/A
DR002 Cost Report               HRT staff     January 31, 2008         $232,089,787λ           N/A
DR002 Cost Report               HRT staff     February 29, 2008        $232,089,787λ           N/A
DR002 Cost Report               HRT staff     March 31, 2008           $231,875,125λ           N/A
DR002 Cost Report               HRT staff     April 30, 2008           $232,466,620λ           N/A
DR002 Cost Report               HRT staff     May 31, 2008             $247,395,440λ           N/A
Presentation to City of
Norfolk Council                 HRT staff     June 17, 2008             $236,423,458λ*          N/A
                                                                        $245,044,522 to
DR002 Cost Report                 HRT staff     June 30, 2008            $247,482,522λ          N/A
^ Memorandum references the LRT/Tide project cost-to-date and cost-to-complete report as of July 31,
2007 for the period ending June 30, 2007 along with additional potential costs to the HRT Budget of, at
least, $15 million.
λ Report format changed in that the required amount of project contingency reserve is no longer
automatically included in the HRT Budget or cost-to-complete amount. For example, the September
2007 report lists a remaining contingency reserve balance of $10,563,238 versus the $28,762,000 of
contingency reserve included in the FFGA baseline cost estimate.
* Estimate does not include approximately $45.8 million in risk factors referenced in the presentation:
construction cost increases/risks estimates ($27 million), enhancements ($11.5 million) and omissions
($7.3 million).

Email correspondence between the City of Norfolk and HRT dating back to March 2007 through
May 2007 disclose discussions of “potential increases to the budget” and “items that may be
outside the LTR budget and thus borne by the City.” Discussions touched on several items to
include: utility relocations, the Military Highway station park and ride, change to embedded
track from York Street station to EVMC, enhancements to station shelters, enhancements to
power stations, sidewalk design changes, and traffic signal alignment changes. These
conversations led to an email dated June 13, 2007 from the Norfolk Assistant City Manager to
the Norfolk Director of Finance and HRT Senior Vice President for Development which states,
                                               17
“I wanted to share with you the direction from the City Manager for the presentation being
contemplated for the 26th…She intends a meeting after the city council meeting of next
week…Regina’s direction is as follows…[w]e need to give an assessment of the project realities
versus the FTA budget. That is give some insight to the council as to issues we are aware of that
will be outside the FTA budget. I.e utilities Goal is to ensure they understand that they may pay
more than just our share of the projected budget….”

A key document identified during our review for this period of time was an internal cost-to-
complete report as of July 31, 2007 that reflected a “Total HRT Budget” of $242,589,311. This
cost-to-complete report was based on information accumulated during a June 15, 2007 cost-to-
complete workshop and excluded 5 items with potential additional costs to the LRT/Tide project
of, at least, $15 million. While the report was distributed to the former HRT President and Chief
Executive Officer and key HRT management, we could find no evidence of where this report
was distributed to any external stakeholders (see support item 13 in Appendix A).

In accordance with Section 15 of the FFGA (49 C.F.R. §633.5), HRT is required to maintain a
Light Rail Transit System Project Management Plan (“PMP”), which includes a provision for
Cost Contingency. In addition, Section 15 of the FFGA defines the LRT/Tide as a “Major
Capital Project” subject to the Project Management Oversight (“PMO”) Regulations set forth in
49 C.F.R. §633.5. The PMO regulations require periodic review by a Project Management
Oversight Consultant (“PMOC”), under contract directly with FTA.

The PMP contains a section entitled “Cost Contingency Management” which states, “…[t]he
PG-35 Contingency analysis performed by the PMOC and Grantee in December 2006 and
further updated in February 2007 outlined the minimum contingency requirements for the HRT
project. These contingency exercises demonstrated HRT’s need for $30 – 35 Million in
contingency funds…” through 100% bid/ 20% construction, whichever is later. The PMP allows
for the level of contingency reserve to drop as construction gets further underway. For example,
at 50% construction the contingency level was required to be in the range of $20 million. If the
required level of contingency reserve is not met, HRT is required to immediately initiate efforts
to develop and implement a recovery plan (as required by the FFGA).

As of July 31, 2007, no construction bids had been received by HRT. As such, based on the
above criteria, a contingency level of $30-35 million was required to be established in order to
comply with the PMP. Although the “Total HRT Budget” figure included approximately $29
million in contingency reserves (the approximate amount included in the FFGA), this caused the
LRT/Tide project to be over budget by $10,489,311 ($242,589,311 - $232,100,000) with
additional potential costs of, at least, $15 million. A former employee involved with producing
the monthly financial reports commented that the required contingency reserve was not
maintained, as it was used to cover overages as they were identified.

During the period October 2007 to March 2008, LRT/Tide project costs continued to escalate.
Most notably during this period was the receipt of bids for construction contracts #30 and #40
which contained costs significantly higher than those reflected in the FFGA budget. In addition,
cost increases associated with unsettled property and right of way acquisition issues with Norfolk
State University were being discussed.




                                               18
The following table summarizes the FFGA budget, bid amount and award amount for contracts
#30 and #40:

                                                                                 Award in
 Contract Date Bid                                                               Excess of
    #       Received       FFGA Budget *      Bid Amount      Award Amount        FFGA
   #30       12/5/07         $37,344,232      $41,157,368      $41,157,368      $3,813,136
   #40       1/25/08         $22,000,000      $42,415,442      $42,415,442      $20,415,442
 * According to internal email documents reviewed.

Numerous stakeholders including the former HRT President and Chief Executive Officer, HRT
management, Norfolk City Manager, and Norfolk Assistant City Manager had knowledge of the
increased LRT/Tide project costs associated with both contracts. In total, the award amounts
exceeded the FFGA budget by $24,228,578.

After the receipt of contract 30 bids, an HRT consultant with PACO Group, a subcontractor
under the PBS&J contract, sent the following email, dated December 7, 2007, to the HRT Senior
Vice President for Development and former HRT Chief Capital Program Officer.

       “I have revised the project budget master control sheet to include the Contract 30
       low bid information. It has been incorporated into the spreadsheet using the FTA
       std cost categories, as is our obligation. The source documentation and budget
       have been cross checked. Skanska’s bid exceeds the allocated contingency for
       Contract 30 by $11.5 million. More seriously, when the overruns due to
       consultants’ current estimates to complete their work is considered we are
       currently at the stage where the entire project Contingency is now blown. We are
       now in the hole by $2.94 million. We can expect a round of cost mitigation
       exercises in order to regain our unallocated contingency amount. This is
       required by the PEP (Project Execution Plan). We are left with just shy of a
       million in construction allocated contingency. This is because we had a good
       result with the Contract 20 bid, and because the consultants’ charges are not
       included in construction. Please bear in mind that the above results already
       include for the re-assignment of former Contract 50. There is no “secret pot of
       money” in the budget which we can use to “find” some money. In other words,
       Skanska’s bid along with all the other current budget information we have at this
       time adds up to $2.94 million MORE than the allowed $232.1 million that our
       FFGA is based on. You can verify the detail in the attached spreadsheet at Tab B
       – Budget, Funding and Costs. It’s interesting to note that Cheryl re-allocated $4
       million from prior Contract 50 to Contract 30 to cover the cost of the Broad
       Creek Bridge. Skanska has bid $2.5 million for the demo of the existing trestle
       and construction of its replacement. (There may be additional costs due to pile
       driving, approaches etc. that I am not able to break out from the bid submission
       at this time.) So eliminating the Broad Creek Bridge would not be sufficient to
       eliminate our contingency bust.”

The FTA Region 3 Administrator advised VDOT Inspector General staff that HRT notified FTA
the LRT/Tide project “might” exceed the FFGA baseline cost estimate in a conference call on
February 29, 2008. The DRAFT meeting minutes provided by the FTA indicate the discussions
between HRT staff and FTA focused on project cost increases associated with construction
contracts and what costs were part of the original FFGA versus non-FFGA costs (costs outside of
the baseline budget). According to the FTA’s Project Management Oversight Consultant
                                                19
(“PMOC”), omitted elements of the project that are required to build the LRT/Tide project in a
right-sized manner should be accounted for against the approved FFGA budget, while
enhancements to the project should be categorized as concurrent non-FFGA scope items. In this
regard, a grantee can choose to pursue activities or pay for items within the project scope of work
that are not eligible for federal assistance. The DRAFT meeting minutes obtained from the FTA
reflected that HRT staff had established a meeting with the City of Norfolk to discuss a list of
“concurrent non-FFGA” line items.

HRT and City of Norfolk staff held discussions, in April 2008, regarding significant LRT/Tide
project cost overruns, additions, and risks. The discussion of cost overruns, additions and risk
was quantified into ranges from approximately $33 million on April 4, 2008 to $47 million on
April 18, 2008. In an email dated May 12, 2008, the HRT Senior Vice President for
Development informed the Norfolk Assistant City Manager that she did not plan on distributing
the full list (showing $47 million in total estimated costs that includes risks, add-ons, etc.) to the
HRT Commission.

A Norfolk City Council meeting was held June 17, 2008 in which there was a closed door
session. A presentation entitled “Light Rail Project Update” was delivered during the closed
session. The presentation included a section entitled “Financial Overview,” which listed the
FFGA Budget at $232,101,000 and the Current Estimate at $236,423,458. The presentation
noted that HRT had provided to the City estimates of potential costs that may exceed the current
budget and which have been allocated to the following categories:

       “Construction Costs…These items are for ‘risks’ estimates for potential higher
       costs to be incurred…The current estimate by HRT is that these could total $27
       MM.”

       “Enhancement Issues…Changes beyond the base FFGA budget contemplation for
       the project to enhance its placement within our urban fabric…The current
       estimate by HRT for items in this category is $11.5 MM.”

       “Omissions Issues…Items of cost beyond the base FFGA budget that should have
       been included…The current estimate by HRT for items in this category is $7.3
       MM.”

A string of emails dated July 24, 2008 to July 28, 2008 between HRT and the City of Norfolk
disclosed that HRT staff did not provide full disclosure of LRT/Tide project cost estimates to
FTA. In an email dated July 25, 2008, the Norfolk Assistant City Manager asked the HRT
Senior Vice President for Development to “…[p]lease provide to me as I requested previously
an understanding of what you have previously provided to FTA with regard to project cost
increase potentials.” The HRT Senior Vice President for Development responded “[w]e gave
FTA a $16M list that we used pieces of the full $40+M list, since we did not think it was time, or
appropriate to show the whole list….”

After information became public due to media coverage in September 2008 indicating the
LRT/Tide project was experiencing overruns and might exceed the FFGA budget of $232
million, HRT staff took steps to disseminate information to stakeholders, including the Norfolk
City Council (December 9, 2008) and FTA (December 11, 2008), reflecting a revised cost-to-
complete of $288 million. The HRT “President and CEO Report” dated January 22, 2009
distributed to the HRT Board of Commissioners also reflected a revised LRT/Tide project budget
of $288 million.
                                               20
______________________________________________________________________________

$288 Million Estimate
The LRT/Tide project budget was revised to $288 million, and publically disclosed on December
9, 2008 during a Special Session of the Norfolk City Council. The following table summarizes
the date select LRT/Tide stakeholders first received indication the cost-to-complete might
exceed the revised project budget of $288 million.

                                                                                         Appendix A – See
                     Stakeholder                                    Date               Support Document(s):
                 $288 Million
(Established $288 million budget at Norfolk
           City Council Meeting)                               December 2008
Hampton Roads Transit                                           February to
(HRT Management)                                                March 2009                      93 – 100
City of Norfolk
(Assistant City Manager)                                         May 2009                     109 – 117
City of Norfolk Council Member*                                  May 2009                     94 and 118
City of Norfolk (Council)                                      December 2009                  147 – 149
HRT Board of Commissioners                                     December 2009                  147 – 151
Federal Transit Administration (FTA)                           December 2009                      142
Commonwealth of Virginia (DRPT)                                December 2009                  147 – 151
Taxpayers                                                      December 2009                  147 – 151
* VDOT Inspector General staff observed where information was shared with a single Norfolk City Council Member (who
was also an HRT Board Member); however, we did not observe any documents to support this information was shared with
the entire Norfolk City Council or HRT Board of Commissioners.


The following table summarizes key reports from December 2008 to February 2010 that contain
cost-to-complete analysis and/or LRT/Tide project budget information identified during our
review:

                                                                                     Cost-to-
                                                                                     Complete
                                                                                        or
                                          Prepared                                  Estimate at          Total HRT
              Source                         by             Report Date             Completion            Budget
Presentation to City of Norfolk
Council                                   HRT staff      December 9, 2008          $288,000,000              N/A
Presentation to FTA                       HRT staff      January 6, 2009          $288,000,000               N/A
October 2009 Cost-to-Complete                                                    $324,512,653 to
Analysis                                  HRT staff      October 30, 2009         $324,807,796               N/A
Cost-to-Complete Amount                                  December 11,
reported to FTA                           AECOM          2009                      $333,800,000              N/A
Preliminary Project Assessment
of the Norfolk Light Rail Transit
Project                                   AECOM          January 27, 2010          $335,019,539              N/A
February 2010 Cost-to-Complete
Exercise                                  HRT staff      February 18, 2010         $338,284,251              N/A

                                                          21
Internal documents suggest the $288 million budget was not completely accurate and up to date
when presented to the Norfolk City Council. For example, within the newly revised project
budget of $288 million, the line item budget for Startup (Pre-Revenue Activities) was $2,064,000
even though internal email from October and November 2008 documented this amount would
not be nearly sufficient to cover the related costs.

Within a few months of the LRT/Tide project budget being revised to $288 million, there were
indications the cost-to-complete might exceed this amount. Stakeholders who either had or
received information the revised project budget of $288 million might be exceeded included
certain members of HRT management.

The former HRT Senior Vice President for Construction had in his possession a DRAFT
memorandum written on Skanska USA letterhead from the Skanska USA Project Manager to an
HRT consultant employee with Post, Buckley, Schuh & Jernigan Inc. (“PBS&J”) that contained
the subject heading “HRT Breach of Contract.” The most recent events cited in the document
occurred on December 20, 2008. This document was not dated or signed. While there was no
evidence of this draft memorandum being formally issued, it illustrates some of the significant
issues affecting the LRT/Tide project. Excerpts of this document include the following:

       “The purpose of this letter is to notify you that Skanska believes that HRT has
       materially breached the Contract by not providing adequate and promised access
       to the Project work site for Skanska to perform Contract work. Although Skanska
       previously re-sequenced work (in coordination with HRT) in an attempt to
       mitigate its damages, HRT’s failure to support Skanska’s schedule – as HRT was
       required to do – has now progressed to the point where the Contract critical path
       is being affected on a day-for-day basis…”

       “…It also was known from the outset of this Project that the Contract work was
       highly dependent on the timely re-location of utilities (especially Dominion
       Virginia Power (DVP) work), which was a prerequisite to much of Skanska’s
       Contract work. HRT knew full well that property ROW acquisitions and utility re-
       locations were outside the control of Skanska, and HRT acknowledged its
       obligations to support the Contract work in this regard. Although changes to the
       Project based on non-acquisition of property rights and failure to re-locate
       utilities have occurred thus far, the Project now has progressed to the point that
       these issues must be addressed immediately…”

       “…Changes to the scope of Contract work include the following…As of
       December 20, 2008, HRT stated that ‘it is not known at this point in time when
       Dominion Virginia Power will perform their re-location on Main St.’…Also on
       December 20, 2008, Skanska notified HRT that its planned work had been
       delayed as a result of the failure to re-locate the Level III underground
       communication line; that Skanska had attempted unsuccessfully to obtain utility
       re-location schedules for several months; that there still was no known date for
       the Level III re-location; that Skanska had pointed out on its baseline schedule
       the importance of DVP’s re-location of its duct bank on East Main Street (which
       is why Skanska started work at Harbor Park), which is now preventing the start of
       electrical re-location work…Further, despite numerous requests, Skanska has not
       received any kind of re-location schedule, which is preventing Skanska from
       accurately sequencing all affected work…”
                                              22
       “…With almost seven months having elapsed since NTP [Notice to Proceed],
       Skanska estimates that, as a result of HRT’s failure to perform its contractual
       obligations as detailed above, over 50% of the Project footprint currently is
       unavailable for work…causing substantial cost impact to Skanska…There already
       have been over thirty change order requests submitted by Skanska and, more
       importantly, Skanska still has not received schedules for ROW acquisitions and
       utility re-location upon which it can rely. Further, timely completion of the CBD
       work almost certainly will not occur, based in part on the following:
            • DVP has not re-located a single service in the CBD to date, and estimates
                up to twelve months of work to accomplish the necessary re-locations.
            • Property acquisitions are incomplete, and some property acquisitions are
                doubtful. Further, some properties currently are not scheduled to become
                available to Skanska until two or three months prior to scheduled
                Contract completion.
            • Utility re-locations required to complete the initial phases remain
                incomplete, with some not scheduled to finish until as late as April
                2009…”

       “…In addition to addressing the additional compensation owed Skanska for the
       changed and new scope work to date, a new Project schedule needs to be
       developed based on accurate estimates of ROW acquisitions and utility re-
       locations…”

An internal email dated February 5, 2009 from the HRT Director of LRT
Engineering/Construction to the former HRT Senior Vice President for Construction referenced
knowledge about LRT/Tide project cost slowly escalating in terms of change notices and bid
escalation and stated that the overall cost of the project may well, even after adjusting for City-
mandated items, rise above the approximate $290 million budget. Reference was also made to
the upcoming station and park-and-ride contracts and it was noted that it was very probable that
the combined bids for contracts 100, 110 and 150 would far exceed the (then) current budget of
$8.3 million for those items.

Starting in March 2009, HRT staff took steps to remove items from the LRT/Tide project budget
to pursue reimbursement from other funding sources, including those made available through the
American Recovery and Reinvestment Act (“ARRA”). Effectively, the aforementioned steps
provided funding for the LRT/Tide project in excess of the $288 million budget. The costs
removed from the project budget related to start-up and pre-revenue activities. HRT
management knew in October and November 2008, prior to releasing the revised LRT/Tide
project budget of $288 million, the established budget of $2,064,000 for these activities was not
going to be nearly enough to cover the related costs.

On April 23, 2009, the HRT Board of Commissioners approved a contract award of $8.1 million
for the extension of Program Management/Construction Management (“PM/CM”) services
provided by PBS&J. The contract extension provided nine additional months of PM/CM
services beginning April 1, 2009 through December 31, 2009. HRT Commission member
Wright questioned whether or not the award amount was within the $288 million LRT/Tide
project budget and the former HRT President and Chief Executive Officer stated that it was
within the $288 million budget.


                                                23
While VDOT Inspector General staff was unable to conclude as to whether or not this $8.1
million was included within the $288 million budget, an internal document indicates that as early
as May 13, 2009 the former HRT President and Chief Executive Officer had knowledge that the
$8.1 million would likely not be sufficient to cover the related PM/CM costs.

During the time period from May 2009 to July 2009, documents obtained during our review (See
Appendix A) suggest that the Norfolk Assistant City Manager, Norfolk City Manager, and a
Norfolk City Councilman (who was also an HRT Commission member) were provided
information regarding threats to the project budget/ schedule which might cause the cost-to-
complete to exceed the revised project budget of $288 million. Documents suggest that full
disclosure of threats to the project budget/schedule were not provided to all members of the
Norfolk City Council.

An email, dated May 13, 2009, from the former HRT Senior Vice President for Construction to
the Norfolk Assistant City Manager, with copies to the former HRT President and Chief
Executive Officer and former HRT Chief Engineering Officer provided an outline of
presentation points for an upcoming presentation to the Norfolk City Council regarding HRT’s
LRT/Tide project.      One of the presentation points was labeled “Threats to Project
Budget/Schedule.” A string of emails followed in which it was requested and agreed that this
item not be on the agenda.

Another email, dated June 17, 2009, from the HRT Public Affairs Manager to the former HRT
President and Chief Executive Officer discussed the Kirn Library asbestos situation and how best
to handle the issue without alarming the HRT Board of Commissioners. The email states,

       “A couple of questions. Given the sensitivity of the Kirn asbestos situation, I made
       no comment on it in this month’s president’s report. There is a short note on it in
       the construction update, however, but nothing that will cause alarm. Still, I’m
       wondering if we will draw further unwanted attention to this situation by omitting
       comment. I’m not looking for trouble, but do you want me to add comment on the
       asbestos matter? I think it’s probably a bad idea, but I also don’t want
       commissioners reading through the report and then, not seeing anything, start
       asking you questions about it. I worry that it might undermine the report’s
       credibility.”

A DRAFT budget summary schedule dated “As of July 20, 2009” calls into question the
accuracy of reports prepared and disseminated by HRT. The schedule included the column
headings FFGA, FFGA Overrun, Enhancements (Existing), Enhancements (Proposed), and cost-
to-complete. Although the schedule reflected a cost-to-complete of $288,000,000, the schedule
contained computational errors and the cost-to-complete figure did not include any amount from
the line item labeled “Unallocated Contingency.” The presentation of the schedule indicates that
the unallocated contingency reserve had been exhausted. This schedule was submitted to the
FTA’s PMOC in an email from the former HRT Chief Officer of Engineering on July 24, 2009.

The Project Execution Strategy (“PES”), which is an appendix to the Project Management Plan,
stipulated that the LRT/Tide project was to have $20 million in contingency reserve through 50%
constructed. According to internal documents, construction was only 44% complete in August
2009 and therefore the LRT/Tide project was required to have $20 million in contingency
reserve.


                                               24
The internal HRT DR002 Project Summary Report dated August 31, 2009 included an
“Unallocated Contingency” amount of $18,766,208 and still reflected a Total Project Budget at
Completion of $288 million. (See footnote 3) Several line item cost categories were reduced
significantly from the July 20, 2009 Draft schedule submitted to FTA in order to accommodate
the additional line item cost category of “Unallocated Contingency.” The reduction of the above
referenced line item cost categories appeared arbitrary and unjustified, especially in light of
HRT’s internal cost-to-complete analysis that was completed in October 2009. This analysis
established a new LRT/Tide project budget of approximately $325 million.

An email from the FTA’s Project Management Oversight Consultant, dated December 4, 2009,
to the former HRT Chief Officer of Engineering with an attachment labeled “07-20-09 HRT
budget summary FTA.pdf” states,

       “I got this request from Katie yesterday but was traveling back from a meeting in
       NY. The pdf version of the July budget was the version I received from you.
       When I retyped the numbers into an Excel form and put in the formulas
       (attached), the totals are $11,757,000 over the $288M. This is something I should
       have caught in July but didn’t check the math. Can you recreate the numbers to
       add up to the $288M? As usual, Katie needs this immediately.”

According to HRT staff, a meeting was held in early December 2009 between the former HRT
President and Chief Executive Officer and the FTA Administrator to seek additional funding for
the LRT/Tide project.

An article appearing in the December 19, 2009 Virginian-Pilot stated,

       “HRT officials said this week they need $38 million to $40 million more to finish
       the 7.4-mile transit system, which is just over 50 percent complete…The latest
       cost estimate is $326 million to $328 million, HRT President Michael Townes
       said…Most Norfolk City Council members and elected leaders who make up
       HRT’s governing board were not aware of the cost overruns and delays until they
       were contacted Friday by The Virginian-Pilot. The issue came to light when the
       Commonwealth Transportation Board voted Thursday to spend an extra $20
       million on the project…Virginia Beach Councilman Jim Wood, who chairs HRT’s
       board, used the words ‘incensed’ and ‘indignant’ regarding the latest
       developments. ‘I’m very disturbed by the quality of the information received from
       HRT’s senior staff and the lack of accurate information received from HRT senior
       staff,’ Wood said. ‘When every single meeting we have we’re told we’re on
       budget and on schedule when we’re not, that’s a major issue’…Townes said he
       did not inform the board because he did not have solid numbers and because he
       was awaiting the Transportation Board’s action first. ‘We’ve been refining these
       numbers and we didn’t have a number to give to the board – we still don’t have
       an exact number to give to the board,’ he said…Townes noted that the original
       design of the light-rail project was ‘bare bones’ to meet stringent criteria for
       federal money. He said the newest budget is close to the price tag HRT estimated
       several years ago before slashing more than $100 million in a ‘value engineering’



3 An internal document dated November 2, 2009 states, “…[t]he July 2009 Memorandum of Understanding
between HRT and VDRPT re-established a contingency fund of $18.8 million and requested that HRT provide
advance notification to VDRPT of any intent by [H]RT to use any of these contingency dollars….”
                                                  25
        exercise to reduce costs. ‘Many of the elements removed have now been put back
        in the project,’ Townes said.” (See footnote4)

On December 22, 2009, a Special Session of the Norfolk City Council was held, which included
updates on the LRT/Tide project. Updates included the following:

        "…City Manager, Regina Williams introduced the presentation to provide the
        most recent information on a full cost to complete the project, commenting this
        assessment is still a work in progress….

        •    Rather than the $288 million budgeted, present estimates to complete the
             project are now between $326 and $328 million…
        •    Hard costs are now estimated at $217 million; soft cost at $99.2 million;
             finance charges of $1.5 million and an unallocated contingency of $10
             million...
        •    While the City’s role in the project cannot change, the following steps have
             been taken:
             1. Active involvement and review of financial assessment.
             2. Participation in contract negotiations to obtain guaranteed fixed prices
                 for completion where obtainable.
             3. Insistence on more consultation with the City and prior approvals going
                 forward.
             4. Establishment of a dedicated City team led by John Keifer, Director of
                 Public Works, to be co-located with HRT staff.
             5. City has retained former VDOT Commissioner, Philip Shucet for
                 assistance with construction management.

        Michael Townes, President of HRT, reported:

        •    In July 2009, it was discovered schedules were slipping and, as a result, an
             internal cost to complete assessment was initiated.
        •    The internal review revealed the $288 million and October 2010 operational
             date were not attainable and that the cost to complete the project had
             increased $38 - $40 million and the operational date pushed back to 2011.
        •    Mr. Townes attributed cost overruns and delays to project enhancements,
             unidentified underground utility issues, State requested additions for safety
             and security, unresolved delay claims and unapproved change orders,
             repeated management changes for project and construction management and
             failure to get the State sales tax exempted.
        •    Additional funding is being pursued through the State, the Federal Transit
             Administration and other sources.”

On December 23, 2009, a media article appearing in the Virginian-Pilot states,




4 VDOT Inspector General staff did not validate analysis of the “value engineering” exercises that were performed
to reduce the project costs and make the project eligible for Federal funding, as it was outside the scope of the
review. However, our review disclosed some examples of elements of the project that had been removed, as a result
of the value engineering exercises, and then added back to the project (these related to safety upgrades subsequently
requested by the State).
                                                        26
       “A frustrated Norfolk City Council demanded answers Tuesday from Hampton
       Roads Transit head Michael Townes as to why the cost of Norfolk’s light-rail
       project rose $40 million over budget…City officials learned last week that the
       cost of the project…has risen to about $328 million… [City Councilman Randy]
       Wright…and Townes disagreed on how well HRT kept the city informed. Townes
       said he told Wright in October that there would be cost overruns. Wright said he
       did not know until he heard rumors about it from [Mayor Paul] Fraim in early
       November. Wright said he asked for a meeting with Townes, who told him Nov.
       19 that there was no conclusive number for the overruns but that the project cost
       could range up to $340 million. Townes said he became concerned about
       potential overruns in July, when officials noticed ‘discrepancies in construction
       and scheduling documents.’ In October, he said, HRT began an internal review
       and discovered costs were spiraling. A consulting firm, AECOM, was hired in
       November to analyze the problems… ‘It was apparent to you in July that you were
       running out of money,’ Fraim said. ‘At that point, you were getting into the city’s
       checkbook. Somebody should have come to the city.’ Townes replied: ‘I wasn’t
       aware of these problems until October. I worked through the commissioner you
       appointed’ to the HRT board, referring to Wright.”

$338 Million Estimate
On January 11, 2010, a special session of the HRT Board of Commissioners was held to discuss
the LRT/Tide project and other concerns. During this meeting, Michael Townes announced his
retirement, effective September 30, 2010, as President and Chief Executive Officer. The
regularly scheduled Commission meeting was held on January 28, 2010 and Mr. Townes wrote
in his President and CEO report that “the project is now projected to exceed the previously stated
cost of $288 million and revenue service will begin in 2011.”

ITEM 1 (a) Recommendation (1 of 31)– We recommend the HRT Chief Executive Officer
take appropriate action to ensure accurate and timely development and routine disclosure
of LRT/Tide project budget-to-actual and cost-to-complete analysis to key stakeholders.
We also recommend the HRT Chief Executive Officer consider having discussions with
FTA and possibly the United States Department of Transportation, Office of Inspector
General regarding whether HRT made full and timely disclosure of the LRT/Tide project
cost-to-complete.


ITEM 1(b) – Full Funding Grant Agreement Compliance Management

HRT staff has not effectively monitored the LRT/Tide project to ensure compliance with the
terms and conditions specified in the Full Funding Grant Agreement (“FFGA”). Specifically,
HRT staff could not demonstrate “written” approval from the Government extending the
Revenue Operations Date (“ROD”) of the LRT/Tide project beyond January 1, 2010, as required
in Sections 5 and 14 of the FFGA. Although we identified email dialogue (dated October 2008)
regarding the ROD between an HRT legislative services consultant and staff of the Federal
Transit Administration (“FTA”) that included distribution to the former HRT President and Chief
Executive Officer, there was no documented evidence to support resolution necessary to comply
with the terms of the FFGA.



                                               27
The FFGA was executed on October 1, 2007 by and between the Transportation District
Commission of Hampton Roads/Hampton Roads Transit (“HRT” or “Grantee”) and the FTA.
As Grantee, the former HRT President and Chief Executive Officer accepted primary
responsibility for compliance with the FFGA upon its execution on October 1, 2007.

Non-compliance with the terms and conditions detailed in the FFGA could result in default and
implementation of “REMEDIES” specified in Section 19 of the FFGA including, but not limited
to, the demand for return of all federal funds. Total federal funding included in the LRT/Tide
project to date is approximately $192 million, $128 million of which is provided through the
FFGA. Such non-compliance could also “…be a factor considered before a decision is made
with respect to the approval of future Grants requested by the Grantee….”

ITEM 1 (b) Recommendation (2 of 31)- We recommend that the HRT Chief Executive
Officer take immediate steps necessary to ensure the LRT/Tide project is in compliance
with all terms and conditions included in the FFGA. Such steps should include at a
minimum, obtaining “written” approval from the FTA extending the Revenue Operations
Date beyond that contained in the FFGA.

NOTE: VDOT Inspector General staff briefed the current HRT Chief Executive Officer in
      August 2010 on the above matter. Subsequent to the briefing, the current HRT Chief
      Executive Officer, took steps to immediately perfect compliance with the FFGA.
      Specifically, the current HRT Chief Executive Officer directed correspondence dated
      August 19, 2010, to the FTA Regional Administrator requesting approval to change the
      ROD. To date, the FTA has not provided the approval required by the FFGA.


ITEM 1 (c) – Norfolk State University Memorandum of Understanding

HRT did not secure right of way property rights/easements necessary to construct the LRT/Tide
as originally contemplated through the Norfolk State University Campus (“NSU”), which
resulted in additional LRT/Tide project cost of approximately $9 million and associated
construction delays. The efficient and cost effective completion of a construction project relies
upon minimal changes to planned activities and associated costs.

The original design of the LRT/Tide project, and related cost-to-complete analysis, was based
upon specific alignment and related amenities which required the acquisition of property rights
within the boundaries of NSU. HRT pursued the acquisition of the property rights through
discussion with the former President of NSU and Enterprise and Empowerment Foundation of
NSU (“E2F”) using a Memorandum of Understanding (“MOU”) that captured an agreement to
negotiate in the future.

During our review, the following response relative to this matter was obtained from HRT
Commission legal counsel:

       We were requested in July of 2003 to review the draft MOU, and whether NSU
       had authority to buy and sell its property or needed higher state authority for
       approval. We provided review comments to HRT on the MOU. We also advised
       HRT that NSU in its proper corporate name would be able to grant easements
       over its property with the approval of its Board of Visitors/Board of Trustees, but
       that any sale or lease of such property would require further approval of the
       Governor. The MOU, executed in excess of 7 years ago, was between NSU, HRT
                                                28
       and E2F, and simply memorialized an understanding of negotiations to take place
       in the future. The MOU contemplated that to achieve the goals of the MOU, HRT,
       NSU and E2F would have to negotiate and reach binding agreements with
       Norfolk Southern, the City of Norfolk and the City of Virginia Beach, none of
       which were parties to the MOU.

HRT did not effect a binding agreement and NSU subsequently requested a change in the
alignment which was significantly different in conceptual design and location. According to
legal counsel:

       HRT pursued further negotiations with NSU in March of 2008 and a
       comprehensive proposed Agreement was submitted by HRT and the City of
       Norfolk in May of 2008, to NSU and the Office of Attorney General…. To date,
       HRT has not yet been able to obtain an Agreement with NSU.

The change in relation to the NSU campus resulted in $9 million of additional LRT/Tide costs.

ITEM 1 (c1) Recommendation (3 of 31)- We recommend that the HRT Chief Executive
Officer consult with legal counsel to evaluate existing remedies and alternatives available to
reduce and/or mitigate the risk associated with actions taken by HRT staff in connection
with their duties. If such remedies exist, then evaluate the probability of recovering
damages related to actions involving LRT/Tide project.

ITEM 1 (c2) Recommendation (4 of 31)-We recommend that the HRT Chief Executive
Officer take the steps necessary to effect a binding agreement regarding the usage of the
NSU property.


ITEM 1(d) – Virginia Freedom of Information Act Compliance

HRT staff delayed providing all documents and records associated with the LRT/Tide project to
VDOT Inspector General staff by citing restrictions under the Virginia Freedom of Information
Act (“FOIA”), Virginia Code Sections 2.2-3700, et seq. Early during our review, April 2010, we
inquired of an LRT/Tide Project Specialist of the preparation of any cost-to-complete or
estimated cost at completion reports. The LRT/Tide Project Specialist advised VDOT Inspector
General staff that she was unaware of any such reports being prepared. This individual indicated
that the only report being prepared was a monthly report that reflected the budget, expenditures
to date, and remaining balance.

During the course of our review, while reviewing the email files of a former HRT employee,
VDOT Inspector General staff identified a cost-to-complete report dated June 30, 2007. Then
during an interview with another former HRT employee, VDOT Inspector General staff was
advised monthly reports were being prepared early in the LRT/Tide project that reflected
projected estimates to complete. The former HRT employee stated these reports were only
distributed internally to certain management personnel.

We then went back to the LRT/Tide Project Specialist and inquired as to other versions of the
monthly expenditure report that reflects projected estimates to complete. The LRT/Tide Project
Specialist stated this was reflected in “Tab B” of the monthly financial reports. Upon requesting
to see the report, we were initially advised that the requested information could not be provided.
The LRT/Tide Project Specialist stated the former HRT Senior Vice President for Construction
                                                 29
asked that the title “Internal Working Document” be added to “Tab B” in belief this would
exempt the document from FOIA request. We were unable to identify any language within
Virginia Code Sections 2.2-3700, which would preclude these documents from being released as
part of a FOIA request. With intervention by Senior HRT staff, the documents were
subsequently provided for review.

“Tab B” also referred to as “DR002 Norfolk LRT Project Budget, Cost-to-Date, and Cost-to-
Complete” included footnotes and comments providing additional information or assumptions
used to calculate the estimated LRT/Tide project cost at completion. This document was not
provided to external parties, including the City of Norfolk and FTA. An email dated May 20,
2008 from the former HRT Transit Development Manager to the HRT Senior Vice President for
Development states,

       “…assumptions…are in Tab B – Comment Section. This is the secret Tab that we
       have NEVER submitted to FTA.”

ITEM 1 (d) Recommendation (5 of 31)- We recommend that the HRT Chief Executive
Officer communicate to all HRT staff the requirement to comply fully with the provisions
of the Virginia Freedom of Information Act.

******************************************************************************

CONSULTANT/VENDOR SELECTION PRACTICES

As described in the Executive Summary, the HRT’s current Chief Executive Officer, Philip A.
Shucet, requested the VDOT Office of Inspector General to evaluate HRT’s consultant selection
practices. VDOT Inspector General staff performed detailed testing on the selection practices for
23 consultant/vendors that provided services to Hampton Roads Transit (“HRT”) between fiscal
years 2006 and 2010 (see table below).

As the recipient of federal funds, HRT procurement is subject to federal laws, regulations and
other guidance and is subject to “Triennial Reviews” by the Federal Transit Administration
(“FTA”). The FTA’s Triennial Reviews are performed in accordance with requirements detailed
in federal law including 49 CFR Part 18 (Section 18.36 specifically) and FTA C 4220.1F “Third
Party Contracting Guidance.” HRT procurement is also subject to the Virginia Public
Procurement Act.

HRT’s Procurement Policy and Procedures were developed to comply with federal laws and
regulations as well as state laws, to the extent that state law is not inconsistent with federal law.
While many similarities exist in federal and state law, there are terms contained in federal law
that differ from state law.

Pursuant to FTA guidelines, grantees must procure professional architectural and engineering
(“A&E”) services on the basis of qualifications, rather than price competition. A&E services
include, program management, feasibility studies, preliminary architectural and design,
engineering, construction management, surveying, mapping, or related services as eligible for
qualifications-based procurement procedures, provided the services are directly in support of,
connected to or related to construction, alteration or repair of real property, or lead to such
construction, alteration, or repair of real property. This is consistent with The Brooks Act which
addresses the federal government selection of architects and engineers.

                                                 30
FTA C 4220.1F states, “…Qualifications-Based Procurement Procedures Prohibited. Unless
FTA determines otherwise in writing, a recipient may not use qualifications-based procurement
procedures to acquire other types of services if those services are not directly in support of,
directly connected to, directly related to, or do not lead to construction, alteration, or repair of
real property….”

The Frequently Asked Questions (“FAQ”) section of the FTA website states, “…[w]hile FTA
grantees are required by law to select contractors performing professional services in
connection with construction identified in 49 U.S.C. §5325 on the basis of their qualifications,
Federal law and regulations require Federal grantees to select contractors offering other
professional services on the basis of their cost as well as other factors important to the
grantee…In contrast, even though State law may provide otherwise, DOT laws and regulations
require the use of competitive price evaluation factors in conjunction with the
technical/qualifications evaluation factors for such services as legal, medical, accounting,
etc….”

                                           Vendors Selected for Testing - Summary Results

                                                                            Initial Award         Services Not     Comprehensive
                                                                             Amount or            Competitively      Evaluation of
                                                                            Payments from         Bid / Lack of   Offerors’ Proposals
        VENDOR                           Description of Services           FY06-FY10 (May)        Competition      Not Established
AECOM Consult, Inc.                General Financial Consulting                      $385,000                              X
AECOM Consult, Inc. λ              General Financial Consulting                     * $296,183          X

Alan C. Wulkan                     Community and Business Relations                 $485,205            X
APS, Inc. (Miscellaneous           Armed Security Guards for LRT
Security Contract)                 Vehicles                                               N/A           X
Armand Resource Group, Inc.        DBE Consulting                                    $173,812
D&J Mobile Car and Power           Bus Interior Deep Cleaning and
Washing ¥                          Exterior Bus Washing                             $129,455            X                  X
Dawn Reed                          Nu Ride Program Marketing                        $298,924            X
Dennis F. Sullivan                 Rail Operation Safety                              $30,000           X
Executive Decision                 Customer Service Survey Program                    $29,182                              X
Filler Security Strategies, Inc.   DHS Grant Support Services                         $81,000           X
Givens Services                    Sweeping and Litter Control                        $67,120           X
HDR Engineering, Inc               Architectural & Engineering ("A&E")            $5,689,784                               X
HNTB Corp.                         Security Grant Application Assistance            * $25,000           X
Holland & Knight LLP               Federal Legislative Consulting                   $708,000                               X
Jackie L. Davison                  Recruitment Assistance                             $10,000           X
Jeffrey T. Fykes                   Telework! VA Program Outreach                    $364,907            X
John A. Dash & Associates          Labor Negotiations                               $242,358            X
Patrisha Piras                     ADA Compliance Consulting                        $274,388            X
PBS&J, Inc.                        Program and Construction Mgmt                 $10,000,000                               X
Seventh Point, Inc.                Marketing and Public Relations                 $2,120,000                               X
The Herrity Group, Inc.        PeopleSoft Technical Support                          $109,428           X
                               Strategic and Business Plan
URS Corp.                      Development                                         * $138,242           X
William E. Hay & Company       Recruitment                                           $27,866            X
Williams Mullen                Legal / General Counsel                            $9,550,000                               X
Total Vendors (23)/ Total Procurements (24) λ                                                          16                  8
λ − Vendor listed twice. Initial services reviewed related to Solicitation 09-50477, awarded in the amount of $385,000. In addition,
reviewed non-LRT services processed and paid through the light rail contract with Parsons Brinckerhoff Quade & Douglas, Inc
("PB"). [Note: Although paid through the PB contract, light rail funds were not used.]
¥ - Attributes are reflected in both columns "Comprehensive Evaluation of Offerors' Proposals Not Established" and "Services Not
Competitively Bid," as initial services, Bus Interior Deep Cleaning, were competitively bid; however, later services were received
under an expired purchase order and additional out-of-scope services, Exterior Bus Washing, were subsequently awarded to this
vendor with no competition.
* - Amount reflects the identified non-LRT services processed and paid through light rail contracts with PB or PBS&J.
N/A - Award was on a per hour basis and not a lump sum amount. Contract was subsequently canceled and services were paid
through an existing contract.




                                                                   31
ITEM 2a - Evaluations of Offerors’ Proposals

Although competition was generally sought for solicitations of the higher dollar value service
contracts, procurement files reviewed were generally incomplete and did not always establish an
impartial and comprehensive evaluation of the offerors’ proposals, including that pricing was
considered as an evaluation criterion. VDOT Inspector General staff performed a detailed
review of nine procurements which were competitively bid (see table below). Seven of these
procurements were solicited as competitive proposals and two were solicited as qualifications-
based procurements. The qualifications-based procurement method, which does not consider
price as an evaluation factor, is required for the solicitation of architectural and engineering
services. All other competitive procurement methods require price to be considered as an
evaluation criterion.

                                                                                                                  Comprehensive      Documentation Did Not
                                                                                                                    Evaluation of     Support that Pricing
                         Solicitation   Solicitation                             Type of         Initial Award   Offerors’ Proposals was Considered as an
       VENDOR             Number           Date      Description of Services   Procurement          Amount        Not Established     Evaluation Criterion
                                                     General Financial          Competitive
AECOM Consult, Inc.       09-50477      3/13/2009 Consulting                     Proposal            $385,000            X                    X
                                                                               Qualifications-
HDR Engineering, Inc      08-49947      12/14/2008 A&E                            Based            $5,689,784            X                   N/A
                                                   Federal Legislative          Competitive
Holland & Knight LLP       39552         8/13/2006 Consulting                    Proposal            $708,000            X
                                                   Program and                 Qualifications-
PBS&J, Inc.                39541          3/1/2006 Construction Mgmt              Based           $10,000,000            X                   N/A
                                                   Marketing and Public         Competitive
Seventh Point, Inc.       09-50625       4/11/2009 Relations                     Proposal          $2,120,000            X                    X
                                                   Legal / General              Competitive
Williams Mullen           08-48646       7/2/2008 Counsel                        Proposal          $9,550,000            X                    X
Armand Resource                                                                 Competitive
Group, Inc.               09-50495      3/26/2009  DBE Consulting                Proposal            $127,971
D&J Mobile Car and                                 Bus Interior Deep            Competitive
Power Washing              60806         6/7/2006 Cleaning                       Proposal             $1,074 *           X                    X
                                                   Customer Survey              Competitive
Executive Decision          08-020708   02/01/2008 Program                       Proposal            $33,150           X                     X
Total Vendors (9)                                                                                                      8                     5
N/A - Qualifications based procurements do not include pricing as an evaluation criterion.
* - Initial purchase order amount based on test cleaning and never increased for contemplated services. As of February 16, 2010, $80,930 was paid against
this purchase order.



Eight (89%) of the nine procurement files reviewed did not adequately establish that an impartial
and comprehensive evaluation of the offeror’s proposals occurred. In five (71%) of seven
competitive proposal procurements reviewed, there was no documentation to support that pricing
was considered as an evaluation criterion. In addition, procurement files frequently either did
not include any detailed technical evaluations (Evaluation Score sheets) or did not include
detailed technical evaluations from all evaluation panel members. The procurement files also did
not include documentation of formal meetings of the evaluation panel.

Examples of procurement files that did not establish that an impartial and comprehensive
evaluation of the offerors’ proposals occurred include:

     •     Solicitation 39552, Federal Legislative Consultant (awarded to Holland & Knight LLP) –
           The procurement files contained no detailed technical evaluations (Evaluation Score
           sheets), no documentation of formal meetings of the technical evaluation panel to discuss
           the various proposals, and no documentation of a formal meeting in which the vendor
           was selected. This is especially relevant given that the composite ranking, which
           includes both technical aspects and price, had the selected vendor ranked third. This
           vendor had a technical ranking of one and a price ranking of five (one being the highest).


                                                                           32
    A procurement summary written to the file by the Procurement Director identified the
    vendor selected; however, there was no date indicating when this summary was prepared.
    Language included in the procurement summary served to minimize positive aspects of
    the two vendors who were ranked higher on the composite ranking than the selected
    vendor. Such language included "…offered option pricing with minimal or no escalation
    in the option years, which raised a concern that the value of their services might diminish
    in the out years…" and "…having as (sic) slight edge with more favorable pricing…."
    These two vendors had a technical ranking of number 3 and number 2 respectively with
    prices $300,000 (42%) and $265,000 (37%) below the selected vendor.

    Additional justification included in the procurement summary noted as a major concern
    that HRT was well into the process of seeking federal funding for construction of the
    light rail line, and that changing the consultant carried a significant risk of disrupting the
    relationships the incumbent vendor had established. The above justification implies a
    restriction to full and open competition, and indicates that, if established relationships
    developed by the incumbent were critical at this moment in time, a sole source
    procurement should have been pursued.

    VDOT Inspector General staff also asked whether there was any consideration of
    reducing the term of the contract, since the timing of the procurement was not optimal
    and resulted in a restriction to competition (Commission approved the base one-year
    contract as well as all four one-year options in November 2006). The Procurement
    Director said he believes this contract will continue through all option years.

    The procurement files did not document discussions or negotiations with any of the other
    vendors, and there was no documentation of any price negotiations with the selected
    vendor. Internal HRT guidance regarding the Evaluation Process for RFPs states, “…[a]t
    this point, there may be a clear winner – a highly qualified firm with a low price that
    meets or exceeds all our needs. But this is rare. In the vast majority of cases, further
    evaluation will be required. On all major proposals, discussions and negotiations should
    be held with the short-listed firms….”

•   Solicitation 08-48646, General Counsel/Legal Services (awarded to Williams Mullen) -
    Detailed technical evaluations were not on file for three of the four identified panel
    members. Two panel members did not submit any form of summary scoring, and price
    was not considered as an evaluation criterion. The procurement summary written by the
    Procurement Director stated, “[t]he technical proposals were evaluated by the
    Commission panel; however there was little response to requests for completion of the
    evaluation…Although no formal documentation was received from the panel, the
    Director of Procurement was informed that the panel had selected Williams Mullen for
    the award….”

    This was not a qualifications-based procurement (consistent with federal laws and
    regulations). However, the procurement files included a memorandum from the
    Procurement Director to the four evaluation panel members (Commissioners), which
    supported that selection of the vendor occurred prior to the consideration of pricing. The
    Request for Proposal (“RFP”) stated this was a competitive source selection based on
    best value and that price would not be evaluated separately. The RFP stated, “…Upon
    completion of the technical evaluations, the pricing proposal will be compared with the
    technical benefits offered, with the intent of obtaining the best combination of technical
    capability and price effectiveness….” The sole panel member who prepared and
                                             33
    submitted detailed technical evaluations gave the competing vendor an average rating of
    “Exceeds.” Internal HRT guidance regarding the Evaluation Process for RFPs states,
    “…[a]t this point, any Unacceptable proposals will be eliminated. Based upon the
    remaining proposals (the short list), the panel may ask proposers for clarifications of any
    unclear or incomplete items...Once the initial round of scoring is completed, panelists
    will receive the pricing proposals….” As a result of having multiple vendors with
    acceptable proposals, pricing should have been reviewed and considered in the selection
    of the vendor.

    Additional bias was introduced into the selection process, by placing too much emphasis
    on the incumbent's prior history with and intimate knowledge of HRT. The detailed
    technical evaluation included several references to the incumbent's history with and
    intimate knowledge of HRT and its needs. The first two sentences under Firm
    Qualifications and Resources state, "Has unequalled knowledge of HRT, its history, and
    its needs. Has demonstrated excellence in representing HRT and its predecessor for
    many years….” The comment under Firm's Commitment to the Betterment of its
    Profession and the Transit Industry reads, "Has an unequalled commitment to public
    transportation, demonstrated by its representation of HRT and its predecessor agency for
    over three decades.”

    Any incumbent with decades of service to an organization will have knowledge that no
    other firm possesses. Using such incumbent knowledge as a focal point of the evaluation
    significantly restricts competition. The HRT Procurement Policy and Procedures Manual
    states, “[s]ome of the situations considered to be restrictive of competition includes, but
    are not limited to…The use of specification requirements and evaluation criteria which
    unnecessarily favor an incumbent contractor.”

•   Solicitation 09-50477, General Financial Consulting (awarded to AECOM Consult, Inc) -
    The procurement files contained no detailed technical evaluations, and price was not
    considered as an evaluation factor. The only documentation in the procurement files to
    support that an evaluation of the offerors’ proposals occurred was a memorandum from
    the Procurement Director, dated April 27, 2009, with the subject heading “First Meeting
    of Evaluation Panel.” The memorandum stated that, after discussion of the two
    proposals, the panel reached a consensus that the proposal of one vendor did not
    sufficiently address the breadth of the scope sought by HRT. The memorandum further
    stated that this vendor’s area of expertise was primarily obtaining debt financing for
    public entities with dedicated sources of funding, which was not the case with HRT.

    The Procurement Director advised VDOT Inspector General staff that no individual
    evaluations were prepared and no scoring took place, as only one vendor was deemed
    qualified. However, in discussions with HRT personnel, VDOT Inspector General staff
    determined that detailed technical evaluations had been prepared and submitted to the
    Procurement Director by at least one panel member. Although this employee did have
    the selected vendor rated higher on her technical evaluation, the vendor categorized as
    not qualified in the above-referenced memorandum was rated at the level of
    “Acceptable.” Internal HRT guidance regarding the Evaluation Process for RFPs states,
    “…[a]t this point, any Unacceptable proposals will be eliminated. Based upon the
    remaining proposals (the short list), the panel may ask proposers for clarifications of any
    unclear or incomplete items...Once the initial round of scoring is completed, panelists
    will receive the pricing proposals….”

                                            34
    VDOT Inspector General staff inquired of another panel member, the former HRT Senior
    Vice president of Finance, regarding this solicitation. This individual advised VDOT
    Inspector General staff that based on his recollection, he had prepared evaluations, and
    that it had been difficult to decide which vendor to select. A rating of “Acceptable” by
    one panel member and the recollection of another that it had been a difficult decision
    were not consistent with the exclusion of the second vendor as unqualified.

    The RFP stated the solicitation was being conducted on the basis of competitive
    proposals, with award based on the best combination of technical expertise and pricing.
    Consequently, pricing should have been reviewed and considered in the selection of the
    vendor.

    Previous to this solicitation, the selected vendor had been providing services to HRT
    through the Norfolk Light Rail Project Final Design contract.

•   Solicitation 08-49947, Virginia Beach AA/DEIS Consultant (awarded to HDR
    Engineering, Inc) – According to HRT staff, the former HRT President and Chief
    Executive Officer, who was not identified as being on the evaluation panel, attended the
    second meeting of the evaluation panel and raised concern regarding a vendor’s
    qualification for the project. There was no documentation in the procurement files to
    support the former HRT President and Chief Executive Officer reviewed or evaluated any
    of the proposals. As such, the incidental participation is considered outside the normal
    process.

    The issues raised by the former HRT President and CEO were outside the immediate
    procurement and related to possible future litigation against one vendor for earlier design
    work. The concern was raised that, if HRT ultimately went to court arguing that there
    were deficiencies in the vendor’s work, the subsequent hiring of this same vendor for the
    same type of work on another project could harm HRT’s case. There were only two
    vendors under consideration for this contract. Prior to this meeting and the comments by
    the former HRT President and Chief Executive Officer, this vendor received scores that
    were either even or slightly above the firm ultimately selected.

    There was no documentation in the procurement files to support any analysis regarding
    the likelihood of future litigation against this vendor or what impact rehiring this vendor
    would have on any potential case. There was also no documentation to support that this
    issue was ever discussed with HRT’s legal counsel. The HRT Procurement Policy and
    Procedures Manual states, “…[s]ome of the situations considered to be restrictive of
    competition includes, but are not limited to…Any arbitrary action in the procurement
    process….”

•   Solicitation 39541, Program Management/Construction Management Services (awarded
    to PBS&J, Inc) - None of the official panel members who prepared individual evaluations
    and participated in the Evaluation Summary Scoring were registered architects, engineers
    or surveyors. The HRT Procurement Policy and Procedures Manual states, “…[a]
    Contractor Evaluation Board (hereinafter CEB) shall be convened for the purpose of
    selecting proposed contractors for the performance of A&E or related services…The
    chairperson and voting members should be registered architects, engineers or surveyors
    and have experience with Commission-related acquisition matters to the greatest extent
    possible….”

                                            35
       In addition, the procurement files for this solicitation did not accurately reflect the
       individuals involved in the evaluation process or include all evaluations submitted to the
       Procurement Director. The procurement summary, which was prepared by the
       Procurement Director, stated that two panel members dropped off the panel. However, in
       discussions with HRT personnel, VDOT Inspector General staff determined the two
       employees who reportedly dropped off the panel were key employees in this solicitation
       and had involvement throughout the evaluation process. One of these employees, the
       designated Project Manager, advised VDOT Inspector General staff that she had
       reviewed the initial proposals, attended vendor interviews, and submitted Evaluation
       Score sheets to the Procurement Director. The evaluations prepared by this employee
       were not included in the procurement files and were not included in the Evaluation
       Summary Scoring.

       The other individual who reportedly dropped off the panel was the Chief Engineering
       Officer. Although this individual was the only panel member who had a background in
       and experience with construction management, there were no evaluations or score sheets
       from this individual in the file. In light of the size and importance of this contract to the
       organization, the level of reported turnover and addition of panel members (including the
       former HRT President and Chief Executive Officer) were considered unusual by VDOT
       Inspector General staff.

The HRT Procurement Policy and Procedures Manual states, “[t]he process and outcome of the
evaluations shall be fully documented” and “[t]he Commission will have written selection
procedures that ensure fair, unbiased evaluation of competing offers for all types of competitive
procurement transactions.” In addition, federal law and HRT’s Procurement Policy and
Procedures Manual both require price or cost to be included as an evaluation factor in every
source selection (excluding qualifications-based procurements).

Without ensuring that the evaluation process is impartial and comprehensive, including
consideration of pricing, HRT has no assurance they receive the most advantageous price for
services. Furthermore, vendors who do not view HRT’s evaluation process as being impartial or
perceive that they did not receive adequate consideration could become discouraged and decline
to bid/propose on future work. Fewer interested vendors could result in restricted competition
and increased cost for future HRT service procurements.

ITEM 2 (a) Recommendation (6 of 31)- We recommend the HRT Chief Executive Officer
ensure that solicitation and subsequent evaluations of offerors’ bid/proposals are
conducted in an impartial and comprehensive manner, including consideration of pricing
as an evaluation criterion where required. We also recommend the HRT Chief Executive
Officer, through the Director of Procurement, ensure that procurement files are complete
and provide a complete background, including the basis for each step in the process and
for the final decision.


ITEM 2b – Lack of Competition

Our review disclosed HRT staff procured services without seeking or obtaining the level of
competition contemplated by federal law [49 USC Sec. 5325 (a)], state law (Virginia Code
Section 2.2-4300 et. Seq.) or HRT’s Procurement Policy and Procedures Manual (Part A, Section
4 entitled “Full and Open Competition”), which requires full and open competition to the
maximum extent possible. Specifically, 16 (67%) of 24 procurements were performed without
                                             36
seeking competitive bids and the following issues were identified (see below table for summary
of each procurement).

          •      Services obtained without involvement or knowledge of Procurement Department.
          •      Services obtained under expired purchase orders or contracts.
          •      Sole Source procurements lacked adequate support or justification.
          •      Services improperly obtained through temporary employment agreements.
          •      Services (non-LRT) improperly obtained through light rail contracts.
                                                                                               Expired      Sole Source                Services
                                                             Services Not      No Involvement Contract        Lacked      Improper Use Obtained
                              Payments from                  Competitively      or Knowledge     or          Adequate     of Temporary through
                               FY06-FY10         Type of     Bid / Lack of     of Procurement Purchase       Support or    Employment Light Rail
         VENDOR                  (May)         Procurement   Competition         Department     Order       Justification Agreements Contracts
AECOM Consult, Inc.               * $296,183      None             X                                                                          X
Alan C. Wulkan                     $485,205       None             X                  X                                         X

APS, Inc. (Miscellaneous
Contract)                               N/A       None             X                  X
D&J Mobile Car and
Power Washing                      $129,455       None             X                                X
                                               None /Sole
Dawn Reed                          $298,924     Source ^           X                  X             X            X
Dennis F. Sullivan                   $30,000      None             X                  X
Filler Security Strategies,
Inc.                                 $81,000   Sole Source         X                                             X
Givens Services                      $67,120      None             X                  X             X
HNTB Corp.                         * $25,000      None             X                  X                                                       X
Jackie L. Davison                    $10,000      None             X                  X
Jeffrey T. Fykes                    $364,907      None             X                  X
John A. Dash &
Associates                          $242,358      None             X                  X             X
Patrisha Piras                      $274,388    None               X                  X                                         X
                                             Sole Source/
The Herrity Group, Inc.             $109,428   None ^                X                             X            X
URS Corp.                         * $138,242    None                 X                                                                         X
William E. Hay &
Company                            $27,866       None                X                  X
Total Vendors/Procurements (16)                                      16                11          5            3               2              3
* - Dollar amount of non-LRT services obtained through light rail contract with PB or PBS&J.
^ - Note: more than one procurement method is reflected. For example, with Dawn Reed, initial services were not competitively bid, while later
services were procured through sole source.
N/A - Contract was subsequently canceled and services were paid through an existing contract.



Examples of services obtained without adequate competition include the following: (NOTE: The
procurement of services from a specific vendor may be identified with more than one of the
following categories. For example, the initial “sole source” procurement of the Herrity Group is
identified in our review as not being adequately supported/justified and services received from
the Herrity Group were also identified as being charged against expired contracts or purchase
orders):

     •     Services obtained without involvement or knowledge of Procurement Department -
           Our review identified eleven instances where services were procured through preferred
           individuals or vendors without putting the services out for competitive bid. VDOT
           Inspector General staff was unable to locate any documentation to support that the
           Procurement Department had been consulted or had knowledge of these procurements.

           For example, Jackie Davison provided recruitment services to fill the Vice President of
           Planning position and was paid a lump sum fee of $10,000. A letter from Jackie Davison
           to HRT documents that the former HRT President and Chief Executive Officer directly

                                                                       37
    facilitated the services of Jackie Davison. The vendor was tasked with (1) reviewing
    resumes provided by HRT in order to assess the background, experience and other
    qualifications of the candidates, (2) providing a list of the top four candidates, (3) making
    a recommendation as to the top candidate and (4) providing a list of interview questions.
    There was no documentation on file to support that these services were competitively bid.

    Internal email documents demonstrate HRT personnel had knowledge that the method in
    which these services were procured violated federal procurement laws. An email from
    the HRT Chief Grants and Budget Officer to the former HRT Senior Vice President of
    Finance, with a copy to the HRT Vice President for Administration states, “…is
    anticipating a $15,000 recruitment expense for filling the VP of Planning position. The
    recruiter they are utilizing was not secured through a federal compliant procurement
    process and as a result she was directed by Mr. Townes to work with Finance to ensure
    that no federal dollars are applied to this procurement.” State law as well as HRT’s
    procurement policies and procedures also require procurements to be conducted in a
    manner providing full and open competition to the maximum extent possible.

•   Services obtained under expired purchase orders or contracts - Our review identified
    five instances where procurement of services was effected with vendors under expired
    purchase orders or contracts.

    One such occurrence involved the vendor John A. Dash & Associates, who provided
    labor negotiation services and was paid for services totaling over $242,000 from July
    2005 to June 2010. The original contract, #23738, dated November 15, 2002, included a
    period of performance for 18 months to expire May 15, 2004. HRT staff entered into
    three separate contract modifications which extended the contract period from May 15,
    2004 to March 31, 2006. From July 1, 2006 to June 8, 2010, this vendor was paid
    $189,441.

    There was no mention of any option periods in the contract. Consequently, the
    modification to increase the term of the contract represented a non-competitive
    procurement which should have required adequate sole source justification. The
    procurement files did not contain any sole source justification. HRT Procurement Policy
    and Procedures Manual states, “The option quantities or periods must be defined in the
    solicitation; contained in the offer upon which a contract is awarded; and evaluated as
    part of the initial award process.”

•   Sole Source procurements lacked adequate support or justification - Our review
    identified three instances where sole source procurements were used to obtain preferred
    vendors without adequate support or justification.

    One such occurrence involved the vendor Filler Security Strategies, Inc., which provided
    grant support services and was paid for services totaling $81,000 over an approximately
    two year period from February 2008 to May 2010. An internal email dated February 7,
    2008 supports that prior to receiving services through a sole source procurement, this
    vendor performed similar work for HRT the previous year as a subcontractor under the
    company HNTB.

    The sole source justification for this procurement included language such as: there is
    simply no other firm that is as readily available, knows HRT’s issues and priorities and
    has the expertise in DHS competitive grant programs and procedures…Josh Filler’s
                                            38
    qualifications and direct past experience in working with HRT make him uniquely
    qualified, and given the tight deadlines involved, there is simply no time to find any
    consultant that can provide the proven depth and breadth of knowledge that FSS can
    provide.

    In analyzing the above sole source justification, VDOT Inspector General staff
    determined none of the information provided supports why only one source was
    practicably available. References to past work and a good job done by a vendor in past
    work is not adequate justification for a sole source procurement. Comments such as
    “there is simply no other firm that is readily available” and “there is simply no other firm
    that has the expertise in DHS competitive grant programs” were not supported.
    References to tight deadlines and “there is simply no time to find any consultant that can
    provide the proven depth and breadth of knowledge that FSS can provide” do not provide
    adequate justification for a sole source procurement, except in cases of emergency.

    HRT’s Procurement Policy and Procedures Manual Section 5.9.2 states, “[p]rocurement
    by noncompetitive proposals may be used when only one source is practicably available
    and the award of a contract is infeasible under small purchase procedures, sealed bids,
    or competitive proposal….” The Manual also states, “If the only justification for using
    sole source procurement is based on the lack of sufficient time to complete the process of
    competitive sealed bids or competitive negotiated proposals, the contracting officer shall
    not award a contract on a sole source basis unless a legitimate emergency, as defined in
    this chapter, exists with respect to the need for the supply, service, or construction being
    procured. Sole source procurement shall not be justified on the basis of any of the
    following circumstances: The lack of adequate advance planning for the procurement of
    the required commodities, services, or other items….”

    When VDOT Inspector General staff inquired of the contract project manager as to
    whether anyone else other than Filler Security Strategies, Inc., could perform this type of
    work, the project manager stated perhaps, but this vendor was the only one she was aware
    of that had the necessary expertise. The project manager advised VDOT Inspector
    General staff that she did not create the original sole source justification. However,
    whenever HRT needed the services of this vendor, she just took the prior sole source
    justification and updated it to reflect the current grant year information.

•   Services improperly obtained without competition through temporary employment
    agreements - Our review identified two instances where services were procured through
    preferred individuals or vendors by contracting with them as temporary employees rather
    than seeking competition. Both individuals, who functioned in the capacity of
    independent contractors, lived in other states and each either ran or was a managing
    partner in a consulting firm.

    One of these individuals, Alan Wulkan, was a managing partner of a company named
    InfraConsult, LLC located in Scottsdale, Arizona. This individual was paid at a rate of
    $250 per hour and received payments totaling $485,204 over a two and a half year period
    from September 7, 2006 to February 26, 2009. Although services from this individual
    were contracted through the use of multiple temporary employment agreements,
    payments were not processed through the payroll system. Instead, payments to this
    individual were reflected on IRS 1099 forms similar to other independent contractors
    who perform work for HRT.

                                            39
    HRT personnel could not explain or justify why the services provided by Mr. Wulkan
    could not have been secured through competitive bid. In addition, InfraConsult, LLC is a
    Delaware domiciled Limited Liability Corporation (“LLC”) that was not registered with
    the Virginia State Corporation Commission (“SCC”) to operate in Virginia during the
    period from 2006 to 2009.

•   Services (non-LRT) improperly obtained through light rail contracts - Our review
    identified that HRT staff used light rail contracts to obtain non-LRT services from
    preferred vendors without seeking competition. These services were not paid for with
    light rail funds.
    For example, URS and AECOM were awarded and paid over $430,000 in non-LRT
    related tasks under the PB Norfolk Light Rail Project Final Design contract. These
    services were considered as “Optional Services” and were not included in the base
    contract amount.

    Section 14 entitled “Contract Options” and Section 10.6 entitled “General Financial
    Assistance Services” included vaguely written contract language that was loosely related
    to these services. However, the “optional tasks” under Section 14 and related prices were
    not negotiated/established as part of the contract negotiations.

    An internal document dated October 4, 2005 from HRT’s legal counsel states,
    “[r]egarding the additional work that is described as ‘Contract Options’ in part 14.0 of
    the SOW, the RFP leaves too much about the type of contract and pricing basis to be
    determined later. By deferring the evaluation of option prices until after award, HRT is
    designating the GEC as the sole source for the options without any competition. This
    procedure is contrary to FTA guidance. The FTA requires that HRT evaluate the
    offerors’ option prices ‘in order to determine contract award.’”

    The memorandum went on to state, “…HRT should endeavor to describe as many of its
    optional requirements as possible with particularity so that fixed prices for these projects
    can be negotiated in this procurement. For those optional items that HRT cannot define
    adequately for meaningful fixed-price competition, I suggest that HRT attempt to identify
    the services that will be required to perform the tasks and negotiate the relevant labor
    rates during the contract negotiations. Then the option can be awarded based on agreed
    estimates of the number of hours required to perform the tasks using the negotiated labor
    rates.”

    Internal documents reviewed by VDOT Inspector General staff support that some of this
    advice was not followed by the Senior Vice President for Development. The Request for
    Proposal was revised to incorporate some of the concerns identified by legal counsel.
    However, during the contract negotiation process, an HRT consultant, with the approval
    of the Senior Vice President for Development, contacted the bidder directly and provided
    instruction that submitted pricing was to be related to tasks included in the base contract
    amount. These instructions were not consistent with previous instructions issued through
    the Procurement Department and did not reference pricing on Optional Tasks listed in
    Section 14 of the Scope of Services. The initial pricing proposal, as well as the best and
    final offer submitted by the vendor, did not include any reference to tasks or pricing
    under Section 14 of the Scope of Services. The Director of Procurement advised VDOT
    Inspector General staff that pricing for these services was not negotiated as part of the
    contract.

                                            40
       HRT Procurement Policy and Procedures Manual states, “In order to meet the
       requirements of this regulation for full and open competition, the option must have been
       evaluated as part of the initial competition and be exercisable at an amount specified
       from the terms of the basic contract.”

       Consequently, services under Section 14 of the scope of services were not competitively
       bid and would have had to comply with the requirements for noncompetitive
       procurement. There was no documentation of sole source justification in the files for
       work performed under Section 14 of the scope of services. As of June 29, 2010, HRT
       had authorized optional tasks under Section 14 of the scope of services totaling
       $1,133,109 of which $138,242 related to non-light rail tasks.

       In relation to optional tasks authorized under Section 10.6 of the scope of services
       entitled “General Financial Assistance Services”, labor classifications and rates were
       negotiated as part of contract negotiations. However, labor rates negotiated as part of the
       contract award varied from those used when individual task orders/ modifications were
       authorized. Also, in light of the significant variances in the labor classifications between
       those negotiated in the pricing proposal and those used when individual task orders/
       modifications were prepared, meaningful analysis by VDOT Inspector General staff was
       not possible.

       Furthermore, the contractual relationship relative to Section 10.6 of the scope of service
       was between HRT and PB. However, the documentation VDOT Inspector General staff
       reviewed indicated that HRT bypassed PB and dealt directly with AECOM. PB’s only
       involvement in most of the services provided by AECOM was to process paperwork,
       including the vendor’s invoices, so that the vendor could be paid through the PB contract.

ITEM 2 (b) Recommendation (7 of 31)- We recommend the HRT Chief Executive Officer
take appropriate action to ensure compliance with federal and state procurement laws and
internal procurement policies and procedures regarding full and open competition. At a
minimum, such activities should include required organization-wide training of all
management and administrative personnel involved with procurement activities. We also
recommend the HRT Chief Executive Officer study current federal, state, local and
internal procurement laws, regulations, policies and procedures and ensure that HRT is
appropriately complying with the correct statutory authority for particular procurement
situations.


ITEM 2c - HRT Board of Commissioners Approval

HRT staff did not notify the Board of Commissioners (“Board”) of all contracts requiring the
Board’s approval, occasionally took actions to prevent contracts from going to the Board, and
did not always provide timely updates to the Board when approved contract amounts were going
to be exceeded. The HRT Procurement Policy and Procedures Manual states that no contract for
goods and services, if the aggregate or sum of all phases is expected to exceed $50,000 ($30,000
for professional services), may be awarded without the advance written approval of the HRT
Board of Commissioners.

VDOT Inspector General staff identified several different instances where services in excess of
$50,000 were received but were not formally presented to the Board of Commissioners for
approval. These included situations where (1) vendors were engaged under expired contracts or
                                              41
purchase orders, (2) contracts were entered into without the knowledge or participation of the
Procurement Department, (3) purchase orders were issued in amounts significantly below the
value of services received, (4) vendors were improperly engaged under temporary employment
agreements, and (5) non-LRT services were improperly obtained through the PB Norfolk Light
Rail Project Final Design contract.

When services were initially received from one vendor, Alan Wulkan, HRT staff took deliberate
steps to avoid obtaining Board approval of these services. This vendor received payments
totaling $485,204 over a two and a half year period from September 7, 2006 to February 26,
2009. The first two contracts and first contract modification with this vendor were intentionally
established for time periods of less than five months and at a total cost of $50,000 in order to
keep it within the President/CEO’s signatory authority. The vendor sent an email to the HRT
Senior Vice President for Development stating, “Since Mike has $50,000 in signature authority, I
was not sure if an invoice showing a $100,000 contract amount causes you problems. Per our
discussion a couple of weeks ago I believe we will need to amend the contract every three
months or so.” The HRT Senior Vice President for Development responded that “Showing a
$100K contract amount would be a problem, so you need to continue to show $50K.”

In relation to other contracts reviewed (39541 for Program Management/Construction
Management Services and 09-50477 for General Financial Consulting Services), VDOT
Inspector General staff identified instances where HRT staff delayed updating the Board when
contract modifications or task orders caused the Board-authorized contract amounts to be
exceeded. For example, modification number 1 to the Program Management/Construction
Management Services contract was for $8.5 million, which increased the total contract amount to
$16.8 million at a point in time when the Board had only authorized an amount not to exceed $10
million on this contract.

Contract modification number 1, dated December 20, 2007 and entitled “Construction
Management Services,” was approved by the former HRT President and Chief Executive
Officer. Based on our review of the procurement file, HRT Board of Commissioners meeting
minutes and discussions with HRT staff, Board approval was not obtained. When modification
number 1 was signed in December 2007, HRT procurement policy required the Board to approve
award actions and modifications of $50,000 or more. Current HRT procurement policy and state
statutes require Board approval when the cumulative value of any contract's change orders
exceeds 25% of the contract's initial value or when a single change order exceeds $50,000,
whichever is greater. In neither of these situations did the former HRT President and Chief
Executive Officer have the authority to approve a contract modification of this magnitude.

Contract modification number 1 was rescinded approximately three weeks later and replaced
with contract modification number 2 in the amount of $1.7 million, which brought the total
contract value up to $10 million, the exact ceiling amount approved by the Board. However,
contract modification number 2, dated January 14, 2008, referenced the same proposal for
services totaling approximately $8.5 million.

The Board was not notified of the need for additional funding under this contract until December
11, 2008 and then only in the amount of $2.8 million. The Program Management/Consultant
Management contractor submitted letters to HRT on May 8, 2008 and September 23, 2008
requesting HRT seek Board approval for the needed additional funding. The May 8, 2008 letter
from the PBS&J Program Manager to the HRT Director of Procurement with a copy to the HRT
Senior Vice President for Development states,

                                               42
       “…PBS&J and HRT need to agree on an increased budget for services through
       the extended contract period. Our initial contract authorization included $8.3
       million in funding. PBS&J submitted a proposal to HRT on December 13, 2007,
       that indicated an additional $8.5 million would be required to initial construction
       management services. In January 2008, HRT authorized $1.7 million for
       construction management, bringing the total contract authorization to $10
       million. The financial analysis presented to Jayne Whitney and John Coard on
       February 22, 2008, indicated depletion of the authorized $10 million in contract
       funds by September or October 2008 at current rates of expenditure…We believe
       an additional $10 million will be required to fund PM/CM activities through
       December 2009….”

Work had been performed in excess of the authorized contract amount by the time HRT
personnel obtained Board approval for additional funding under this contract. According to the
contractor’s records, the $10 million authorized by the Board under this contract had been
expended with services provided through October 31, 2008. Consequently, approximately $1.1
million in work was performed from November 1, 2008 through December 11, 2008 without
approved funding.

HRT advised the Board that a requested increase of $2.8 million was needed to cover four
months of services starting December 1, 2008 and lasting through March, 2009. Services
provided by the contractor through February 28, 2009 exhausted the additional $2.8 million in
funding authorized by the Board and an additional approximately $1.3 million of work was
performed without approved funding from the Board. On April 23, 2009, the Board increased
the available funding by $8.1 million bringing the total contract value to $20.9 million.

ITEM 2 (c) Recommendation (8 of 31)- We recommend the HRT Chief Executive Officer
take appropriate steps to ensure the complete, open, and timely disclosure of contract
matters to the Board. We also recommend the HRT Chief Executive Officer take
appropriate steps to ensure all required Board approvals are obtained in accordance with
applicable federal and state laws and HRT policies and procedures.


******************************************************************************

REVENUE OPERATIONS

ITEM 3 – Revenue Operations

Background

On August 15, 2009, it was determined that bus fare money was missing from the Hampton
Roads Transit (“HRT”) Trolley Base Facility. In September, reconciliations of the fares
collected at the Trolley Base Facility with the funds deposited from the Trolley Base Facility
were subsequently performed for the time period of January 2009 through August 2009. The
reconciliations indicated that approximately $80,000 appeared to be missing.

In February 2010, the Chief Executive Officer (“CEO”) of HRT asked the VDOT Inspector
General to review several issues at HRT. The initial request for the review from the CEO, dated
February 13, 2009, included the objective, “A review of the previously reported theft of $80,000
to assure that the matter was appropriately investigated by HRT, that appropriate disciplinary
                                               43
actions were taken by HRT as a result of the theft and that appropriate and thorough cooperation
was extended to any law enforcement agency that did or is now investigating the theft.” This
letter was published in the media.

Prior to formalizing the objectives, the Inspector General was contacted by the Virginia Beach
Commonwealth’s Attorney and told that they had an active investigation into the missing funds
at the Trolley Base Facility. The Commonwealth’s Attorney requested that the Inspector
General not investigate this matter at the time, as it may compromise their investigation. The
Commonwealth’s Attorney also contacted the CEO of HRT, and it was agreed that the objective
related to the missing funds would be dropped.

As a result, when we formalized the objectives, the response letter to the CEO did not include the
above objective. However, after starting the review at HRT, we identified weaknesses in HRT’s
revenue operations that we felt should be reviewed further, which did not directly relate to the
Commonwealth’s Attorney’s investigation. We have therefore included some recommendations
for the revenue operations function.

Our review focused on documenting the events which occurred relating to the discovery and
disclosure of the missing funds, reviewing studies performed of the revenue operations section
and identifying issues and recommendations for improvement for management.

Our review included reviewing the HRT report documenting their surveillance of the money
room employees, interviewing HRT personnel, reviewing reports and studies conducted relating
to the revenue operations, interviewing Goodman and Company auditors, reviewing Goodman
and Company’s workpapers, observing locations where the fare money is collected in vaults,
observing the money room where the fares are counted, observing the Trolley Base Facility,
reviewing the reconciliations of fares deposited to the fares collected according to the fare
collection system (GFI), reviewing policies and procedures, reviewing documents and audio
tapes of information presented to the Budget and Audit Committee and the Commission,
reviewing employee personnel files, discussing the review with the Virginia Beach Police and
reviewing employee background checks.

In September 2010, we shared a draft report which covered the revenue operations portions of
the review only with the Office of the Virginia Beach Commonwealth’s Attorney. On
September 16, 2010, we were advised, in writing, that the Commonwealth’s Attorney had no
objection to the release of the information contained in the draft report.

Discovery and Disclosure of the Missing Funds

On August 15, 2009, the Manager of Revenue Services suspected that there were missing funds
at the Trolley Base Facility. There was in incident in which he had been informed that the vault
with the money from the Trolley Base Facility was open prior to it reaching the money room.
Because reconciliations were not being performed, he performed a reconciliation of the funds
collected per the GFI system for the Trolley Base Facility to the funds deposited for that day and
determined there was a shortage of $5,333. He suspected that the money room employees who
were transporting the funds from the Trolley Base Facility to the money room to be counted
could have some involvement with the missing funds. He shared this information with the Chief
Accounting Officer, the Human Resources Manager and the Security Manager. A surveillance
operation of the money room collections from the Trolley Base Facility was set up for August
29, 2009.

                                               44
The surveillance team included the Security Manager and two off-duty Norfolk Police Officers,
who worked part-time at HRT. They followed the money room vehicle to the Trolley Base
Facility. The money room employees loaded the vault in the vehicle and departed. The money
room vehicle drove toward the oceanfront, which was a diversion from the normal route back to
the money room. The surveillance team also observed that the money room vehicle was
speeding at times. They continued to follow the vehicle until it arrived at a personal residence
that was later determined to be the residence of one of the money room employees. One of the
money room employees exited the vehicle, went to the right side doors behind the passenger
door, opened those right side doors (presumably to remove something), walked to the house, and
entered it. The surveillance vehicle was parked in such a way that they could not see if the
money room employee removed anything from the vehicle after opening the right side doors.

The Security Manager stated that he and the off-duty Norfolk Police Officers discussed what had
happened at this point. The off-duty Norfolk Police Officers told him that someone should
follow the money room staff for a couple of weeks with the police. They did not see enough to
arrest the money room employees or to get a warrant.

The Security Manager discussed the situation with the former HRT Senior Vice President of
Finance and the Senior Vice President for Operations. It was decided that the Security Manager
would return to the money room and confront the employees. When they returned to the money
room, they confronted each of the money room employees separately. Their stories did not agree
as to what they did after they picked up the funds at the Trolley Base Facility. The money room
employees were suspended for speeding in the money room vehicle and going off their assigned
route.

A reconciliation was subsequently performed of the fares collected according to the GFI system
at the Trolley Base Facility on August 29, 2009 with the fares deposited by the money room. It
was noted that the fares deposited were short by $2,065.

In an email dated September 1, 2009, to the Chief Accounting Officer and the Manager of
Revenue Services, the former HRT Senior Vice President of Finance noted, “To avoid being
cited by our external auditors for a material weakness, we need to monitor daily the GFI data
related to applicable cash counts. This is among the most important internal control mechanisms
and requirements related to Revenue Management.” (Exhibit 1)

In September 2009, the Manager of Revenue Services performed reconciliations of the Trolley
Base Facility for the period of January 2009 through August 2009. He identified approximately
$80,000 in shortages.

After identifying the money room employees working on the days that shortages occurred, a
third employee was suspected in participating in the missing funds. The three money room
employees were terminated in October 2009 for failure to follow policy. Two employees were
terminated for speeding in the money room vehicle and going off their assigned route. The third
was terminated for another issue. None of the employees were terminated for taking the funds.

According to the former Senior Vice President of Finance this matter was discussed with HRT
management in November 2009 and it was the opinion that there was insufficient evidence at
that time to pursue prosecution of the matter.

HRT’s external auditors, Goodman and Company, were notified of the missing funds in
November 2009 by HRT Finance Management during their audit. Interviews of the Goodman
                                       45
and Company Partners on this engagement revealed the following information:
   • As part of their normal audit testing, they are required to ask if anyone is aware of any
      fraudulent activity involving the agency. When one of their staff members asked this
      question at HRT, they were informed of the missing funds.
   • They were not asked by HRT to verify the amount of the missing funds. HRT asked
      them to look at HRT’s work papers to see if they took the correct approach in identifying
      and quantifying the extent of the approximately $80,000 in missing funds.
   • They were not asked to increase their audit testing.
   • They said their audit probably would not have detected this fraud. The standards require
      them to do some test work in this area, but not to the detail that they would have had to
      be looking to find this. Also, even though $80,000 is a large amount of public funds that
      are missing, based on the size of HRT, this would not have been considered a material
      amount.
   • They told HRT to disclose the missing funds to the Budget and Audit Committee,
      because Goodman and Company was required to disclose it to the Budget and Audit
      Committee when they discussed their audit report.
   • They were present at the December 9, 2009 Budget and Audit Committee meeting where
      the missing funds were discussed. This meeting was not open to the public. They
      presented an internal communication to the Committee concerning the missing funds.
      The document noted, “The GFI receivers that were located at the Trolley Base Facility
      that were transported to the money room were not analyzed with GFI reports on a
      consistent basis…While the Commission has strengthened procedures after the fraud was
      discovered, we recommend that these procedures be continually updated and the money
      room cash is analyzed with GFI reports on a daily basis.” (Exhibit 2)
   • Fearing possible legal liability, as there was no ongoing police investigation and the
      employees had been terminated, Goodman and Company did not want to discuss the
      missing funds with the Commission in a meeting that was open to the public.

In an email dated December 18, 2009 to the former HRT President and Chief Executive Officer
and to legal counsel, the former HRT Senior Vice President of Finance blamed the theft on
“collusion, combined with a deviation from established procedures.” He also stated, “However,
while $80,000 is certainly a meaningful sum, Goodman did not consider the situation a
‘reportable condition’ given that collusion was necessary for the loss to have occurred—in other
words, HRT’s policies and procedures were sufficient to avoid this type of loss in all but an
instance of collusion which, obviously, can circumvent any policies and procedures.” (Exhibit 3)

The full HRT Commission was not briefed about the missing funds until the former HRT Senior
Vice President of Finance wrote the Commission in a letter dated January 15, 2010. (Exhibit 4)
The letter noted:
   • “This fraud involved the suspected taking of cash being transported from one of the
        Commission’s outlying locations to its central money room operation.”
   • “Commission staff was able to detect suspicious activity by observing variances beyond
        the norm between GFI fare box software data and the actual cash deposits for the
        outlying facility.”
   • “Staff is pleased the auditors concluded the fraudulent activity did not result from an
        inadequacy of internal controls. Nevertheless, staff has amended its procedures related to
        this specific activity to help preclude possible future instances of fraud, based upon the
        manner in which staff believes the fraud may have occurred. And while staff may take
        comfort that the auditors found no significant deficiencies in procedures or internal
        controls, staff regret the negative attention this matter has drawn to the Commission.”
                                               46
What the letter to the Commission did not mention is that the cash had been taken for an
extended period of time, because the staff was not performing reconciliations of GFI data to
deposit data. The former HRT Senior Vice President of Finance was aware of the importance of
performing these reconciliations. Also, the estimated loss of $80,000 was not mentioned in the
letter.
In addition, it was noted in the letter to the Commission that, “Having the auditors report their
findings relative to this matter – rather than staff providing a report – would provide the
Commission an independent, third party perspective, to include any discussion of possible
inadequacies in management’s internal controls.” Based on our discussions with the auditors,
they did not perform any test work related to the missing funds. Their only involvement was that
they participated in the meeting with the Budget and Audit Committee that included disclosure
of the incident, as required by auditing standards.

HRT management did not adequately disclose the missing funds to the appropriate authorities in
a timely manner. Although the missing funds were identified in late-August 2009 or early-
September 2009, the Budget and Audit Committee, the Chairman of the Hampton Roads
Commission and the Virginia Beach Commonwealth Attorney’s Office did not become aware of
this situation until December 2009 or January 2010.

Once the Chairman of Hampton Roads Commission became aware of this matter in January
2010, he requested that the Virginia Beach Commonwealth Attorney’s Office investigate the
missing funds. During this time period, the Commission also hired Philip Shucet as the CEO of
HRT.

According to HRT Risk Management, a claim has been filed with their bonding company for the
missing funds.

While we agree that there may have been collusion involved in taking the money, the real issue
is that reconciliations of the GFI data to the fares deposited were not being performed. If the
reconciliations had been performed according to policy, the missing funds would have been
detected earlier and the loss would have been mitigated. Clearly, because staff was not
following policies and procedures correctly, which included appropriate internal controls, and
management had reason to know that policies and procedures were not being followed, the loss
of these funds is a direct result of poor management oversight. Because these funds were not
deposited into HRT coffers, the 7 participating localities ultimately bear the burden of these lost
funds.

Revenue Studies

As a result of the missing funds, HRT management realized there were problems in the revenue
operations. They created a Revenue Operations Task Force (ROTF) in October 2009 to evaluate
the unit and make recommendations to improve revenue operations. The ROTF is made up of
staff from various HRT departments. In addition, HRT management asked the American Public
Transportation Association (APTA) in January 2010 to perform a peer review to provide them
with an independent look at the revenue operations. The APTA panel consisted of transit
professionals with expertise in revenue operations and fare collection management systems. In
April 2010, the ROTF issued its report which incorporated the findings and recommendations of
the APTA report that was issued in January 2010.

The ROTF report identified the following high level assessment of the issues relating to the
                                           47
revenue operations (Exhibit 5):
   • Non-compliance with several established policies and procedures
   • Lack of clear guidelines in some cases
   • Inadequate resources and underutilization of existing resources
   • Organizational culture that is accepting of underperformance
   • Productivity losses due to poor division of labor and organizational structure

Some of the most significant issues identified in the APTA report relating to the revenue
operations were (Exhibit 6):
   • It appears there is no current consolidated set of policies and procedures for revenue
       management and no clear formal direction or understanding of functions. Revenue
       operation responsibilities are separated among several functional groups, a practice that
       obscures accountability and ownership of issues, data, and analysis.
   • HRT has opened a system that was originally designed to be a closed fare collection
       system. Cash funds are not logged within the money room, nor is any tracking
       maintained on the system to document trends and past history.
   • Money room employees currently perform multiple functions, both inside and outside the
       money room. The money room has not availed itself of technology and equipment to
       efficiently process, face, and count currency.
   • GFI system knowledge and experience is insufficient in key areas. GFI reports have not
       been analyzed nor actions taken on data provided.
   • There is no internal audit function within HRT. Revenue management operations do not
       have a dedicated analyst.
   • The procurement of contracted revenue collection service needs to be explored further.

Some of the most significant recommendations issued in the APTA and ROTF reports relating to
the revenue operations were:
    • Document all job duties in a policies and procedures manual.
    • Train all relevant staff on the policies and procedures manual.
    • Evaluate consolidating all revenue management functions (operations, maintenance,
        information technology, etc.) under one section.
    • Review the current money room staff functions to determine the most efficient and
        effective use of assignments, and consider outsourcing some functions.
    • Review the potential benefits from technology, equipment and software which might add
        efficiency and reliability to money room functions (e.g. processing dollar bills).
    • Consider reconfiguration of the probing area at the Trolley Base Facility and at
        Headquarters (i.e., locate a GFI receiver and mobile vault in the area).
    • Conduct an inventory and institute control procedures for security critical revenue
        equipment (fare boxes, cash boxes, keys, bullets, etc.).
    • Review GFI systems to determine how they might be reconfigured into a closed system
        as originally intended.
    • Review benefits to be derived from creating a dedicated analyst function within revenue
        management.
    • Define fare box variance thresholds and calculate daily, with an ongoing review of trends
        and appropriate follow-up.
    • Institute protocols for review of GFI reports to monitor potential revenue shortages.

The findings and recommendations in these two reports were made by transit professionals with
expertise in revenue operations and fare collection management systems from other locations, as

                                              48
well as staff involved in HRT operations. Our review identified many of the same findings and
recommendations identified in these reports. We will not repeat those findings and
recommendations in our report, but will instead focus on other issues and recommendations that
we identified in our review that we feel should be brought to the attention of management.

Issues and Recommendations with the Revenue Operations

Inadequate Management Oversight

We determined that the missing funds went undetected for an extended period of time because
no one was reconciling the fare money deposited to the fare money that was collected according
to the GFI data. Procedures were in place for staff to perform the reconciliations two times per
week for all locations where money was collected. However, the reconciliations were not
performed. We determined that the Managers of Revenue Services responsible for performing
the reconciliations from mid-2007 until August 2009 did not perform any reconciliations.

We discussed this with the Chief Accounting Officer and noted the following:
  • The former HRT Senior Vice President of Finance asked him to oversee the role as the
      Manager of Revenue Services during this time period, because the former Manager of
      Revenue Services was transferred to another department within HRT in May 2007.
  • He had staffing issues with the Manager of Revenue Services position.
  • He hired a replacement Manager of Revenue Services on August 6, 2007; however, this
      employee went on military leave August 17, 2007. This employee did not return until
      June 2008.
  • A replacement Manager of Revenue Services was hired on October 22, 2007. This
      employee was moved to another position within HRT in June 2008, once the Manager of
      Revenue Services returned from military leave.
  • In March 2009, the Manager of Revenue Services went on military leave again.
  • A temporary employee was hired in March 2009 to fill the vacant Manager of Revenue
      Services. He was hired full-time as the Manager of Revenue Services on August 17,
      2009.
  • At the time he was asked to oversee the money room, he was not fully aware of how the
      Trolley Base collection process operated.
  • He did not understand the GFI data. He misunderstood GFI’s usefulness.
  • He was aware the Managers of Revenue Services were not adequately trained to use the
      GFI system.
  • He was also aware the reconciliations were not being performed. However, he was not
      concerned, because he thought the information from the GFI system was unreliable and
      of no value.
  • He also noted that they had a shortage of staff when he was overseeing the unit.

In a subsequent interview, the Chief Accounting Officer stated that he was overseeing the role as
the Manager of Revenue Services, with the exception of the GFI information. He said that
responsibility remained with the previous Manager of Revenue Services who transferred to
another department at HRT in 2007. It was that employee’s responsibility to perform the
reconciliations until the subsequent Managers of Revenue Services could be trained.




                                               49
We discussed this with the former HRT Senior Vice President of Finance and noted the
following:

   •   He gave the Chief Accounting Officer the responsibility for managing the revenue
       operations function.
   •   The Chief Accounting Officer never told him that the reconciliations were not being
       performed until after the incident with the missing funds.
   •   The Manager of Revenue Services who transferred to another department at HRT in 2007
       was supposed to continue performing the reconciliations until she was able to train her
       replacement.
   •   He noted that there was subsequently a lot of turnover in the Manager of Revenue
       Services position.

We discussed this with the Manager of Revenue Services who transferred to another department
at HRT in 2007, and noted the following:
    • She worked for the former HRT Senior Vice President for Finance and Administration
      when she was the Manager of Revenue Services.
    • She currently works for the Service Development and Strategic Planning Department.
    • She agreed to train her replacement on using the GFI data to perform fare collection
      reconciliations.
    • She provided training to the three employees hired in her previous position as Manager of
      Revenue Services.
    • She assumed that since they did not come back to her and ask questions, that they were
      performing the reconciliations.
    • Since she was no longer in that section, it was not her responsibility to perform the
      reconciliations.
    • She did not inform anyone that she was no longer performing the reconciliations.
    • She stated that the money room had a separate set of keys from the rest of the facility,
      and that her key to the money room was given to the Chief Accounting Officer in May
      2007. As a result, she did not have access to the money room receipts generated from the
      cash counts that are needed to perform the reconciliations.

We also discussed this with the current Manager of Revenue Services, and noted the following:
  • When he was hired in March 2009, he did not perform reconciliations.
  • He worked on TVM’s (Ticket Vending Machines) at the request of his managers.
  • He was not exposed to GFI until July 2009.

Additional reconciliations of the fares collected with the fares deposited at the Trolley Base
Facility location back to mid-2007 have been performed by HRT personnel. The process of
preparing reconciliations for the Trolley Base Facility for the additional 1 ½ years took HRT
approximately 6 months to complete from when the missing funds were first identified. It
appears the estimate of the amount of the loss at this time is approximately $189,000. (Exhibit 7)
We were told that there were no shortages noted on the reconciliations performed prior to mid-
2007. We were also told that the reconciliations prior to 2007 could not be located.

The Manager of Revenue Services who was performing the reconciliations and was the only
employee who was trained and understood GFI was moved out of the money room in 2007.
There was an understanding between this employee and upper management that she would
continue performing GFI reconciliations, along with her newly assigned duties, until the next
Manager of Revenue Services was trained. Three separate Managers of Revenue Services were
                                             50
hired and each had been provided GFI training; however, there is no evidence that
reconciliations were performed and no evidence that the Chief Accounting Officer ensured these
individuals were performing the reconciliations. The former HRT Senior Vice President of
Finance was not aware that the reconciliations were no longer being performed until the funds
were missing.

The former HRT Senior Vice President of Finance and the Chief Accounting Officer were aware
that the Manager of Revenue Services was responsible for performing these reconciliations.
They also knew there were extended periods of time where the position was vacant. It was their
responsibility to ensure that the reconciliations were being performed.

The Chief Accounting Officer did not monitor the staff to ensure they were trained to perform
the reconciliations and did not ensure that the reconciliations were performed in accordance to
established procedures.

In addition, HRT management did not adequately disclose the missing funds to the appropriate
authorities in a timely manner. Although the missing funds were identified in late-August 2009
or early-September 2009, the Budget and Audit Committee, the Chairman of the Hampton Roads
Commission and the Virginia Beach Commonwealth Attorney’s Office did not become aware of
this situation until December 2009 or January 2010.

We also question the manner in which Goodman and Company was apprised of the missing
funds and potential theft, asked to report it to the Budget and Audit Committee, but not perform
additional work in the area. At best, HRT management failed to clearly ask Goodman and
Company to perform additional test work in this area and draw conclusions related to the internal
controls in the area, and then, they presumptively reported the outcome they wished. Goodman
and Company clearly states that their conclusions on internal controls relate solely to the
preparation of the financial statements.

Clearly, because staff was not following policies and procedures correctly, which included
appropriate internal controls, and management had reason to know that policies and procedures
were not being followed, the loss of these funds is a direct result of poor management oversight.

ITEM 3(a) - (9 of 31) The missing funds at the Trolley Base Facility were not discovered timely
or disclosed timely, because management failed to do their jobs. Fare reconciliations were not
performed for a period of over two years. We recommend that management evaluate the
need for corrective and/or disciplinary action for those employees, currently employed,
who failed to perform their duties.

Revenue Reconciliations

Our review concentrated on the missing funds from the Trolley Base Facility. We did not review
the funds collected from other locations. However, we identified issues relating to collections
from other locations which need to be communicated to management.

For fiscal year 2009, HRT collected approximately $75 million in total revenue. Approximately
$18 million of the total revenue was fares collected, either through customer service sales or
from fare box revenues. Approximately $9 million of the fares collected were counted and
deposited through the money room. Only approximately $500,000 of these fares was from the
Trolley Base Facility.

                                               51
At the beginning of our review, we asked the current Manager of Revenue Services to provide us
with the reconciliations of the fares collected with the fares deposited for all of their revenue
collection locations from 2008 through 2010. We were informed that the reconciliations were
not performed for this time period until the missing funds were identified in August 2009. When
we reviewed the reconciliations, we noted they were for the Trolley Base Facility only. The
Manager of Revenue Services said there were no plans to perform reconciliations that included
all of the revenue locations prior to September 2009. As this was outside the scope of our
review, we did not look into this area.

ITEM 3(b) - (10 of 31) As the missing funds at the Trolley Base Facility occurred prior to
September 2009, we recommend that HRT evaluate the need to perform reconciliations for
collections prior to September 2009, at least on a sample basis, to look for patterns of
shortages at fare collection locations other than the Trolley Base Facility.

ITEM 3(c) - (11 of 31) Our review of the daily reconciliations also noted that ticket vending
machine money, customer service cash, customer service credit card receipts, petty cash and
other miscellaneous funds are co-mingled with the fare collections and combined into one
deposit for the day. We recommend that funds other than fare collections be put in a
separate daily deposit in order to simplify the fare revenue reconciliation process.

ITEM 3(d) – (12 of 31) We also recommend that the other funds (i.e. ticket vending
machine money, customer service cash/credit cards, petty cash) be collected and deposited
separately.

ITEM 3(e) – (13 of 31) Due to the lack of following procedures in cash receipts, we
recommend HRT look at the controls over all cash revenue operations.

GFI System
Based on our discussions with HRT personnel, there seems to be a lack of confidence in the
information generated by the GFI system. One type of fare box requires the bus driver to
reclassify the money collected when bills greater than one dollar bills are collected. We were
told that the bus drivers may not be doing this, which is causing the data collected by the system
to be incorrect. In addition, it does not appear that the staff has the training and experience to
use the system to its fullest extent.

ITEM 3(f) - (14 of 31) We recommend that HRT management review the GFI system and
evaluate implementing any software or hardware that could enhance the performance of
the HRT GFI system.

ITEM 3(g) - (15 of 31) We also recommend that HRT management evaluate the personnel
that will be using the GFI system and ensure that employees are capable of using the GFI
system, and are held accountable for doing so.

The GFI system is the system used to determine the amount of funds which should have been
collected. HRT relies on this information in reconciling the daily fares which were deposited.
As there have been breakdowns in the internal controls and policies and procedures relating to
this area, it is important that the system providing the data concerning the funds that should have
been collected be tested to determine whether it is accurate and reliable.

ITEM 3(h) - (16 of 31) We recommend that management evaluate the need for an audit of
the GFI system at HRT to determine whether it is accurate and reliable.
                                         52
Reorganization of the Revenue Operations Unit

We feel that the issues relating to the weaknesses noted in the operations have been adequately
identified and viable recommendations have been made to resolve the issues in the revenue
operations studies. However, additional guidance and expertise may be needed to implement
these recommendations. HRT staff does not have the qualifications, experience, resources and
time needed to adequately and independently reorganize the revenue operations function in a
thorough and timely manner, while also performing their normal duties. In addition, HRT will
soon be taking on the challenges of revenue operations from the light rail system, which we
recommend be considered when reorganizing the revenue operations unit.

The reorganization should consider items such as:
   • cost benefit analysis to determine whether any or all revenue functions can be
       outsourced;
   • new technology which may increase efficiency and reduce staff size;
   • proper internal control as the unit is being developed;
   • establishment of performance measures by position to ensure work is performed;
   • establishment of processes to ensure the internal controls and policies and procedures are
       followed; and
   • establishment of policies and procedures at a position level, to promote proper training,
       oversight, and continuity of operations.

We reviewed the policies and procedures relating to the revenue operations function and noted
that they were inadequate. Most of the policies and procedures we reviewed lacked detail. Also,
additional policies and procedures are needed to cover such matters as logging the transfer of
fares from the locations to the money room, notifying security personnel and the police
concerning thefts, and for inventorying items such as fare boxes, money bags, keys and bullets.

ITEM 3(i) – (17 of 31) We recommend that HRT consider hiring an independent third
party consultant to assist in implementing the recommendations from each of the revenue
studies.

ITEM 3(j) - (18 of 31) We recommend that HRT document responses to each of the ROTF
and APTA recommendations.

Security

GFI is based on a closed system of collecting fares. This means that no one can access the
money after it is deposited in the fare box until it reaches the money room. HRT has adapted to
a variety of ways of collecting money which has made this an open system in some locations. It
appears that collections are handled differently based on the type of vault used, the location of
the facility, and whether a guard is used.

We reviewed the method in which fares are transported from each location to the money room
and noted there is no consistency. We identified the following methods in which fares are
transported to the money room:

  Location                 How Transported to Money Room
  Headquarters             Security bags by Dunbar

                                               53
  Suffolk                  Cashboxes by Dunbar
  Ferry                    Cashboxes by money room employees
  Ford Plant               Mobile vault (The money room is currently at the Ford plant.)
  Trolley Base Facility    Metal box by the money room employees, with a guard, if going to TVMs
  TVMs                     Cashboxes by money room employees with a guard

We noted that funds are being transferred from the remote locations, such as the Trolley Base
Facility and the ferry, to the money room without the consistent presence of guards. Not only is
this a risk for HRT in that funds can be taken, but it also puts the employee at risk for being
attacked. It was noted that a majority of the missing funds at the Trolley Base Facility occurred
on days in which the guard was not there to transport the funds.

ITEM 3(k) - (19 of 31) We recommend that HRT review the different ways in which funds
are transferred to the money room and develop a consistent method for all locations which
ensures security of the funds and the employees transporting the funds.

Staffing Issues

Our review noted that there have been issues with the revenue operations unit not being
adequately staffed. There was an extended time period in which the prior Manager of Revenue
Services was away on military leave. Two money room employees were terminated in June
2009, and three additional money room employees were terminated in October 2009. In
addition, the employees working in the unit may not be the best suited for the positions. The
ROTF report noted performance issues within the unit. Many of the positions in the revenue
operations unit are paid less than $10 per hour.

ITEM 3(l) - (20 of 31) We recommend that management review the staffing qualifications
of the revenue operations unit to ensure they have adequately qualified employees and an
adequate number of employees to perform the duties of the unit at all times.

The current Manager of Revenue Services stated that they have had difficulty hiring employees
to do the work. This has impacted the performance of the unit. The Manager of Revenue
Services noted that they were unable to pick up money from the remote locations on some
occasions on a daily basis because of a shortage of staff.

ITEM 3(m) - (21 of 31) Management may want to consider using contract employees or
paying more money to get better qualified staff in some of the positions in the revenue
operations.

ITEM 3(n) - (22 of 31) HRT could also prepare a cost benefit analysis of using a
professional security firm, like Brinks or Dunbar, to move vaults. Some banks may also
provide money counting services, and HRT could also consider if there is enough benefit to
outsource some or all of these operations.

HRT does not have a consistent way of handling shortages or thefts of cash. Some personnel are
terminated, while others have been turned over to police.

ITEM 3(o) – (23 of 31) We recommend that Human Resources consider developing policies
to address shortages or thefts of funds and determine what actions should be taken when a
shortage or theft is noted.
                                               54
We reviewed the background checks conducted on several employees recently hired in the
revenue operations unit and noted they were not adequate.

ITEM 3(p) - (24 of 31) We recommend that management consider conducting more
thorough criminal background checks on employees working in the revenue operations.
We also recommend that management keep the requirement that employees must have a
positive credit history report to be hired in the revenue operations unit.

Update-On August 19, 2010, two former HRT employees were indicted by a Grand Jury in
      Virginia Beach on three (3) counts each of Embezzlement, Fraudulent Tax Return and
      Money Laundering involving “missing” HRT funds.

******************************************************************************

ADDITIONAL FINDINGS IDENTIFIED DURING OUR REVIEW

ITEM 4a - Grant Agreement Compliance Management

HRT staff has not effectively monitored grant agreements to ensure compliance with the terms
and conditions of such agreements.

Vehicle Usage

Nineteen HRT employees were improperly using vehicles purchased with federal grant funds
(Section 5307 Program/Flexible Funding) to commute from home to work. In some cases the
vehicles were provided to HRT management staff as a “fringe benefit” of employment with
HRT. The vehicles were requested under line item 11.42.11 entitled “Acquire – Support
Vehicles” and the comments in the grant applications were generally vague and did not address
the planned use of the vehicles.

The Vice President for Administration advised VDOT Inspector General staff that take-home
vehicles were given to employees who held positions that were previously determined to need a
take-home vehicle as well as for senior level management (senior vice presidents and vice
presidents) and LRT/Tide management. Take-home vehicles were being used as a compensation
factor in hiring senior level management. New hires would sign an employee agreement which
reflected they would receive a take-home vehicle and it could be used for commuting purposes.

The FTA Master Agreement states the Recipient agrees that project costs eligible for federal
participation must comply with the following requirements to include OMB Circular A-87 “Cost
Principles for State and Local Governments” Revised. OMB Circular A-87 Revised states,
“Goods or services for personal use: Costs of goods or services for personal use of the
governmental unit's employees are unallowable regardless of whether the cost is reported as
taxable income to the employees.” OMB Circular A-87 Revised also states, “To be allowable
under Federal awards, costs must meet the following general criteria: a. Be necessary and
reasonable…In determining reasonableness of a given cost, consideration shall be given to: a.
Whether the cost is of a type generally recognized as ordinary and necessary for the operation of
the governmental unit or the performance of the Federal award.” NOTE: Motor vehicles are
considered “goods” under federal regulations.


                                               55
Using a vehicle to commute from home to work is a personal use and is not permissible under
OMB Circular A-87 Revised. The nineteen vehicles were purchased at a cost of approximately
$280,000. An analysis performed by HRT staff indicated HRT’s annual cost of providing take-
home vehicles to the nineteen employees referenced above totaled approximately $130,000.
This included depreciation on the vehicles, maintenance, fuel, and the employer’s share of FICA
and Medicare taxes on the tax value of the take-home vehicles.

Donated Assets

VDOT Inspector General staff also identified another grant compliance issue involving the
disposition of surplus property acquired with federal Grant funds. Specifically, our review
determined that HRT staff did not maintain documentation to support the “fair market value” of
surplus property “donated” by the former HRT President and Chief Executive Officer under
authority delegated by the HRT Board of Commissioners Resolution No. 13-2001, which states
in part:

       The Executive Director, or his designee, shall have the authority to declare
       personal property, including but not limited to, motor vehicles, to be surplus and
       not needed for the use of the Commission, and to dispose of such property as
       provided in this Policy…The Executive Director shall determine the method of
       disposal of such personal property consistent with the requirements of the Grant
       under which the personal property was acquired including any required
       reimbursement to any federal or state agency that provided funds to acquire the
       property.

The disposal of HRT equipment acquired using federal grant funding is subject to the Code of
Federal Regulations (49CFR18.32), which states in part that “…[i]tems of equipment with a
current per-unit fair market value of less than $5,000 may be retained, sold or otherwise
disposed of with no further obligation to the awarding agency….”

VDOT Inspector General staff identified 10 vehicles that had been donated from January 2005 to
June 2010. HRT staff was unable to provide documentation to support the fair market value of
the vehicles at the time of donation. Such documentation is necessary to ensure HRT maintains
compliance with the underlying grant agreement.

Commission Resolution No. 13-2001 currently provides authority for the HRT Chief Executive
Officer to declare personal property to be surplus and not needed by the Commission, and to
dispose of such property without approval as long as individual items maintain a depreciated
value of less than $7,500 or aggregate values less than $50,000. Disposals in excess of the
aforementioned limits require Commission approval. While the donation of surplus property is a
permitted activity under Commission Resolution No. 13-2001, it eliminates a potential revenue
source that could be used by HRT to defray costs passed on to the participating localities’
taxpayers through the Cost Allocation Agreement with the seven participating cities. The seven
participating cities pay an equitable share of the operating costs incurred by the Commission to
offset HRT’s annual funding deficit.

ITEM 4 (a1) Recommendation (25 of 31)- We recommend that the HRT Chief Executive
Officer take immediate steps to ensure compliance with all terms and conditions of grant
agreements, including but not limited to:


                                              56
   •   Review, identification and repayment of funding associated with the purchase of
       vehicles used for commuting purposes.
   •   Review, identification and repayment of funding associated with the maintenance of
       vehicles used for commuting purposes.
   •   Review recent surplus property disposals to ensure documentation is maintained to
       establish the fair market value at time of disposal.

ITEM 4 (a2) Recommendation (26 of 31)- We recommend that the HRT Chief Executive
Officer consider pursuing action to revoke the authority granted under Commission
Resolution No. 13-2001 relative to the donation of surplus property.


ITEM 4b – Processing of Invoices

During the course of fieldwork, VDOT Inspector General staff observed a general lack of
controls over the processing of invoices. Observations included two instances of payments to
vendors for which there was no purchase order or contract, five instances of payments to vendors
on expired purchase orders or contracts (which exceeded the purchase order or contract amount
in all but one instance where there was no dollar limit on the contract), two instances where the
rates charged and paid significantly exceeded those established in the contract, and one instances
where the amount paid on an active purchase order significantly exceeded the purchase order
amount.

In discussions with one Project Manager who obtained services under an expired contract and
approved invoices for payment, in which the rates exceeded those established in the contract,
VDOT Inspector General staff was advised that this individual was unaware of the rate increase.
The Project Manager stated they merely approve the invoice for the work performed and do not
review the rates being charged. As the individual overseeing the contract and approving the
invoice for payment, the Project Manager is responsible for ensuring the work is performed and
that payments are made in compliance with the contract terms and conditions.

The Director of Accounting advised VDOT Inspector General staff that invoices associated with
a project are sent to the Project Manager for approval. It is up to the Project Manager to ensure
there is a valid purchase order or contract in place and that the payments do not exceed the
purchase order or contract amount. Accounts Payable processes the invoice for payment as long
as the Project Manager signs the invoice.

ITEM 4 (b) Recommendation (27 of 31)- We recommend the HRT Chief Executive Officer
ensure that adequate controls exist over the payment of invoices. At a minimum, current
policies and procedures should be reviewed and updated, as necessary, and there should be
mandatory training for all Project Managers to ensure they have a complete understanding
of their responsibilities in this critical role.


ITEM 4c – State and Local Government Conflict of Interest Act Compliance

Statements of Economic Interest (“SOEI”) and/or other forms designed to disclose Conflict of
Interest (“COI”) were not historically completed by any HRT staff. At the commencement of
our review, requests and inquiries were made for copies of SOEI/COI type disclosure forms from
both Senior HRT and other staff holding positions relating to procurement. HRT staff indicated
they were not requested to execute SEOI/COI or similar disclosures.
                                              57
Based on an opinion from HRT Commission Counsel, HRT staff is subject to the provisions of
the State and Local Government Conflict of Interest Act contained in Title 2.2, Chapter 31 of the
Code of Virginia.

HRT uses a unique mix of employment contracts, consultant contracts and temporary employees
to achieve its desired workforce. The lack of knowledge and understanding of the provisions
contained in the Commonwealth’s Conflict of Interest Act increases the risk that HRT staff could
engage in transactions involving personal interest resulting in actions adversely impacting HRT.
In addition, the lack of historical SOEI/COI type disclosure precludes effective review of HRT
staff transactions.
ITEM 4 (c) Recommendation (28 of 31)- We recommend that the HRT Chief Executive
Officer immediately take the steps necessary to ensure compliance with the State and Local
Government Conflict of Interest Act contained in Title 2.2, Chapter 31 of the Code of
Virginia and that such actions apply to all key management and procurement personnel
whatever the employee type.


ITEM 4d – Internal Control Evaluation

HRT does not maintain independent staff and/or a Senior Management position designed to
evaluate the efficiency and effectiveness in the design and functionality of internal controls. The
independent review and evaluation of internal controls is necessary to assist management in
determining whether or not a reasonable system of internal controls exists within the
organization. The lack of effective internal controls increases the likelihood of financial loss and
lack of public trust.

ITEM 4 (d) Recommendation (29 of 31)- We recommend that the HRT Chief Executive
Officer establish a position to independently evaluate HRT’s network of internal controls.
The position should report functionally to the HRT Chief Executive Officer under a
Charter that permits the position to report directly to the Chairman of the HRT
Commission or to the Federal Transit Administrator when situations require such a direct
reporting relationship.


ITEM 4e – HRT Administration

In the three areas reviewed, the LRT/Tide, procurement and revenue operations, the issues
identified would point to concerns involving leadership and management oversight of these
major HRT operations. This report demonstrates that some of these issues have adversely
impacted both HRT’s day-to-day transit operations, but also the timely and cost effective
completion of the LRT/Tide project. The lack of efficient and effective oversight as well as poor
judgment and decision making has resulted in a couple of cases of protracted employment
litigation and settlements, excessive project staff turnover and increased cost to both transit
operations and the LRT/Tide project.

ITEM 4 (e) Recommendation (30 of 31)- We recommend that the HRT Chief Executive
Officer perform an evaluation of the existing HRT organizational structure and staffing to
ensure core functions are supervised by experienced and knowledgeable staff with the right
skill level.


                                                58
ITEM 4f – Locality Cost Allocation Agreement/True Up Process

HRT maintains “due to” and “due from” balances attributable to contributions received from the
seven cities participating in the Cost Allocation Agreement (“CAA”), dated October 1, 1999.
The seven cities participating in the CAA provide HRT with funding for 100% of administrative
expenses and the portion of operating and capital expenses not covered by operating revenues or
eligible federal and state funding. Based upon the transportation services to be received, a city’s
equitable share of operating/capital expenses are estimated and billed quarterly to each city.

At the end of each fiscal year, after actual revenues/expenses are known, HRT staff calculates
the amount of funds due to/due from the participating cities by preparing a cost “true-up” (i.e.,
comparing budget to actual revenues/expenses). This calculation is based on the transportation
services provided and revenues generated in each individual city. Each city receiving
transportation services are allocated costs proportionate to their “In Service Hours” or “In
Service Miles” (i.e., total number of hours or miles that revenue vehicles are operated in revenue
service), with the exception of administrative costs which are shared equally.

In past years, HRT billed the cities that had a balance owed and generally retained amounts due
to the cities until receiving direction from the associated city on the application of the fund
balance. According to HRT staff, cities often preferred to maintain the funds in reserve to offset
future years HRT cost sharing obligations. For the past couple of fiscal years, HRT has not
billed cities that have a balance owed. According to HRT financial staff, this was an internal
decision.

Pursuant to Article IX.C, of the CAA, “…[i]nvestment income earned from funds advanced by a
participating City and not expended by the Commission will be allocated to that participating
City….” HRT staff advised VDOT Inspector General staff that excess city funds maintained by
HRT are not invested and the participating cities do not earn interest or accrue any benefit from
the excess funds maintained at HRT. HRT staff stated they use the excess balances on-hand to
offset the amount needed from their line of credit, which helps fund HRT’s operations until they
receive access to Section 5307 federal grant funds. HRT staff advised that overall, this practice
benefits the localities in that it reduces HRT’s interest expense that would otherwise be charged
to the participating cities through the cost allocation agreement.

However, this practice is not in compliance with the CAA. Those cities with “due to” balances
are subsidizing those with “due from” balances. In addition, to the extent that the cumulative
“due to” balance exceeds the cumulative “due from” balance, HRT receives the benefit of
interest free funds.

As of June 30, 2009, the balances due from/ (due to) the participating cities, excluding capital
costs, totaled $919,051. (See the below chart)




                                                59
                                         June 30, 2009
                                                                     Total Due from
                                    Due from City    Due to City        (to) City
              City of Chesapeake    $     106,386
              City of Hampton                            (370,917)
              City of Newport News                       (216,492)
              City of Norfolk             53,296
              City of Portsmouth                         (773,905)
              City of Suffolk                              (5,901)
              City of Virginia Beach     288,482
                      Total          $   448,164    $ (1,367,215) $       (919,051)

ITEM 4 (f) Recommendation (31 of 31)- We recommend that the HRT Chief Executive
Officer ensure that local contributions are calculated, billed, collected, or refunded in
accordance with the terms and conditions specified in the Cost Allocation Agreement
negotiated with the seven participating cities.

******************************************************************************




                                           60
                                Appendix A
        CHRONOLOGY - DISCLOSURE OF COST-TO-COMPLETE INFORMATION

   As described in the Executive Summary, the HRT Chief Executive Officer, Philip A. Shucet,
   requested the VDOT Office of Inspector General to evaluate the management preparation, timing
   and disclosure of budget, actual, and cost-to-complete data in order to answer the basic question
   of “who knew what and when” regarding the LRT/Tide project cost-to-complete.

   To answer this question, we interviewed several current and former HRT employees, reviewed
   HRT Board of Commission meeting minutes, contacted FTA, reviewed the email files of select
   current and former employees, and reviewed monthly LRT/Tide project summary reports. The
   vast majority of our support for “who knew what when” came from our review of select email
   accounts. We included in our report excerpts of significant emails or documents identified
   during our review and attempted to provide a brief summary of what we believe these documents
   demonstrate.

1. Early in the LRT/Tide project history, prior to the City of Norfolk entering into an agreement
   with the FTA to assume the obligation for completing the project in the event that the total
   project cost exceeded the baseline cost estimate of $232 million, HRT management had
   information indicating the cost-to-complete might exceed the project budget. Emails also show
   that the Norfolk Assistant City Manager was exchanging emails with HRT about escalating
   costs. Initial indications of cost increases were the result of enhancements or additional work
   requested and/or identified by the City of Norfolk. Included below and throughout Appendix A
   are examples of documents and information obtained during our review.

   March 16, 2007 (Support Document 1)

   An email from the former HRT Chief Capital Program Officer to the Norfolk Assistant City
   Manager and Norfolk Director of Finance with the subject heading Possible Budget Additions
   states,

          “We have previously discussed the need to report potential increases to the
          budget. The attached spreadsheet is my first attempt to present that information
          in enough detail to have value. Each of the items listed notes the root cause or
          entity initiating a potential change. I keep stressing the word “potential” because
          when you review the list you will understand that we are not locked into most of
          these items but they do appear to have either merit or backing. The biggest
          unknowns are the sewer and water impacts because, as Ken Turner mentioned,
          we are in a process of working through the issues. My goal is to stay within the
          utilities budget even recognizing that a future catastrophe could create service
          interruptions. The alternate option is to relocate everything and swallow a big hit
          upfront (Ken informed us that just the sanitary line in Monticello is as much as 17
          feet deep and could require shutting Monticello to traffic for up to 18 months and
          cost several million dollars – I don’t think that such a plan would gain approval
          from City Management or the City Fathers). For the most part we have incurred
          minor design costs, and for the most part the real decision on construction cost
          items can be forestalled or even bid as options in the contracts. We will continue
          to move forward but at this point I don’t foresee any significant additions to this
          list….” (emphasis added)

                                                  61
The above email also contained a spreadsheet entitled, “2007.03.16 Betterments List” which
identified “Construction Costs Not Included in the Preliminary Engineering Design” of the
LRT/Tide project reflecting costs of at least $9 million related to such items as traffic signals,
alignment changes, enhancements to the Traction Power Substation, sidewalks, and parking
lots/decks.

April 1, 2007 (2)

An email from the Norfolk Assistant City Manager to the HRT Senior Vice President for
Development with a copy to the Norfolk Director of Finance states,

     “…[a]nd we are talking about the issues of ‘conflict’ between what staff sees as the
     items that may be outside the LTR budget and thus borne by the City. Moving of
     sewer and water lines, traffic intersections and stuff like that. Regina was asking me if
     we could identify all items. I advised her that the drawings were still not at sufficient
     detail to allow us to feel sure we could identify everything. That is based on staff to
     staff discussions. It is our intention to put together a list and then call a meeting of the
     group that met several months ago to discuss the issues. My recollection is that it was
     Mayor and Randy; Michael and you; myself, Steve and John Cord as the
     principals….”

May 9, 2007 (3)

An email from the Norfolk Assistant City Manager to the HRT Senior Vice President for
Development states,

       “Jayne, good morning and thank you for the meeting yesterday to include the
       Mayor, Randy, et al. The following is my synopsis of the meeting discussion and
       then some comments as to issues going forward…

       1. Military Highway station park and ride…
       b. HRT has a plan showing surface parking along Curlew for just over 250
          spaces; HRT indicated that for budget and FTA process purposes they will
          propose this as the current and intended outcome.
       c. HRT also noted that other structured alternatives may be desired but they
          have price tags of $4.3 M to $6.3 M and a good portion of each of those
          numbers is above the budget.
       d. Committee accepted the concept but now understands this is a future issue to
          decide.

       2. Utility relocations; priorities; cost and schedule impacts…
       d HRT noted that they have a list of relocations that they believe are warranted
          at a cost of $3.0 M and that they have a budget of $5.0 M.; further that time is
          an issue in the decisions for relocation in that there is a design time and a
          relocation work time that can have impact on the LTR time line.
       e. Staff advised that utilities has reviewed the HRT list and agrees that the A list
          that HRT provided to the staff must be achieved. However, they also believe
          HRT B list must also be achieved and they have provided HRT with a C list
          with other relocations or upgrade to lines that they believe must be done. The
          utilities lists (all 3) total $9.0 M in work.

                                                 62
       f. Discussion tried at first to focus on the time line of the project and limits of
          the budget. Staff replied that contacts with other cities indicate relocation is
          best and that the issue needs to be considered as what is the best for the City
          long term and not just the immediate issue…

       3. Ballasted track from York Street station west to EVMC as well as in front of
          Harbor Park…
       c HRT indicated that cost to change to embedded track from York Street
          station to EVMC might be $500,000. Committee appeared to think that was
          worthwhile.
       d This is still an unresolved issue from a budget and processing standpoint for
          City.

       Note: we were running out of time so the last items got little discussion but were
       mentioned in overview:

       4. Concepts for station shelters; process for decision making
       a It was reported that we intend to engage UDA in reviewing the shelters and
          power station designs
       b That any issues of the cost of some shelters or power stations being higher
          than HRT budget will be raised to committee…
       d HRT noted that power stations need to be kept simple in design concept as to
          enclose them can get very expensive due to their nature…

       Further comment:
       Jayne, on the issue of utilities. It is my desire and intent that we quickly discuss
       these staff to staff and create a shared understanding of the criteria and reasons
       for decisions on each sub-issue or site on the 3 lists. The issue of the budget is
       an issue but that is not the deciding issue at the initial level; it is what is
       technically thoughtful and has cost benefit analysis….” (emphasis added)

June 13, 2007 (4)

An email from the Norfolk Assistant City Manager to the Norfolk Director of Finance and HRT
Senior Vice President for Development states,

       “I wanted to share with you the direction from the City Manager for the
       presentation being contemplated for the 26th. From a time standpoint we need to
       do this effectively so that we have it Monday so that she can review it. She
       intends a meeting after the city council meeting of next week. Jayne I am
       presuming she means a meeting of just the city staff and not HRT. At today’s
       Alliance meeting it is clear that there is a desire of the Councilman to have the
       presentation include as a sub-set the naming recommendation for the system.
       Jayne please prepare that as we discussed. Regina’s direction is as follows:

   •   Forget the 16-minute marketing video
   •   Presentation needs to be from the city administration
   •   We need to give an assessment of the project realities versus the FTA budget.
       That is give some insight to the council as to issues we are aware of that will be
       outside the FTA budget. I.e utilities Goal is to ensure they understand that they
       may pay more than just our share of the projected budget.
                                               63
   •   She wants us to be able to define what the agreement and letter is committing us
       to pay (be obligated for). Steve she said if you need to have PFM assist you in
       preparing then use them as she wants the numbers to be right. She does not want
       us giving a number only to find it changed in short or long order.
   •   She indicated she wants a “risk analysis” of what can make the numbers go up
       and an evaluation of whether we think each factor has a low, moderate or high
       probability of occurring.
   •   And she wants to ensure the presentation communicates in layman’s terms
       generally what is involved in constructing light rail, such as there will be multiple
       contracts for each segment, timing, so forth.

       Jayne, I am sharing this communication with you with a request that it be for us
       staff to staff and not for your board or our council member. I want to not get
       short circuited even with the best of intentions as this is our staff to staff
       presentation to get done. CM with this and all other projects feels very strongly
       that the Administration needs to communicate fairly and clearly to the whole
       council. As she reads and finalizes the presentation she will as always begin to
       move to sensitivities of politics and the individuals. But we need to give the best
       straight forward staff input. I also want to be clear that it is not our intent to be a
       bump in the road in this process that is nearing an end but to facilitate it and give
       council a sense that they got a fair representation of the risks and obligations that
       they will be voting on.

       We are now staff to staff on the same page. Steve will see this wherever he is and
       will get started on his stuff. He will be back Monday I think. Steve we will need
       to be sure all documents are ready for council with ordinances….”

June 26, 2007 (5)

A Special Session of the Norfolk City Council was held June 26, 2007 that included a “Closed
Door Session.” Council members present for the meeting were President Fraim, Mr. Burfoot,
Ms. Hester, Mr. Riddick, Mr. Williams, Mr. Winn and Mr. Wright.

September 28, 2007 (6)

An email from a Norfolk city employee to a consultant at Urban Design Associates (“UDA”), a
design firm used by the City of Norfolk, states,

       “…On the other hand, I understand there are some cost overrun elements
       accumulating on the LRT project. Thus, I need to get some guidance as to how
       much UDA analysis and suggestions for various project design improvements are
       warranted in terms of having the potentiality of ‘payback’ in terms of being
       authorized for actual construction. Please advise your colleagues of this e-mail
       and hold off on further analytical work in regard to the LRT until I can get back
       to you.” (emphasis added)

This above email was forwarded to the Norfolk Assistant City Manager on September 28, 2007.




                                                 64
   September 28, 2007 (7)

   An email from the Norfolk Assistant City Manager to the above referenced city employee and
   the HRT Senior Vice President for Development states,

           “I respectfully disagree. HRT will always say to us that it is not within the
           budget. This however is a City of Norfolk project and the decisions of today are
           ones that future generations will have to live with. The views of HRT consultants
           on what is to be achieved are fully respected but always I expect that the City will
           be briefed and have final say as to if we want to do more or not.” (emphasis
           added)


2. Also early in the LRT/Tide project history (prior to any construction bids being received, prior to
   the start of any construction, and prior to the execution of the Full Funding Grant Agreement),
   HRT management had knowledge the project cost-to-complete was in jeopardy of exceeding the
   $232 million baseline cost estimate in the FFGA. Indication of cost increases at this point were
   the result of increased construction cost estimates, increased construction management cost
   projections, enhancements or additional work requested and/or identified by the City of Norfolk,
   as well as unresolved property and right of way acquisition issues with Norfolk State University.

   May 31, 2007 (Support Document 8)

   An internal document entitled “DR002 Norfolk LRT Project Budget, Cost-to-Date, and Cost-to-
   Complete – May 31, 2007” reflected a negative project variance of $8,688,369 (Total HRT
   budget of $240,788,369 – FFGA budget of $232,100,000). The HRT budget figure of
   $240,788,369 included $10,757,000 in “Unallocated Contingency” and $18,005,000 in
   “Allocated Contingency”.

   NOTE: A spreadsheet (dated February 16, 2007 and contained within an Excel Workbook
   entitled FFGA SCC Workbook Rev.9 Final) entitled, Main Worksheet-Build Alternative,
   submitted by HRT to the FTA in support of the FFGA, reflects Unallocated Contingency reserve
   totaling $10,244,000 and Allocated Contingency reserve of $18,005,000 based on the following
   percentages of “Base Year Dollars.”

    Allocated Contingency as % of Base Yr Dollars w/o Contingency                  9.50%
    Unallocated Contingency as % of Base Yr Dollars w/o Contingency                5.41%
    Total Contingency as % of Base Yr Dollars w/o Contingency                     14.91%


   Allocated Contingency is a provision and/or reserve for unknown/unanticipated escalation in a
   specific Standard Cost Code (“SCC”) line item. Unallocated Contingency is a provision and/or
   reserve for unknown/unanticipated escalation in the total project cost.

   June 9, 2007 (9)

   An email from the HRT Senior Vice President for Development to the HRT Vice President of
   Public Affairs and Communications states,

           “We are meeting with the PMC and GEC consultants to go through the current
           and projected costs to complete FD and construction. We are very tight on the
           budget and we need to understand clearly how tight…”
                                                 65
June 30, 2007 (10)

An internal document entitled “DR002 Norfolk LRT Project Budget, Cost-to-Date, and Cost-to-
Complete - As of June 30, 2007 (Updated 7/30/07)” reflected a “Total HRT Budget” of
$242,589,311. The HRT budget figure of $242,589,311 included $10,757,000 in “Unallocated
Contingency” and $18,005,000 in “Allocated Contingency.” This report was distributed
internally on August 2, 2007 (see below reference for list of recipients).

July 18, 2007 (11)

An email from the former HRT Chief Project Management Officer to the HRT Senior Vice
President for Development, former HRT Chief Capital Program Officer, and a PBS&J
Consultant employee with the subject heading “PB’s Updated Cost Estimate” states,

       “…In terms of base year construction costs, this new estimate reflects an 11% or
       $11.8 million increase (from $107.4 million to $119.3 million)…”

August 2, 2007 (12)

An internal memorandum from the former HRT Chief Project Management Officer to the HRT
Senior Vice President for Development and former HRT Chief Capital Program Officer with
copies to the HRT Project Specialist, the Chief Grants and Budget Officer, and a consultant
employee from AECOM states,

       “Attached is a Norfolk LRT project cost-to-date, and cost-to-complete report as of
       July 31, 2007 for the accounting period (and fiscal year close) ending June 30,
       2007. This report incorporates updated cost estimates per our 6/15/07 cost-to-
       complete workshop. Still outstanding and needing more discussion, are the
       following items which can significantly affect the bottom line….”

The attached report entitled “DR002 Norfolk LRT Project Budget, Cost-to-Date, and Cost-to-
Complete - As of June 30, 2007 (Updated 7/30/07)” reflected a “Total HRT Budget” of
$242,589,311. Although the HRT budget amount included $10,757,000 in “Unallocated
Contingency” and $18,005,000 in “Allocated Contingency”, it did not include consideration of 5
outstanding items referenced in the above memorandum which identified potential additional
costs of, at least, $15 million.

One of these outstanding items related to updated construction cost estimates. The memorandum
states,

       “The updated construction cost estimates provided by Moe on 7/12/07 have not
       been incorporated based on a lot of uncertainty about the utility costs and what
       adjustments should be made to the allocated contingency and escalation
       factors….” (emphasis added)

The above referenced construction cost estimate, dated July 12, 2007, from the PB Project
Manager to the former HRT Chief Capital Program Officer, HRT Senior Vice President for
Development and former HRT Chief Project Management Officer states,


                                              66
       “Attached is a summary of current working capital cost estimate (CWE). The
       summary is by SCC categories and reflects both the total project cost and the
       costs by contract packages. All allowances and place holders have been
       removed, and replaced with actual or projected quantities and costs, depending
       on the current level of design. Since the designs are at various levels of
       completeness, we have provided the construction cost (including SCC categories
       10, 20, 30, 40, and 50) at different levels of design contingency as shown below.

                             SUMMARY OF BASE YEAR COSTS
       July 07    Base Year (without contingency)                      119,276,000
       July 07    Base Year Inc 5% Allocated Design contingency        125,240,000
       July 07    Base Year Inc 10% Allocated Design contingency       131,203,000
       July 07    Base Year Inc 15% Allocated Design contingency       137,167,000

       Feb 07     Base Year Inc 15% Allocated Design Contingency 122,345,000

       The costs for SCC categories 60 through 80 are relatively constant. The February
       07 CWE is shown for comparison.

       Please note that July 07 estimate update reflects the following;

          1 - Does NOT reflect changes in Package 20 (Embankment to Structure;
              sewer work, etc)
          2 - Does NOT include City Utility B/C list
          3 - Does NOT reflect cost reduction for changing to CBD center poles and
              normal profile catanary
          4 - Does NOT include the 4-inch architectural surface treatment on station
              platforms
          5 - Does NOT include special surface treatments at walls or structures
          6 - Does NOT include Bute/Charlotte Couplet changes
          7 - Does Not include systemwide duct bank in CBD area

          1 - DOES include base year cost for VEPCO distribution line relocation in
              package 20/30 of $70,000
          2 - DOES include base year cost for Hazardous material mediation of $
              1,300,000.
          3 - DOES include base year cost for underground duct bank and cable $
              1,150,000.”

August 16, 2007 (13)

An email from the former HRT Senior Vice President of Finance to the HRT Senior Vice
President for Development, which included the DR002 monthly report reflecting an estimated
cost to complete of $242,581,311 with copies to the former HRT President and Chief Executive
Officer and HRT Chief Grants and Budget Officer states,

       “I notice the July 31, 2007 update to the LRT project (see attachment) reflects an
       $8 million funding shortfall. A portion of that shortfall is the $2.6 million higher
       than anticipated cost for the rail cars. I know you’re following this closely, and I
       presume our partners in Norfolk are as well.” (emphasis added)

                                               67
August 20, 2007 (14)

The former HRT President and Chief Executive Officer responded with an email to the HRT
Senior Vice President for Development, which included the above referenced DR002 monthly
financial report reflecting a cost to complete of $242,581,311. The email stated,

       “This is the second significant staffer who has mentioned a funding shortfall in
       the LRT project and I have heard nothing from you about it. When were you
       planning to talk to me?”

August 27, 2007 (15)

An excerpt from the “Cost Review Meeting Minutes – August 27, 2007” regarding Construction
Management is below. Individuals that attended the meeting included the HRT Senior Vice
President for Development, former HRT Chief Capital Program Officer, former HRT Senior
Vice President of Finance, HRT Chief Grants and Budget Officer, HRT Project Specialist,
PBS&J Program Manager, former HRT Chief Project Management Officer, and an HRT
consultant employee with PACO Group.

       “We are currently projecting a huge cost overrun of almost $8 million against an
       allowance of $10.5 million on the FFGA/SCC workbook for this catch-all
       professional services line item. We have itemized approx. $18 million in costs, as
       follows:

       a.   public involvement ($1.8 million),
       b.   program management support by PBS&J ($1.4 million),
       c.   HRT staff costs during construction ($5.1 million),
       d.   construction management staff and services by PBS&J ($8.5 million),
       e.   project office ($340,000), and
       f.   design support during construction ($1.2 million).

       HRT and PBS&J will work to create a composite CM org chart to determine what
       staff positions may be eliminated due to duplication. PBS&J has submitted what
       they consider to be the “bare bones” level of effort needed to manage the project
       during construction which reflects a cost estimate of $10.8 million. PBS&J
       advises that construction management (excluding design support during
       construction, program management, and public involvement) typically runs about
       9% of construction costs, which would be $11.7 million for our project based on
       $130 million in construction costs.” (emphasis added)

August 31, 2007 (16)

The former HRT Chief Project Management Officer submitted a document entitled “August
2007 Analysis of Estimated Costs and Contingency Remaining” to the HRT Senior Vice
President for Development and former HRT Chief Capital Program Officer, which contained the
below chart.

The chart shows that the LRT/Tide project was facing significant overruns and was forced
to dip into the majority of its contingency reserves prior to the start of any construction or
prior to any construction bids being received. According to the chart, as of August 31,
2007, remaining contingency reserves totaled only $5,725,529. The notes in the chart also
                                                68
indicate the analysis used positive assumptions about working one cost category down to
match the amount budgeted in the FFGA and excluded another cost estimated at $2.5
million.

                   August 2007 Analysis of Estimated Costs and Contingency Remaining
                      Aug 2007 Estimate
                     Escalated to Year of     FFGA Estimate
                     Expenditure (“YOE”),   (Escalated to YOE,         Variance in YOE
                       No Contingency        No Contingency)
          PE         $          8,754,000   $          9,032,000   $           278,000
          FD         $          9,807,471   $          6,912,000   $        (2,895,471)
        CONST        $      126,851,000     $      113,612,000     $       (13,239,000)
          INS
       (w/o SIR)     $          6,016,000   $          5,239,000   $          (777,000)
          RE         $         10,714,000   $       10,714,000     $                     -
          LRV        $         36,015,000   $       36,015,000     $                     -
       STARTUP                              $          1,882,000
         CM *        $          9,597,000   $          9,597,000   $                     -
         PM **       $         10,200,000   $          5,363,000   $        (4,837,000)
         PI ***      $          2,600,000   $                 -    $        (2,600,000)
                     $      220,554,471     $      198,366,000     $       (24,070,471)

       Allocated Contingency                $       18,005,000
       Escalation to YOE Allocated Cont.    $          1,034,000                                Total
                                                                                              Remaining
       Unallocated Contingency              $       10,757,000                               Contingency
       Total Contingency (no Est. Cont.)    $       29,796,000     $       (24,070,471)      $ 5,725,529
       Finance Charges                      $        3,938,000                               A/O 8/31/07
                                            $      232,100,000

  *    Construction Management - PBS&J CM services only. "Bare Bones" estimate from PBS&J is
       $10.9 million; The number above assumes we'll work that number down to match what's in the
       FFGA workbook - $9,597,000
 **    Project Management (during final design & construction) - PBS&J program mgmt. support, HRT
       staff costs, project office expenses, design support during construction
 ***    Public Involvement - Includes Alan's approved budget of $1,796 for half of CY2007 and all of
       CY2008, plus $839,000 for Alan's PI program in CY2009, plus $50,000 for branding campaign by
       PB, and PI expenses up through June 2007 (when Alan's budget began). This does not include
       the estimated $2.5 million for Advertising

September 11, 2007 (17)

A memorandum from the Norfolk City Attorney to the former HRT President and Chief
Executive Officer, HRT’s Legal Counsel, Norfolk City Manager, Norfolk Assistant City
Manager, Norfolk Deputy City Attorney with a copy to Councilman Randy Wright states,

        “Most fortunately, the final approval of the federal funding for light rail is
        imminent; however, while diligently pursuing the abandonment of the line,
        Norfolk Southern has not yet achieved it. The full funding agreement has a
                                                  69
       construction completion date. My question is whether given the construction
       completion date in the FFGA and uncertain abandonment date, are we at risk of
       having issue with not being able to complete construction as provided in the
       FFGA and, if so, should we now endeavor to get an accommodating amendment
       to the FFGA.”

September 14, 2007 (18)

A letter signed by the HRT Senior Vice President for Development to the Norfolk Light Rail
Project Final Design & Design Services during Construction consultant, with copies to numerous
individuals, to include the former HRT President and Chief Executive Officer, states

       “Recently PB has presented HRT with a series of significant and largely
       unexplained increases in its construction cost estimates for the Norfolk LRT
       project…Whereas PB’s FFGA (February 2007) cost estimate reflected $107.4
       million in base year construction costs with an allocated contingency of $14.9
       million, recent cost estimates from PB reveal a much different picture with $120.9
       million in base year construction costs and only $1.4 million allocated
       contingency. The sequence in which this $13.5 million cost increase has been
       provided to HRT from PB is detailed below….”

September 21, 2007 (19)

An email from an HRT Consultant with URS to the HRT Senior Vice President for Development
states,

       “Yes I am on e-mail. I wanted to be on the call too....

       $221 million vs $189 million in FFGA...............strategizing how we spin this with
       FTA and what our recovery plan is to peel back the layers of the cost increase.

       Going well in terms of behavior.”

The overall FFGA budget of $232 million less contingency reserves and preliminary engineering
(which costs have already been incurred) would roughly equal the $189 million referenced in the
above email. In any regard, the above email indicates an overage of $32 million in the total
estimated project cost.

September 21, 2007 (20)

A letter from the Board of Visitors of Norfolk State University to the former HRT President and
Chief Executive Officer with a copy to the Norfolk City Mayor states in part,

       “…However, in reviewing the current plans, the Board of Visitors supports the
       concerns expressed to you and, subsequently, to Mayor Paul Fraim by President
       Meyers on June 18, 2007 regarding the interfaces of the Light Rail System with
       Norfolk State University. First, in these times of increased focus on deterring
       criminal activity, it is especially incumbent on universities to maintain their
       commitment to a safe learning and living environment for students, faculty, and
       staff alike. We strongly feel that the proposed Light Rail station near the
       University’s stadium increases the security risk for the University and most
                                               70
       especially for the residential students. Please note that this risk was first
       communicated to you several years ago in a memo by Mr. Kevin Appleton, the
       then Vice President for Finance and Business…Secondly, from a logistics
       perspective, there is little need for a second station adjacent to our small campus
       and we request that the Ballentine Blvd. station not be built at this location…Also,
       as we continually upgrade our campus facilities, the proposed placement of a rail
       yard and maintenance facility adjacent to the campus is undesirable and
       inconsistent with the long range plans of the University. It is important to us that
       our campus visibly represents a hallowed place of learning that reflects positively
       on our history of access and education for the Commonwealth’s citizens. We
       respectfully request that the Hampton Roads Transit Authority reposition this
       facility so that it is not adjacent to our campus. Furthermore, the accompanying
       parking spaces in the plan exacerbate Norfolk State’s parking availability for our
       faculty, staff, students, and visitors. We simply cannot afford to diminish our
       parking inventory. Our first obligation is to our stakeholders and their needs
       must accordingly be served first. The environment and the public expectations of
       universities have changed significantly since we began discussions and plans for
       NSU’s involvement in the Light Rail System. We ask you, in light thereof, to
       understand the importance of the aforementioned considerations to the effective
       and safe execution of our mission as a university….”

September 2007 Project Management Plan (“PMP”) (21)

The HRT Light Rail Transit System Project Management Plan dated September 2007 (prior
version dated May 2007) contains a section entitled “Cost Contingency Management” which
states,

       “The PG-35 Contingency analysis performed by the PMOC and Grantee in
       December 2006 and further updated in February 2007 outlined the minimum
       contingency requirements for the HRT project. These contingency exercises
       demonstrated HRT’s need for $30 – 35 Million in contingency funds at the time of
       100% bid/20% construction (whichever is later). The findings from this report
       further outline various contingency hold points that HRT should incorporate in its
       contingency management plans. These limits included minimum floor values for a
       management reserve where HRT is required to report all changes to a third party
       management (that is, City of Norfolk oversight committee). A range value where
       HRT must consider secondary mitigation efforts (that is, pre-determined scope
       changes and alternates to the project) and a floor value where HRT may be
       required by FTA to enter the recovery process. For the purposes of this PMP
       scoping document, the contingency reference is interpreted as ‘total contingency.’
       In Application for FFGA timeframe, this total contingency was reported to be
       approximately $30 million with an additional $4 million in latent (estimator’s)
       contingency….”

The PMP also states,

       “Grantee’s plan shall also ensure that the amount of total undistributed
       contingency (inclusive of its reserve portion) throughout project implementation
       meets the following two requirements: 1. The amount of undistributed
       contingency in aggregate is, at all times, above the Contingency Analysis
       minimums specified in the plan schedule. 2. The management reserve portion is
                                               71
          at all times above the minimums at the following specified times. These periods
          set forth below are defined in terms of physical completion of sealed bid
          procurement actions for construction (‘Bid’) and the construction contract
          completion itself (‘Constructed’)…
          • $34 million through 100% Bid or 20% Constructed, whichever is later.
              Currently, this is forecasted to occur during the second quarter of 2008.
          • $20 million through 50% Constructed. Currently, this is forecasted to occur
              during the fourth quarter of 2008…
          In the event that any of the above requirements are not met, Grantee shall
          immediately initiate efforts to develop and implement a recovery plan (in
          conformance with the FFGA requirements).”

   Internal cost-to-complete analysis and/or LRT/Tide budget information from May 2007 to
   September 2007 support the LRT/Tide project did not have the appropriate level of contingency
   reserves available for the project. For example, the internal cost-to-complete report as of July
   31, 2007 reflects a “Total HRT Budget” of $242,589,311. This cost-to-complete report was
   based on information accumulated during a June 15, 2007 cost-to-complete workshop and
   excluded 5 items with potential additional costs of, at least, $15 million. Although, the “Total
   HRT Budget” figure includes approximately $29 million in contingency reserves, it causes the
   project to be over budget by $10,489,311 with additional potential costs of, at least, $15 million
   (thus absorbing the vast majority of the contingency balance). As of July 31, 2007, no
   construction bids had been received and therefore, HRT was required to have from $30 to $35
   million in contingency reserves.


3. During the period October 2007 to March 2008, LRT/Tide project costs continued to escalate.
   Most notably during this period was the receipt of bids for construction contracts #30 and #40
   which contained costs significantly higher than those reflected in the FFGA budget as well as
   unforeseen costs associated with the Norfolk State University property and right of way
   acquisition. Numerous stakeholders including the former HRT President and Chief Executive
   Officer, HRT management, Norfolk City Manager, and Norfolk Assistant City Manager had
   knowledge of these increases.

   October 4, 2007 (Support Document 22)

   An email from the HRT Senior Vice President for Development to an HRT consultant states,

          “…I also included, fyi, a MOU that was executed with Norfolk State University
          related to property/access issues for the project. There is a new President now
          that is not willing to abide by many of the items and it has become a serious issue
          that Mike and Regina Williams are pursuing directly. This will be one of the
          items needed for discussion….”

   December 5, 2007 (23)

   An email from the HRT Senior Vice President for Development to the former HRT President
   and Chief Executive Officer and the Norfolk Assistant City Manager states,

          “The bids for Contract 30 were just received; there were two; Skansa and E.V.
          Williams. Prices were: Skansa: $41,157,367.89 E.V. Williams $49,549,197.38
                                                  72
       The budget amount in the FFGA, including allocated contingencies, was
       $37,344,232. Bids are being reviewed with the anticipation of making an award
       at the Commission meeting on Dec. 13th.” (emphasis added)

Contract 30 was ultimately awarded to Skanska USA for $41,157,367.89, the amount indicated
above.

December 5, 2007 (24)

An email from the Norfolk Assistant City Manager to the HRT Senior Vice President for
Development and former HRT President and Chief Executive Officer, with copies to several city
employees, including the City Manager states,

       “OK so this is suggesting that the next segment will be over $4.0 Million over the
       budget including contingency…I don’t have a council meeting prior to the 13th
       and must let you know that I am a little skittish having an award that they may
       have to then read about in the newspaper that shows a $4.0 M overage…Just
       reacting with my gut to what could create issues if we don’t work it hard and
       ensure I have opportunity to get the CM/administration in sync with taking item to
       commission and thus the public.”

December 6, 2007 (25)

An email from the Norfolk Assistant City Manager to the former HRT President and Chief
Executive Officer states,

       “…I then said that if we remain over the base budget and the contingency then I
       would want to advise the City Manager and do not know if she will want to either
       brief council by confidential memo; hold the award till she can brief council face
       to face (hold due to council meeting dates – next meeting is the 18th); or if she has
       another option. I have only alerted her that you have bids and now need to
       evaluate them but they appear to be over. As you can imagine we (read that at
       least I) am sensitive that we don’t have newspaper accounts of overages so early
       into the project.” (emphasis added)

December 7, 2007 (26)

An email from an HRT consultant employee with PACO Group to the HRT Senior Vice
President for Development and former HRT Chief Capital Program Officer states,

       “I have revised the project budget master control sheet to include the Contract 30
       low bid information. It has been incorporated into the spreadsheet using the FTA
       std cost categories, as is our obligation. The source documentation and budget
       have been cross checked. Skanska’s bid exceeds the allocated contingency for
       Contract 30 by $11.5 million. More seriously, when the overruns due to
       consultants’ current estimates to complete their work is considered we are
       currently at the stage where the entire project Contingency is now blown. We are
       now in the hole by $2.94 million. We can expect a round of cost mitigation
       exercises in order to regain our unallocated contingency amount. This is required
       by the PEP (Project Execution Plan). We are left with just shy of a million in
       construction allocated contingency. This is because we had a good result with the
                                                73
       Contract 20 bid, and because the consultants’ charges are not included in
       construction. Please bear in mind that the above results already include for the
       re-assignment of former Contract 50. There is no “secret pot of money” in the
       budget which we can use to “find” some money. In other words, Skanska’s bid
       along with all the other current budget information we have at this time adds up
       to $2.94 million MORE than the allowed $232.1 million that our FFGA is based
       on. You can verify the detail in the attached spreadsheet at Tab B – Budget,
       Funding and Costs. It’s interesting to note that Cheryl re-allocated $4 million
       from prior Contract 50 to Contract 30 to cover the cost of the Broad Creek
       Bridge. Skanska has bid $2.5 million for the demo of the existing trestle and
       construction of its replacement. (There may be additional costs due to pile
       driving, approaches etc. that I am not able to break out from the bid submission
       at this time.) So eliminating the Broad Creek Bridge would not be sufficient to
       eliminate our contingency bust.”

December 7, 2007 (27)

An email from the HRT Senior Vice President for Development to the Norfolk City Attorney
states,

       “…NSU property issues – After a meeting between Mike Townes and Dr. Carolyn
       Meyer of NSU, HRT has been asked to identify the impacts of relocating the NSU
       opening day platform to the west side of the Brambleton Bridge and to identify
       LRT Maintenance Shop impacts if no NSU property was available for yard tracks
       and/or storage areas. A parcel of property owned by NSU which fronts
       Brambleton Ave. at the shop site is needed for access into the site. HRT is
       working on an alternative design that removes the need for that parcel. However,
       an aerial easement is needed from NSU where a portion of the LRT line “hangs
       over” NSU property. Relocation of the Maintenance Yard to the west side of
       Brambleton is not possible. It will re-open the Environmental process, and for all
       intents and purposes, shut down the project for now. Based on an initial
       evaluation, there may be two options for the station platform location at
       Brambleton. However, these options are not without cost and schedule
       implications and HRT and the city need to carefully consider an acceptable
       strategy….”

Included in this email were four letters or notes from meetings between HRT and NSU dating
from May 3, 2007 to December 4, 2007, which included discussion of the items of concern noted
above.

December 10, 2007 (28)

An email from the Norfolk City Attorney to the Norfolk City Manager, Norfolk Assistant City
Manager, HRT Senior Vice President for Development with copies to the Norfolk City Mayor
and Norfolk City Councilman Randy Wright states,

       “In your absence at the executive retreat on Friday, the mayor asked me for
       information about light rail issues with Norfolk state. Jayne told me that Norfolk
       state may now be questioning the need for stations on both the east (Ballentine)
       and west (brambleton), whether the brambleton station should be on its west or
       east side, whether the maintenance station can be located further from campus,
                                               74
      and whether the university can afford to give up spaces to HRT for park and ride.
      Jane informed me that a MOU covered these issues and provided for exchanges
      of real estate including access for the maintenance and an aerial easement for the
      line’s facilities. Jayne also told me that regina and Stanley met with NS’s
      president on Thursday, 12/6. the mayor was at the president’s Christmas party on
      Friday, 12/7 and the topic may have been brought up. I was meeting with henry
      light who is on NS’s board and he told me that there was a fair amount of concern
      about these issues at NS and showed me a copy of what looked like a form letter
      from NRHA threatening condemnation. Condemnation should not now have been
      threatened. Any condemnation of Norfolk state interests would have to go to the
      SCC and would be fairly uncertain not to mention the issue it would present to
      city’s relationship with this important institution. After I spoke with jayne and the
      mayor, I received a copy of a MOU which does not appear legally binding and on
      many of the above issues is sketchy. For instance, the location of the maintenance
      yard is never mentioned. However, provision for the receipt of the land for the
      access road is mentioned but not its use. Jayne believes that the issue presented
      by relocating the yard is that an environmental impact statement will be required
      for any new location. Jayne told me that the access road is not required but most
      efficient, that the maintenance site can be otherwise accessed, so no
      condemnation there would ever have to be contemplated. The need for an aerial
      easement was not fully discussed. Jayne, if NS did not provide the aerial
      easement, is there no university land that it can be moved to? I do think that we
      need to know if any of Norfolk state’s real estate is essential. I understand that
      you are endeavoring to work through these issues and assume that we will be able
      to but wanted to brief you on my participation on Friday. At this point, I do not
      know of anything that I can immediately do to help. Please let me know if there is
      anything that you would like me to try to help with.”

December 12, 2007 (29)

An email from an HRT consultant employee with PACO Group to the HRT Senior Vice
President for Development and former HRT Chief Capital Program Officer states,

      “Following on from our meeting earlier today, I have transferred a number of
      SCC line items in the master budget. The transfer relates to trackwork in the
      Yard & Shop area (previously shown in the master budget in Contract 80) that is
      now being done in Contract 30. The transfer does NOT affect the firm bid value
      for Yard trackwork, but it IMPROVES the SCC (YOE w/wo contingency) numbers
      for this item. The effect of the transfers is to reduce the hit from negative $14.7
      million to negative $10.4 million. This is in line with the "Fred spreadsheet"
      values we looked at this morning. Of course, since this is a transfer, the bottom-
      line totals for all construction costs are unchanged. (However the "Current
      Budget" total has DECREASED by $3.5 million. This is because there can be no
      transfer between this budget item in the number resulting from the June 15 CTC
      meeting for Contract 80 which is now being done in Contract 30 as we have a
      firm bid for the item in the Contract 30 bid summary. Instead the number is
      zeroed out and the total goes down as a result.) The REMAINING BIG HIT that
      needs explanation is why our Direct Fixation trackwork bid item is $5 million
      more than PB's estimate for this in Contract 30 + Contract 20 (Since Contract
      20's trackwork is done in Contract 30). Eliminating this would remove half our
      outstanding problem.”
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December 18, 2007 (30)

An email from an HRT Consultant employee with PB to the HRT Senior Vice President for
Development and former HRT Chief Capital Program Officer states,

       “For your information, the ROM (rough order of magnitude) cost for the NSU
       Re-Alignment that we transmitted per the below e-mail is approximately $5M
       which includes Engineering cost but does NOT include any delay costs to your
       awarded Contract #20 and/or any possible follow-on impacts to Contract #30.”

The above rough order of magnitude cost is related to LRT/Tide re-alignment options to remove
the track from NSU property.

December 2007 (31)

The FTA’s Project Management Oversight Contractor (“PMOC”) Monthly Status Report filed
with the FTA for December 2007 states,

       “An issue with the scope elements exist in the area of NSU. The new president of
       the university has reneged on a prior MOU HRT had in place with the former
       president of the university. HRT is working on scope modifications that add
       options for HRT in negotiating with NSU. If needed, HRT is currently able to
       walk away from NSU with no cost or schedule consequences”. (emphasis
       added)

January 15, 2008 (32)

An email from an HRT Consultant employee with PB to the HRT Senior Vice President for
Development and former HRT Chief Capital Program Officer with the subject heading “NSU
Station shift construction and design estimate” states,

       “Jayne, we are still tweaking this some, but I wanted you to have the latest for
       your meeting with Stanley. I have attached all the backup, but the two yellow tabs
       (summary and schedule) are the only two you really need to review. The current
       construction estimate is $778,000, and the design cost is $171,591. For numbers
       reported to the City, I would use $800,000 construction and $200,000 design, for
       a total of $1 million….”

January 15, 2008 (33)

A Special Session of the Norfolk City Council was held on January 15, 2008. The meeting
included the following discussion from the Norfolk Assistant City Manager regarding the
LRT/Tide project:

       “…Financial Accountability Performance Measurements that provide a way to
       exceed the minimum costs prescribed by the Federal Transit Authority and a
       policy for considering and approving project improvements that would result in a
       cost overrun…”

       “…Segments adjacent to Norfolk State University
                                            76
              1. Ballentine Station
              2. Maintenance Facility…its design has been changed in response to
                 Norfolk State concerns about the look of the building, security and
                 noise.
              3. Brambleton Station – has been moved across Brambleton from NSU
                 campus and will be elevated.
              4. Harbor Park Station – will use ballasted tracks….”

January 25, 2008 (34)

An email from the former HRT Chief Capital Program Officer to the former HRT President and
Chief Executive Officer and Senior Vice President for Development provided the three bids for
contract #40 which ranged from $42,093,140 to $44,816,167.

The former HRT President and Chief Executive Officer responded with an inquiry as to what the
FFGA estimate was for this contract. The response to the inquiry is noted below.

January 25, 2008 (35)

An email from the HRT Senior Vice President for Development to the former HRT President
and Chief Executive Officer and the former HRT Chief Capital Program Officer states,

       “You don’t want to know. It was $22M, and the engineer’s estimate was $33M
       BUT, I’m trying not to freak yet and the bid eval is underway. We have to see
       how much of this is city extras, especially the utility extras, OCIP, etc. We will
       have to have serious deliberations about this but we need to be deliberate.”
       (emphasis added)

Contract 40 was ultimately awarded to Skanska USA for $42,415,442.

January 28, 2008 (36)

An email from an HRT consultant employee with the PACO Group to the HRT Senior Vice
President for Development and former HRT Transit Development Manager states,

       “…You’ll recall when we spoke this morning that NHRA’s fee was left off the
       budget. Our contract requires us to pay 4% in fees, and carry 15% in
       contingency for property acquisition. This results in an INCREASE to the budget
       of $817k. Ben advises there are more costs to come. As this is preliminary, I will
       NOT be presenting it in the materials for tomorrow.”

February 11, 2008 (37)

An email from the Norfolk Assistant City Manager to the HRT Senior Vice President for
Development and former HRT President and Chief Executive Officer states,

       “I just got back into town and I am reading through my e-mails. I see a few items
       to bring to your attention so that we might all have similar information and see
       how best for us to be responsive to each other and the project.


                                              77
Light Rail Landscaping – the following is the highlights of what I have received
from the participants from the City to the meeting on this subject.
• FFGA budget has $236,000 allocated for landscaping throughout the project.
• Estimate of needs for landscaping are $978,000 and this is $742,000 above
   the FFGA budget.
• Conversation seems to identify that with few exceptions the new landscape
   budget only reflects the minimum needs to meet current city ordinances for
   landscaping. The only item that was identified to me as being over the
   minimum city code requirement was about 10 trees along the entrance road
   for the maintenance facility.
• In the above budget is included only 2” of top soil on the Kirn site once the
   building is demolished. Normal City requirements has been and remains 6”
   of top soil.
• As you can see we have some issues in just what is presented and not counting
   if our desire is for more landscaping since I don’t have a detailed plan and
   only an e-mail noting the highlights of the conversations.
• I am not sure how the FFGA budget could have been created without meeting
   at least the minimum requirements of the City Code. We would not have
   authorized a budget to be less than what we require of all others. That has
   been a principle that we have imposed upon ourselves for decades now to
   ensure the quality of a site no matter if done privately or publicly.
• I have not spoken to staff to see if the City can do the landscaping for you and
   if a savings in the labor might be achieved by doing so versus the budget
   estimates shown above.
• This is an issue that needs some further delineation by HRT and some ideas as
   to how you will propose to respond to it.

Private Utilities
• Several e-mails on this subject.
• I see there is a meeting being set up with HRSD and that this may help in
   getting some of the privates on the same page and working with you so that
   appears to be a good step.
• I also see an e-mail or two from Dominion Power and they are frustrated that
   they are not getting cooperation from PB and getting frustrated. I sent the e-
   mail itself yesterday to you Jayne. I would hope we have this resolved by
   now.
• And I see e-mails that the roles of HRT and PB on the lead for utility work
   with the private utilities with the City assisting has not been clarified and
   continues to be an issue and this as we have talked (the Friday meetings)
   needs to be resolved and clearly communicated. This is frustrating Dominion
   Power.
• Of continued interest and concern is the fact that we don’t have detail as yet
   as to the private utilities and in turn the contractor is not yet on board for his
   detail as to impacts on streets and sidewalks and timing of each. I mention
   this as it is becoming a great concern over here that we can’t know yet the
   answers and not only are businesses but some council members are
   expressing concern over the lack of information. I read an e-mail exchange
   between Cathy Coleman and some staff and it only serves to illustrate and
   highlight why this is a critical concern. She speaks to HRT staff and they
   express that her questions as to technical issues of timing and
                                         78
          sidewalks/streets is one that should be asked of the City. And she asks Rick
          Henn and/or Don Lint and of course we don’t have the answers as HRT and
          its consultants are not so far along with the private utilities nor with
          contractors to provide details. So for us it is becoming a catch 22 and we
          don’t feel comfortable at all about where we are. Our inability to tell folks
          like Cathy and our City Council and our inability to attend the individual
          meetings along with your staff with individual businesses and have answers is
          becoming a problem.
      •   I need to start to see the end of the tunnel as to how we can have the answers
          to start to come forward so we can wrestle this issue to the ground and so we
          have sufficient information so that if we (the City) have to require any
          adjustments then we are doing it with some cooperation instead of reacting
          and potentially causing change orders.
      •   This one is significant for us and while I have asked Public works to sit in on
          meeting and help I am concerned this is still not coming to resolution timely.”

February 13, 2008 (38)

An email from the Norfolk Assistant City Manager to the former HRT President and Chief
Executive Officer and HRT Senior Vice President for Development, with a copy to the Norfolk
City Manager states,

      “I understand from staff that your staff has indicated that contract #40 will be
      awarded this month. The last I heard it was over the budget significantly and
      while you may have spoken to staff I am not aware of any detail of value
      engineering or other analysis achieved and then consulted with before an award
      would go forward….” (emphasis added)

February 15, 2008 (39)

An email from the HRT Senior Vice President for Development to a PB consultant employee
states,

      “…We are moving toward a plan to be able to get with the city on the items for
      discussion to separate out of the FFGA project cost…Since the Contract 40 items
      that are recommended to be separated out don’t fully make up for the FFGA cost
      overrun, we will need, as discussed earlier, the same information (scope items
      added since the FFGA budget was established) for Contracts 20 and 30….”

February 15, 2008 (40)

An email from the HRT Senior Vice President for Development to the Norfolk Assistant City
Manager states,

      “…we would like to set up an initial meeting to discuss Contract 40 and the
      items/costs we will need to agree on as separate costs outside of the FFGA.
      There are probably a no. of folks from the city that need to attend, but let’s start
      with a couple of dates to float; the 21st in the p.m. or 27th in the a.m.”

February 29, 2008 (41)

                                              79
In response to an inquiry from VDOT Inspector General staff (dated May 21, 2010), the FTA
Region 3 Administrator indicated that HRT notified the FTA that the LRT/Tide project “might”
exceed the FFGA baseline cost estimate in a conference call on February 29, 2008. The DRAFT
meeting minutes provided by the FTA indicate the discussions between HRT staff and FTA
focused on LRT/Tide project cost increases associated with construction contracts and what costs
were part of the original FFGA versus non-FFGA costs (costs outside of the baseline budget).
The DRAFT meeting minutes reflected that HRT had established a meeting with the City of
Norfolk to discuss a list of “concurrent non-FFGA” line items HRT had assembled. HRT
discussed four separate groupings of costs that included contract 20, public utilities, additional
work that was not part of the bid package (primarily from contract 40, but also in contract 20),
and items having potential redundancy. Excerpts from the February 29, 2008 draft meeting
minutes are below:

       “…HRT reported that it found approximately $1 million in line items in Contract
       20…The second grouping is the public utilities…The bottom line is that HRT
       ended up with ‘B’ and ‘C’ items in Contracts 20, 30, and 40 worth a lump sum
       number of about $1.1 million…The third grouping contains additional work that
       was not part of the bid package, primarily from Contract 40 but also in Contract
       20. This is work definitely requested by the city, things the city absolutely wanted,
       and this totaled to about $2 million…The last group contains items HRT reviewed
       and saw potential redundancy. The city desires these, but the items are not in the
       original FFGA scope…This totals almost $3 million…The total is almost $7
       million in the menu list with a potential of $13 million including utilities and city
       requests. This could draw down the Skanska bid of $42 million by about $3
       million. If the city agrees with the rest, HRT sees a potential for $9.5 to $13
       million savings from FFGA funding. HRT probably will not get $13 million, but it
       will go to the city with the list….” (emphasis added)

February 2008 (42)

The FTA Project Management Oversight Norfolk Light Rail Transit Project Monthly Status
Report dated February 2008 included the following excerpts,

       “Contingency: Currently, $10.8 million, unallocated contingency exists. The
       PMOC believes this amount sufficient to complete the project within budget.”

       “An issue with the scope elements exists in the area of NSU. The new president of
       the university has reneged on a prior MOU HRT had in place with the former
       president of the university. HRT is working on scope modifications that add
       options for HRT in negotiating with NSU. If needed, HRT is currently able to
       walk away from NSU with no cost or schedule consequences. HRT continues to
       meet with the City and NSU to resolve issues pertinent to VSMF.”

       “Project Budget: Contract 40 exceeded the FFGA line item amount and has put
       the unallocated contingency at risk. HRT has been reviewing Contracts 20, 30,
       and 40 for line items that can be removed or paid by the City as concurrent non-
       FFGA line items. HRT is in negotiations with the City on these items. A
       resolution is expected by the end of March.”

       “Norfolk State University will not execute a right of entry for its parcels, and this
       is impacting construction in Contract 20 and delaying the contractor.”
                                               80
   March 21, 2008 (43)

   An email from the Norfolk City Manager to the Norfolk City Mayor, Norfolk Assistant City
   Manager, former HRT President and Chief Executive Officer as well as other Norfolk City
   employees states,

           “I just got a call from Bobby Vassar. He said the Board of Visitors authorized
           their executive committee to ‘negotiate a resolution and work out the details with
           the City in support of the light rail project’. However, Bobby indicated that he
           will use the outline that I sent to Caroline to provide me with an outline of their
           remaining issues. Sounds like they will have some more requests of us. He will
           try to get it done over the weekend and provide it to me on Monday. I told him I
           was around all weekend and to call me if he got it done sooner, impressing upon
           him that we have a real time problem….”

   The former HRT President and Chief Executive Officer responded on March 22, 2008 stating,

           “I’m sure you know that the contractor is poised to de-mobilize as of Monday
           which will potentially impose large costs upon the project and, by extention,(sic)
           on the city. Anything that can be done to encourage them to act before Monday is
           in our interest….”


4. During the period of April 2008 to June 2008, the City of Norfolk was provided details regarding
   the severity of budget issues facing the LRT/Tide project. HRT staff was working towards
   identifying work that fell within the FFGA scope versus non-FFGA work and trying to reach
   consensus with City of Norfolk staff. The discussion of cost overruns, additions and risk was
   quantified into ranges from approximately $33 million on April 4, 2008 to $47 million on April
   18, 2008. Internal documents during this period of time support full disclosure of critical project
   cost estimates were not provided to the HRT Board of Commissioners.

   April 5, 2008 (Support Document 44)

   An email from the Norfolk Assistant City Manager to the HRT Senior Vice President for
   Development as well as several other city employees, with copies to the former HRT President
   and Chief Executive Officer and Norfolk City Manager contains the subject heading “Notes from
   Friday, April 4, 2008 HRT/City staff to staff meeting on LTR.” The notes from the meeting
   identify cost issues totaling $32,726,027. A section entitled Costs Issues states,

           “HRT provided an updated list of costs issues which is appreciated. We went
           over them. A new list is to be provided.
           •      Group 1 is a list of items that HRT termed as items of ‘risk’. These are
              costs that they indicate have a probability of occurring and coming to the City
              as they exceed FFGA budget. Total is $6,042,000. During discussion it was
              noted by HRT that the General Engineering Consultants (GEC) that is made
              up of PB, URS and other consultants have used up their allotted funding for
              design and all future design work will need more funds. Some of the group
              are still ‘works in progress’ and not firm numbers.


                                                   81
       •       Group 2 is extras that have been identified as improvements to the project
           and not in the FFGA budget. Total of this group is $7,674,999. These are
           estimates to include but not limited to items such as enhancements to Ingleside
           station, moving to the UDA inspired shelters, drainage pipe for support of
           maintenance facility and so forth…Other noted items are the redesign of the
           maintenance facility and movement of the NSU station to the other side of
           street both of which are $1.0 or more.
       •       Group 3 is a list of items from contract 40 that are bid and still works in
           progress to be finalized. The total of this group is $9,048,073. This list is 3
           pages long…There is a long list of items that are costs that seemingly were
           not anticipated when the FFGA budget was being created and now have been
           identified by the bid and HRT is suggesting are cost to the City. City asked
           PW and HRT to go through list and bids to see if any individual items such as
           the bridge are when compared to city bid experiences items of interest as
           being too high. Bridge at Smith Creek is one such item.
       •       Group 4 is a list of items from contracts 20 and 30 that HRT indicated are
           not within the FFGA budget. This is a list in progress and is now shown at a
           total of $9,960,955.”

April 10, 2008 (45)

An email from the HRT Senior Vice President for Development to an HRT consultant employee
with PACO Group states,

       “Hi Keith; it was mentioned to me that you had said that you were not involved in
       the financial accounting process anymore. Is that something you have been asked
       not to do or is there some misunderstanding? Our last agreement amongst you, I,
       Laura and Juanita was that you are tracking construction contract amounts,
       change orders, etc., and inserting them into the budget format and Juanita is
       tracking expenses. Has something changed that I am not aware of? Thanks”

April 11, 2008 (46)

An email from an HRT consultant employee with PACO Group to the HRT Senior Vice
President for Development states,

       “Perhaps it’s a misunderstanding, or the way I have interpreted recent
       developments. When I agreed to help out with the budget reporting process I
       picked up where Cheryl left off. I figured HRT was looking for me to substitute
       for her as best I could. Since that time in November the following has happened:

       1. In December I added costs that Joe Mundo had informed HRT it would be
          seeking compensation for. This was in the handover material from Cheryl but
          not in the last budget she had prepared. I reviewed the material and added
          only those costs that HRT felt had some merit, and put these into the budget
          update I was preparing. I was then asked to remove them from the budget.
       2. In January you directed me to confine myself to construction costs only.
          The January budget meeting was the last one I sent out reminders for.
       3. In February I prepared a revised cash flow for construction and provided to
          Chad. At the time we had the Contract 40 bids, but I was asked to prepare
          the cash flow on the basis of the $232.1 million budget. It now looks like
                                             82
            HRT will be going with the Skanska bid for Contract 40. As the decision to go
            with the Skanska bid has become firmer, I’ve mentioned at several project
            meetings that the current cash flow is not sufficient for our 2008/2009 needs.
            However, nothing has been said to me as to what HRT would like to see done
            in response. The danger is that Chad has obtained an appropriation based on
            the old “official” budget that is now short by the Skanska amount. We could
            therefore run out of funds. I have mentioned this in my emails and at project
            meetings, but this issue has not been picked up by the team.
       4.   The February budget meeting was convened by Laura. She changed the start
            time, and didn’t inform me. That was the morning which you, she, Juanita
            and I met later upstairs to brief you on the meeting. One of the things Laura
            showed you was the format the team had agreed to use in reporting future
            change orders. The format did not meet your needs. You asked for it to be
            changed. I advised against it, but you are the client.
       5.   The March budget meeting was canceled by Laura.
       6.   At the most recent PMOC meeting, Laura presented the budget. She
            apologized to me just prior to the meeting that she had been unable to send
            me a copy ahead of time. She promised to send the electronic version after
            the meeting, but didn’t.
       7.   At this meeting Laura highlighted the $16,512,000 in funds that are from the
            Commonwealth. This was the first I had heard of it.

       The $16.5 million in VA funds led me to ask the following: Since they are shown
       in an extra column in the budget summary sheet distributed at the PMOC
       meeting, are they extra funds? In other words, has the budget for the project
       increased from $232.1 million to $232.1 + $16.5 = $248.6 million? If the VA
       funds are not an increase, then the summary spreadsheet is misleading. In such a
       case, the budget remains $232.1 million, and the Skanska bid puts us over the
       budget. I have sensed a pattern in these developments. The information and
       analysis I provide is sometimes ignored, and sometimes reversed….” (emphasis
       added)

April 11, 2008 (47)

An email from the HRT Senior Vice President for Development to the former HRT President
and Chief Executive Officer with the subject heading and an attachment labeled “Issues list for
meeting with Mayor 4-10-08 (2).xls” included the following regarding private utilities.

       “Relocation of Existing DVP services on Old Norfolk Southern Right of Way
       (Easement Agreement) ROE to DVP currently being denied by NSU.”

       “All private utilities were engaged in the project alignment and potential conflicts
       during PE (2005-2006) with understandable reluctance since the project was not
       funded at that time. In early-to-mid 2006, as the project probability increased all
       private utilities were engaged in the LRT design and in August 2006 the City
       issued a letter exercising their franchise rights. Under that arrangement all
       franchised utilities have approximately 150 days to design and relocate their
       facilities. To date, there have been minor relocations by Verizon and VNG but our
       assumption is that (1.) the utility companies are waiting for HRT contractors to
       "open the street" for them whereupon they will move into the barricaded area to
       do their work, and/or (2.) an attempt to see if they can be reimbursed by the
                                                83
       project for their effort. In both cases they will force the project to exceed the
       schedule and very likely the budget also. As of the last meeting DVP and Verizon
       have not identified where they are relocating the majority of their conflicted
       utilities in the downtown area.”

       “DVP has stated that they will not be prepared to start construction downtown till
       the fall. They have not provided a schedule for the Norfolk Southern Right of
       Way. All private utility companies have been asked for a schedule for their
       relocations. To date Virginia Natural Gas is the only utility to provide that
       schedule. In light of their inactivity HRT has offered to install conduits as
       requested to help the utilities to relocate their utilities that are not in direct
       conflict with the rail construction. To date no one has taken advantage of this
       offer. HRT's original plan to have the utilities relocated within 180 days of FFGA
       has gone by the wayside and we are now faced with having to orchestrate (sic) a
       coordinated effort between unwilling utility companies and contractors who will
       rightly claim delays.”

April 16, 2008 (48)

An email from an HRT consultant employee with Post, Buckley, Shue and Jernigan (“PBS&J”)
to another PBS&J employee, with a copy to the HRT Senior Vice President for Development
contained the subject heading “Copy of budget3.xls.” The email contained no words, but
included an attached spreadsheet labeled “Light Rail Budget Issues” which identified 4
groups of costs totaling $44,263,746.

    The groups were broken out as follows:
       • Group 1 entitled “Risk Items” totaled $26,050,000
       • Group 2 entitled “Extras to Improve the Project” totaled $6,510,000
       • Group 3 entitled “Contract 40 Items that have been bid” totaled $9,786,746
       • Group 4 entitled “Contract 20 and 30 Items that have been bid” totaled
           $1,917,000

April 22, 2008 (49)

An email from the former HRT President and Chief Executive Officer to the HRT Senior Vice
President for Development states,

       “Are you sensitive to the fact that the projection of $45 million represents a 20%
       increase in the total cost of the project? This increases when the costs increases
       of engineering/design are thrown in. This makes the differential of ‘natural’ cost
       increases and the ‘requests for extras’ all the more critical.”




                                              84
April 23, 2008 (50)

An email from the HRT Senior Vice President for Development to the former HRT President
and Chief Executive Officer states,

       “The engineering costs are included. A reminder that these are not certain
       increases and include many items that may not occur and will require diligent
       oversight as the project progresses.”

April 2008 (51)

The FTA Project Management Oversight Norfolk Light Rail Transit Project Monthly Status
Report dated April 2008 included the following excerpts,

       “Contingency: Currently, $10.8 million, unallocated contingency exists. The
       PMOC believes this amount sufficient to complete the project within budget.”

       “Project Schedule…Current issues that could affect schedule are utility
       relocations and City supplied demolition contractors. Dominion Power is
       reacting slower than expected to relocate overhead power lines for Contract 20.”

       “Project Budget…HRT has been reviewing Contracts 20, 30 and 40 for line items
       that can be removed or paid by the City as concurrent non-FFGA line items.
       HRT is in negotiations with the City on these items. HRT stated it has assurances
       that the City will provide funds for concurrent non-FFGA line items in the
       contract…HRT must keep track of the FFGA Scope when assigning increased
       costs and new dollars to the project. If indeed HRT, for whatever reason
       including simple oversight or omission, failed to account for elements of the
       project that would be required to build the MOS in a right-sized manner, then
       these elements of the required scope and the costs should be accounted for
       against the FFGA budget, inclusive of allocating the necessary dollars from the
       Unallocated Contingency to same. This will be the only way for FTA to assess the
       real costs of the FFGA approved project, permit accurate analysis of the
       Contingency and the Project Execution Plan accepted at the outset of the FFGA,
       and enable the HRT to most effectively and efficiently provide for rational
       mitigation response. For ‘concurrent non-FFGA’ scope, HRT should continue as
       it has begun to do to show such work and costs as above and beyond the FFGA
       Scope and Budget.”

       “HRT continued to meet with Norfolk city agencies. By agreement, utility
       companies are allowed a specified time to move their utilities after notification by
       HRT. Dominion Power has exceeded their time limit to relocate overhead power
       lines for Contract 20 and there is a danger of delay to the contractor. HRT and
       the City mayor are working with Dominion Power and others to ensure HRT is
       not delayed.”

May 12, 2008 (52)

An email from the HRT Senior Vice President for Development to the Norfolk Assistant City
Manager with the subject heading RE: request to award letter states,

                                               85
      “Attached is the list for the $9.8M. It should look familiar; this is part of the list
      distributed at our April 18th meeting which had a summary page showing $47M in
      total estimated costs (that included risks, add-ons, etc. and attempted to reflect
      the one big no.). We extracted only the Contract 40 items that were included in
      the bid, most were items that needed to be included from design, some were city
      items (the B&C list for utilities, e.g.). I do not plan to distribute this list to the
      Committee or the Commission. In essence, the line of presentation will be:
      1. The FFGA budget estimate was $27.7M as updated in July 2007
      2. Design was completed in October and bids were solicited in November
      3. In January, bids were received and the Engineer’s Estimate (EE) was
          prepared, based on final plans and specs
      4. EE was $33M, Skansa’s bid was $42.4M (Our Construction Manager will
          explain to the committee the categories where bids were higher than the EE,
          etc.; I’ve attached in case you haven’t seen in my earlier email
      5. In comparing the budget no. of $27.7M and the bid of $42.4M, we will explain
          that $9.8M are items not originally in the FFGA budget break out but added
          as design advanced (PB/URS identified those items for us as they did the
          original cost estimate for the FFGA and subsequently put the EE together, so
          they could easily identify those added items). The remaining $5M (est.) is risk
          the contractor added to the bid for a variety of reasons; challenge of working
          in downtown environment, access to work on Smith Creek Bridge, utility
          conflicts, etc.)….” (emphasis added)

May 12, 2008 (53)

An email from the Norfolk Assistant City Manager to the HRT Senior Vice President for
Development states,

      “Thanks. We are taking a look and Regina is considering what to say to our City
      Council if anything tomorrow so they are not surprised by the public
      announcements/actions of your board. I presume nothing publicly is being done
      today or prior to the board meeting for the media to pick up on?”(emphasis
      added)

May 12, 2008 (54)

An email from the HRT Senior Vice President for Development to the Norfolk Assistant City
Manager, with a copy to the former HRT President and Chief Executive Officer states,

      “Correct. We are not pursuing any story, but want to be prepared. So the simple
      story is: $27.7 M (updated FFGA est.) + $9.8 M (bid items added since FFGA
      budget) = $37.5 M + $4.9 M (deemed as risk protection added by contractor) =
      $42.4 M…If project budget comes up, additional project funding available at this
      time and not yet obligated = $10 M in unallocated contingencies + $12 M in
      additional state funding.”

May 12, 2008 (55)

A request to award, Contract #40, in the amount of $42,415,442.87 was presented at the HRT
Operations & Oversight Committee Meeting. Committee members were presented with
information that the updated budget estimate in July 2007 was $27,701,605, including
                                            86
contingencies. Committee Members included Chairman Brown, Ms. Routten, Mr. Haskins, Mr.
Holley, Mr. Newman, and Mr. Uhrin. The Commission meeting minutes do not reflect any
discussion on this matter. However, the Commission minutes do not ordinarily capture the
detailed discussion.

May 20, 2008 (56)

An email from the former HRT Transit Development Manager to the HRT Senior Vice President
for Development with a copy to the former HRT Chief Capital Program Officer had a subject
heading of “Assumptions in Tab B – Comments section attached” and included a Micrsoft Excel
attachment labeled “2008_03_31 Cost Report R4.xls”. The email states,

       “Per Cheryl, assumptions from Feb 2007 are in Tab B – Comment Section. This
       is the secret Tab that we have NEVER submitted to FTA. PB/Shamoon should
       have session notes, and anything from Plume Street notetaking.”
       (emphasis added)

June 16, 2008 (57)

An email from the HRT Senior Vice President for Development to the former HRT President
and Chief Executive Officer states,

       “At our Stanley meeting Friday, he mentioned going to Council tomorrow in
       closed session to talk about the ‘extras’ list with them and to generally go over
       the project budget. He and Paul asked about the soft costs in the budget
       (consultant/management fees) showing a deficit. He asked that I give him a
       general explanation to share with Council. Here’s what I propose:
       •     These costs include current contract award values for Design, Program
           Management and Construction Management as well as estimates through
           construction and up to opening day for these services.
       •     Also included are estimated costs for Public Involvement activities through
           construction.
       •     LRT Project costs are reviewed in terms of the total project cost,
           construction and “soft costs”. Throughout the project period, line item
           balances will be adjusted to reflect actual project expenses.
       •     Mitigation of cost overruns to this point include additional state funding
           ($12M) and the application of unallocated contingencies ($10M).
       Are these points ok to send to Stanley?” (emphasis added)

June 17, 2008 (58)

A Norfolk City Council meeting was held June 17, 2008 in which there was a closed door
session. A presentation entitled “Light Rail Project Update” was delivered during the closed
session. Excerpts of this presentation include the following:

       A section entitled “Financial Overview” listed the FFGA Budget at $232,101,000
       and the Current Estimate at $236,423,458 and stated,

       “…[c]urrently we are $4,816,892 over the FFGA budget however we have added
       $12.0 MM from Commonwealth…These numbers represent a point in time

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       reflecting the actual awards plus current HRT estimates of remaining elements to
       be performed.”

       Working with HRT to achieve evaluation of the issues raised by HRT that will
       have impact on the project, achieve information reliable for City Council
       understanding and evaluation so it may provide guidance…HRT has provided to
       the City estimates of potential costs that may exceed the current budget and
       which we have allocated to 3 groupings of (1) construction cost increases, (2)
       enhancements, and (3) omissions…The City is going to engage a firm to assist it
       and HRT to confirm the values assigned to each issue and to assess the
       reasonableness in terms of cost increases.”

       “Construction Costs…These items are for ‘risks’ estimates for potential higher
       costs to be incurred…The current estimate by HRT is that these could total $27
       MM.”

       “Enhancement Issues…Changes beyond the base FFGA budget contemplation for
       the project to enhance its placement within our urban fabric…The current
       estimate by HRT for items in this category is $11.5 MM.”

       “Omissions Issues…Items of cost beyond the base FFGA budget that should have
       been included…The current estimate by HRT for items in this category is $7.3
       MM.” (emphasis added)

June 25, 2008 (59)

The former HRT Chief Capital Program Officer sent the following correspondence to the HRT
Senior Vice President for Development,

       “…MY OBSERVATION…I see a lot of decisions made through political
       accommodation that will eventually be very harmful to the project. I told you
       years ago that traditionally, large projects such as this will run into political
       problems toward the end that usually result in a high-level person being
       dismissed. I was willing to take that sword for the project while I was in control.
       I’m not willing to make that sacrifice when I have very little authority. So when
       the going gets really tough regarding busted budget, busted schedule, media
       ridicule, and/or public frustration; and those in the spotlight demand that heads
       must roll, who will take the sword? Not the city, nor any of their staff, because
       through ignorance or premeditation they are setting HRT up to fail. We have
       turned over more and more control to the City while, at the same time, they
       accept no responsibility. There is no way to survive this chaos. And while I have
       a long track record of making order out of chaos I have no control over decisions
       or events on this project. Therefore, since I can’t affect or create order it’s time to
       say goodbye.”

April to June 2008 Monthly LRT/Tide Project Summary Reports (60)

HRT Monthly DR002 Project Summary reports from April 2008 to June 2008 did not reflect the
level of projected costs referenced in the above documents (ranging from $33 million to $45
million) that were presented to the City of Norfolk. These reports contain a column entitled
“Total Estimated Cost at Completion” which reflects $232,466,620, $247,395,440, and
                                              88
   $245,044,522 respectively. In reviewing the July to September 2008 reports it was determined
   the total estimate cost at completion column was eliminated from the Project Summary report.


5. Internal documents from July 2008 disclose further instances where HRT staff did not provide
   full disclosure of critical LRT/Tide project cost estimates.

   July 24, 2008 (Support Document 61)

   An email from the HRT Senior Vice President for Development to the Norfolk Assistant City
   Manager and Norfolk Acting Director of Finance, with copies to the former HRT President and
   Chief Executive Officer and former HRT Senior Vice President of Finance states,

          “As we have discussed in several meetings/conversations, FTA and VDRPT are
          requesting additional confirmation of the city’s commitment to fund additional
          LRT project expenses, as needed. The state is seeking this confirmation prior to
          release of the additional $12M recently approved by the CTB…”

   July 25, 2008 (62)

   An email from the Norfolk Assistant City Manager to the HRT Senior Vice President for
   Development and Norfolk Acting Director of Finance, with copies to the former HRT President
   and Chief Executive Officer and former HRT Senior Vice President of Finance states,

          “…Please provide to me as I requested previously an understanding of what you
          have previously provided to FTA with regard to project cost increase potentials.”

   July 28, 2008 (63)

   An email from the HRT Senior Vice President for Development to the Norfolk Assistant City
   Manager, with a copy to the former HRT Chief Officer of Engineering states,

          “We gave FTA a $16M list that we used pieces of the full $40+M list, since we
          did not think it was time, or appropriate to show the whole list. Attached are the
          lists that comprised that $16M. The Cont. 40 attachment is the detail for $9.8M
          referenced for Group 3. Please understand that the lists were developed back in
          April when FTA asked for it, so there have been revisions in some of the costs
          based on actual bids or updated costs…”

   July 28, 2008 (64)

   The Norfolk Assistant City Manager responded via email as follows,

          “Let me tell you back what I think I have here to be sure we get to where we need
          to be…I have a list from you that is contract 40 specific that is $9,786,746 or as
          you refer $9.8 MM. I have a second list that is one page and has $16 MM on it to
          include $13.5 MM for contract 40, $500,000 for contract 20 and $2.0 MM for
          contract 30. I don’t have a reconciliation between the two contract #40 list ($9.8
          vs $13.5). And you are saying FTA has only the $16 MM list and that is their
          current knowledge base.”

                                                 89
   July 28, 2008 (65)

   The HRT Senior Vice President for Development responded via email as follows,

          “The $9.8 is part of the $13.5M. The delta costs are the risk items that Regina
          asked that we include. FTA only has the $16M list so far (at least from me!).”

   July 2008 (66)

   The FTA Project Management Oversight Norfolk Light Rail Transit Project Monthly Status
   Report dated July 2008 included the following excerpts,

          “Contingency: Currently, HRT is showing a contingency amount below the value
          calculated in risk workshops; however, two factors may mitigate this budget
          issue. First, negotiations with the City to pay for “concurrent non-FFGA”
          (CNFA) scope items have not been finalized and are likely to result in these costs
          being absorbed by the City or the work eliminate. Second, the State has
          committed an additional $12 million in funding toward the project, and these
          funds made available as of July 1, 2008 PMOC is concerned about the budget
          but must review remaining scope and projected costs after City negotiations to
          determine if the budget is in jeopardy.”

          “Private Utility Relocation…By all appearances, the timely relocation and/or
          other work by private utilities may be a serious problem and result in delays to
          contractors, especially as relates to the downtown civil contractor (Contract
          40).”

   August 2008 (67)

   The FTA Project Management Oversight Norfolk Light Rail Transit Project Monthly Status
   Report dated August 2008 included the following excerpt,

          “Contingency: Currently, HRT is showing a contingency amount that appears to
          be adequate for the remainder of the project. Additionally, when negotiations
          with the City to pay for “concurrent non-FFGA” (CNFA) scope items are
          finalized they are likely to result in these costs being absorbed by the City or the
          work eliminated. The State has committed an additional $12.3 million in funding
          toward the project, and these funds have been made available as of July 1, 2008.
          The City has provided a 20% match.”


6. During the period from September 2008 to January 2009 issues started becoming public and
   HRT staff took steps to disseminate information regarding the LRT/Tide project budget
   exceeding the original FFGA budget of $232 million.

   September 28, 2008 (Support Document 68)

   An article in the Virginian-Pilot with the heading “HRT hasn’t addressed concerns about light-
   rail project, Norfolk officials say” states,

                                                  90
       “City leaders say that Hampton Roads Transit has failed to inform them about
       cost overruns for the $232.1 million light-rail system and has not properly
       explained the project to residents and business owners who will be affected by
       it…Councilman Barclay C. Winn said he’s been asking for figures on the city’s
       share of the project for seven months. The numbers are scheduled to be presented
       to the council Monday at its retreat. But as of late Friday, Assistant City
       Manager Stanley A. Stein said he had not yet gotten updated numbers from
       HRT…”

September 30, 2008 (69)

An email from an HRT legislative services consultant from Holland & Knight to the former HRT
President and Chief Executive Officer and HRT Senior Vice President for Development states,

       “It looks like HRT got ‘thrown under the bus’ by Stanley and some City Council
       members. When will you be able to delineate between cost increases, scope
       changes and concurrent non-project expenses? I thought Brian had prepared
       something.”

September 30, 2008 (70)

A response from the former HRT President and Chief Executive Officer via email states,

       “Unfortunately we allowed ourselves to be set up by Stanley and Regina. They
       have had detailed estimates since April that have been updated regularly. We
       didn’t provide ‘all the back-up’ which gave them the excuse the[y] want[ed] to
       ‘diss’ us….”

September 30, 2008 (71)

An email from the HRT Senior Vice President for Development to the HRT Vice President of
Public Affairs and Communications states,

       “…In my opinion, this gives us the opening to lay it on the line about how and
       what info we have provided and has not been communicated to Council. But we
       need to tell Randy if we do this in case the city wants to change their tactic….”

October 1, 2008 (72)

An email from the HRT Senior Vice President for Development to the HRT Public Affairs
Manager and HRT Vice President of Public Affairs and Communications with a copy to the
former HRT Chief Officer of Engineering included an attachment labeled “Summary page for
cost table for Ed Brd” that stated,

       “HRT has worked with the city of Norfolk staff regarding potential additional
       LRT project costs. The attached information illustrates these costs by the
       following categories:

       Recent costs beyond original Full Funding Grant Agreement (FFGA) Budget -
       These costs reflect items that are necessary to construct the LRT system that were
                                                91
       not included in the original $232.1 million FFGA. These items were added as a
       result of completion of Final Design and depict exclusions as well as estimates of
       additional costs for project components not yet resolved or bid.

       City Improvements – These costs reflect LRT project items the City of Norfolk has
       requested be included for consideration. These items are enhancements to the
       original project scope.

       Potential Project Risks- This table represents cost estimates for items that reflect
       potential unforeseen risks the project may experience, e.g., drastic increases in
       construction materials.

                   Recent List of Costs
                   Beyond Original FFGA                          $27,034,262
                   City Improvements                             $16,174,063
                   Potential Project Risk
                   Items                                         $12,700,000

                   Total                                       $55,908,325”

October 23, 2008 (73)

An email from an HRT legislative services consultant from Holland & Knight to the FTA
Deputy Chief Counsel states,

       “Need to talk to you today or early tomorrow. This is an informal ‘next steps’
       call rather than a formal request. The Norfolk LRT project just opened the bid 80
       that now will require the use of unallocated contingency. They recognize that
       they will need to develop a new project cost. They have heard that FTA granted a
       "waiver" to Portland rather than requiring a formal recovery plan. They would
       like to know if that option is available…Moreover, we will need to discuss a
       revised ROD but don't have enough information to-date to give you a firm
       date….”

October 23, 2008 (74)

An email from the FTA Deputy Chief Counsel to the HRT legislative services consultant states,

       “…[T]he grantee's project management staff needs to contact the Regional Office
       to discuss the amounts of the cost overruns and schedule slippage, if any, as
       compared to the Baseline Cost Estimate (FFGA Attachment 3) and the Baseline
       Schedule (Attachment 4) specified in the FFGA. Just because the grantee might
       have to dip into its unallocated contingency or revise the Project Budget (FFGA
       Attachment 3A) doesn't mean the Regional Office would have to prepare an
       amendment to the FFGA…Moreover, the Regional Office would likely need a
       "Spot Report" from its PMOC before it could make any judgments about the need
       for a "Recovery Plan" or an amendment to the FFGA…If the project is still early
       in the schedule, it's likely FTA will insist on a "Recovery Plan" and a 30 days'
       notice to the appropriators. If the project is substantially completed, however,
       FTA might forego a "Recovery Plan" and any notice to the Hill…Michael Townes
       should call Letitia Thompson (Regional Administrator for Region 3) to discuss the
                                                92
       likely amounts of cost overruns and schedule slippage, and Letitia's staff will take
       it from there. If she wants it, Letitia would then call on the Office of Engineering
       in Susan Schruth's headquarters Office of Program Management for help and
       advice in developing any changes to the FFGA.”

This email was forwarded to the former HRT President and Chief Executive Officer and Senior
Vice President for Development.

October 24, 2008 (75)

An email from the former HRT President and Chief Executive Officer to the Senior Vice
President for Development and HRT legislative services consultant states,

       “Letitia is out today. I have a call in to Reggie. I'll send you a message after we
       talk.”

October 24, 2008 (76)

An email from the former HRT Senior Vice President of Finance to the Deputy Director -
Virginia Department of Rail and Public Transportation (DRPT) and Chief Financial Officer –
DRPT, with copies to the former HRT President and Chief Executive Officer, former HRT
Senior Vice President for Construction, former HRT Chief Officer of Engineering, and two other
employees from DRPT included an attached spreadsheet showing an adjusted LRT/Tide project
cost of $283M. The email states,

       “Please find attached a revised version of the presentation we discussed earlier
       this week. It should reflect the results of our discussions. Perhaps most
       significantly, you'll note in the "Summary" tab the addition of $9 million of scope
       additions proposed by DRPT. On that tab, I've also portrayed how the federal,
       state, and local funding could be allocated to each of the columns of cost
       elements, as Matt requested. On the ‘Funding Source’ tab, I've adjusted state and
       local funding to reflect a 50 - 50 match…At your earliest opportunity, could you
       please comment as you deem appropriate or confirm that this accurately reflects
       your understanding. I've been asked to discuss this with a senior staff member in
       Norfolk on Monday afternoon, and I'd like to benefit from your feedback prior to
       then.”

October 27, 2008 (77)

An email from the former HRT Senior Vice President of Finance to the DRPT Deputy Director
and DRPT Chief Financial Officer, with copies to the former HRT President and Chief
Executive Officer and two employees from DRPT included an attached spreadsheet showing an
adjusted LRT/Tide project cost of $283M. The email states,

       “…Michael has asked Stanley [Stein] not to divulge the contents of my discussion
       with him tomorrow until after Matt has completed his deliberations and provided
       a ‘go ahead.’ It turns out Norfolk’s Mayor has a meeting this Wednesday
       afternoon with Secretary Homer. The Mayor has asked Stanley for updated
       information, which, unless you tell us otherwise, would include what we talked
       about last week and was included in the material I sent to you Friday for your

                                               93
       review and comment (see attachment). We don’t want to get ahead of Matt.
       Please advise.”

October 27, 2008 (78)

The former HRT President and Chief Executive Officer forwarded the above email and the
attachment to the Norfolk Assistant City Manager stating,

       “I am forwarding this so that you can be in the loop. Until we get guidance please
       consider this all confidential.”

October 27, 2008 (79)

An email from the DRPT Deputy Director to the former HRT Senior Vice President of Finance
and DRPT Chief Financial Officer, with copies to the former HRT President and Chief
Executive Officer and two employees from DRPT states,

       “The table that you sent us reflects what we talked about in our meeting last
       week. The numbers that you have shown us indicate that the improvements to the
       project requested by the City of Norfolk will be paid for by the City. This will
       bring the total investment in this project by the City to approximately the same
       level as State investment currently programmed. We believe that it is reasonable
       for the state and the City to share evenly the responsibility for project risk and for
       the scope additions that have been made to the project to date and for the scope
       additions that we have indicated are necessary in our recent assessment of the
       project. This shared responsibility will be for project expenses as currently
       defined net of any additional federal funds that may be brought to the project.
       Any further improvements that are requested by the City will be the sole
       responsibility of the City. Please understand that while we believe that this is a
       reasonable cost sharing arrangement, we cannot commit state funds until a new
       Six Year Improvement Program is developed and approved by the Commonwealth
       Transportation Board…We have no objection to your sharing this information
       with the City.” (emphasis added)

November 7, 2008 (80)

The following is an excerpt from an article appearing in the Virginian-Pilot regarding the
LRT/Tide project:

       “Michael Townes, HRT president, has said the project will go over budget and
       will not open by January 2010 as originally planned. He said he cannot provide
       detailed numbers and dates until mid-November.”

November 19, 2008 (81)

An email from the former HRT Senior Vice President for Construction to the former HRT Senior
Vice President of Finance and HRT Senior Vice President for Development states,

       “As I am working through the light rail budget 284 and No More (sounds like a t-
       shirt – kind of like SARAH! 2012 note the intentional use of Red, anyway I
       digress) I need the detail of charges to the budget specifically SCC 80.03 and
                                               94
       even more specific, PI charges as they seem to be spending money like a
       drunken…in Vegas.”

December 6, 2008 (82)

An email from the former HRT Senior Vice President of Finance to the Norfolk City Manager,
with copies to the former HRT President and Chief Executive Officer and Norfolk Assistant City
Manager states,

       “I strongly recommend consideration of the presentation developed by HRT. The
       HRT presentation is based on the attached file.”

The spreadsheet attached to the above email entitled “Norfolk LRT Presentation 12/09/2008”
identified the Total Project of $243,925,613, a Contingency of $17,731,208, Local Components
of $13,702,179, Scope Additions of $5,741,000, and State Components of $6,900,000 for a total
revised LRT/Tide project budget of $288,000,000.

December 9, 2008 (83)

During a Special Session of the Norfolk City Council, it was reported the LRT/Tide project
budget was being revised to $288 million.

December 10, 2008 (84)

An article in the Virginian-Pilot contains the following excerpt:

       “City Council members grilled Hampton Roads Transit and city staff Tuesday
       about $55.9 million in light rail cost overruns…The price tag has grown to $288
       million, from $232.1 million a year ago, a 24 percent increase…Some costs
       within the budget are double the original estimates – including consultant fees,
       the downtown construction contract and start-up expenses…In general, officials
       attribute the overruns to construction and real estate cost increases, safety and
       security features requested by the state, changes sought by Norfolk State
       University, and enhancements such as station upgrades and landscaping added
       by the city…The largest increases were especially troubling to council members.
       Consultant contracts to design the system rose to $14 million from $7.7 million
       and to manage the project jumped to $13.5 million from $5.9 million…”

December 11, 2008 (85)

An email from the former HRT Senior Vice President for Construction to the Federal Transit
Administration (“FTA”), with copies to the former HRT President and Chief Executive Officer
and former HRT Senior Vice President of Finance states,

       “Attached is the HRT cost to complete spreadsheet for the Norfolk Light Rail
       project. This spreadsheet is in a format that you probably are not used to seeing
       as it is what was presented to the Norfolk City Council earlier this week. I am
       still hoping to have a draft agenda for the 1/5/09 Cost Workshop to you by the end
       of today.” (emphasis added)


                                                95
   The spreadsheet attached to the above email reflected a cost-to-complete of $288 million. The
   above email also indicates changes in report formatting were used depending on the recipient.

   January 22, 2009 (86)

   The “President and CEO Report” dated January 22, 2009 to the HRT Board of Commissioners
   reflected a revised LRT/Tide project budget of $288 million.


7. Internal documents suggest the $288 million budget was not completely accurate and up to date
   when presented to the Norfolk City Council. For example, within the newly revised LRT/Tide
   project budget of $288 million, the line item budget for Startup, Pre-Revenue Activities, was
   $2,064,000 even though internal email from October and November 2008 documented this
   amount would not be nearly sufficient to cover the related costs.

   October 28, 2008 (Support Document 87)

   An email from the former HRT Senior Vice President of Finance to the former HRT President
   and Chief Executive Officer states,

          “I heard this morning that Jim Price has identified $5 million of startup costs
          beyond the $2,064,000 in the FFGA budget. I have not seen the detail of Jim's
          projection. In addition, Fred tells me he has developed $2.3 million of potential
          risk items associated with Jim's items. Combined, this would add another $7.3
          million to our financial projection. Fred also mentioned that he thinks Jim's items
          should have been included in the original FFGA/design. I think we need to fully
          vet this information prior to adding it to our schedule. In my meeting with Stanley
          today, I may mention just that we're working on the startup activity costs and
          should have a refined number in a week or so….” (emphasis added)

   October 28, 2008 (88)

   An email from the former HRT President and Chief Executive Officer to the former HRT Senior
   Vice President of Finance states,

          “Yes mention that these numbers are being refined to Stanley. Don't say
          anything else and don't make a big deal about it. Make it off the cuff and don't
          allow him to create a big issue out of this. These numbers need to be refined and
          absolutely need to be lowered…I want to know the basis of the $800,000 estimate
          NOW! Jayne must come clean…If this is just some BS number she had in the
          budget then she needs to admit that right now…Please send an answer to this
          issue ASAP…I cannot foresee where such magnitudes of extra money is going
          to come from…PS: DON'T SEND ME ANY MORE BAD NEWS!!” (emphasis
          added)

   November 13, 2008 (89)

   An email from the HRT Senior Vice President of Operations to the former HRT President and
   Chief Executive Officer states,


                                                  96
          “…The $284m is the bottom-line and I can deal with that. However, Rail
          Activation is a process which must be completed following FTA Guidelines
          regardless of our project cost, providing we are using their funding. Therefore, it
          is unreasonable for me to lead you to believe that I can activate this railroad, and
          comply with all the FTA, State as well as industry standards with this proposed
          activation budget of $2.064m…After knocking the hell out of Jim Price's
          requirements, (by the way, what he proposed is industry standard rail activation
          costs), and if our understanding is accurate as far as how we reviewed the
          Siemens Letter Agreement which we believe there is training, special
          tools/equipment, car maintenance manuals, and finally, Larry's possible
          assumptions of an additional $2m plus if the ball bounces our way, I am still
          $2.4m short of what we believe is least costly light rail start-up budget in the 21
          century. Our project cost of $6.4m which represents a little over 2.2% of the
          entire project budget. If the rail activation is not done correctly, we don't open.
          I’m asking if you can squeeze VDRPT for some additional Rail Activation
          funding?” (emphasis added)

   November 13, 2008 (90)

   An email from the former HRT President and Chief Executive Officer to the HRT Senior Vice
   President of Operations, with a copy to the former HRT Senior Vice President of Finance, states,

          “…I talked to Matt. It's possible that we can do something.”


8. Within a few months of the LRT/Tide project budget being revised to $288 million, there were
   indications the cost-to-complete might exceed this amount. Stakeholders who either had or
   received information the revised project budget of $288 million might be exceeded included
   certain members of HRT management.


   December 20, 2008 (Support Document 91)

   VDOT Inspector General staff obtained a DRAFT memorandum from the files of the former
   HRT Senior Vice President for Construction. The DRAFT memorandum was written on
   Skanska USA letterhead from the Skanska USA Project Manager to an HRT consultant
   employee with PBS&J that contained the subject heading “HRT Breach of Contract.” This
   document was not dated or signed. The most recent events cited in the document occurred on
   December 20, 2008. Excerpts of this document include the following:

          “The purpose of this letter is to notify you that Skanska believes that HRT has
          materially breached the Contract by not providing adequate and promised access
          to the Project work site for Skanska to perform Contract work. Although Skanska
          previously re-sequenced work (in coordination with HRT) in an attempt to
          mitigate its damages, HRT’s failure to support Skanska’s schedule – as HRT was
          required to do – has now progressed to the point where the Contract critical path
          is being affected on a day-for-day basis…”

          “…It also was known from the outset of this Project that the Contract work was
          highly dependent on the timely re-location of utilities (especially Dominion

                                                  97
       Virginia Power (DVP) work), which was a prerequisite to much of Skanska’s
       Contract work. HRT knew full well that property ROW acquisitions and utility re-
       locations were outside the control of Skanska, and HRT acknowledged its
       obligations to support the Contract work in this regard. Although changes to the
       Project based on non-acquisition of property rights and failure to re-locate
       utilities have occurred thus far, the Project now has progressed to the point that
       these issues must be addressed immediately…”

       “…Changes to the scope of Contract work include the following…As of
       December 20, 2008, HRT stated that ‘it is not known at this point in time when
       Dominion Virginia Power will perform their re-location on Main St.’…Also on
       December 20, 2008, Skanska notified HRT that its planned work had been
       delayed as a result of the failure to re-locate the Level III underground
       communication line; that Skanska had attempted unsuccessfully to obtain utility
       re-location schedules for several months; that there still was no known date for
       the Level III re-location; that Skanska had pointed out on its baseline schedule
       the importance of DVP’s re-location of its duct bank on East Main Street (which
       is why Skanska started work at Harbor Park), which is now preventing the start of
       electrical re-location work…Further, despite numerous requests, Skanska has not
       received any kind of re-location schedule, which is preventing Skanska from
       accurately sequencing all affected work…”

       “…With almost seven months having elapsed since NTP [Notice to Proceed],
       Skanska estimates that, as a result of HRT’s failure to perform its contractual
       obligations as detailed above, over 50% of the Project footprint currently is
       unavailable for work…causing substantial cost impact to Skanska…There already
       have been over thirty change order requests submitted by Skanska and, more
       importantly, Skanska still has not received schedules for ROW acquisitions and
       utility re-location upon which it can rely. Further, timely completion of the CBD
       work almost certainly will not occur, based in part on the following:
            • DVP has not re-located a single service in the CBD to date, and estimates
                up to twelve months of work to accomplish the necessary re-locations.
            • Property acquisitions are incomplete, and some property acquisitions are
                doubtful. Further, some properties currently are not scheduled to become
                available to Skanska until two or three months prior to scheduled
                Contract completion.
            • Utility re-locations required to complete the initial phases remain
                incomplete, with some not scheduled to finish until as late as April
                2009…”

       “…In addition to addressing the additional compensation owed Skanska for the
       changed and new scope work to date, a new Project schedule needs to be
       developed based on accurate estimates of ROW acquisitions and utility re-
       locations…”

December 23, 2008 (92)

An email from the former HRT Senior Vice President for Construction to the Project Specialist,
with copies to the HRT Vice President for Public Affairs and Communications and HRT Senior
Vice President for Development with the subject heading “Light Rail Published Cost Report”
states,
                                             98
       “The last published cost report on the J-drive is 9.30.08, which I already have a
       copy of – the genesis of the PI [Public Involvement] budget crises. I need a copy
       of the most current report as well as detail of the charges to the LTR project that
       are reflected in that report. I need both of these ASAP so that I can work through
       PI budgeting issues on the project….”


February 5, 2009 (93)

An internal memorandum from the HRT Director of LRT Engineering/Construction to the
former HRT Senior Vice President for Construction with the subject heading “Norfolk Light Rail
Transit Project Construction Cost Control Items” states,

       “As per your request to begin considering Norfolk LRT project cost items that can
       be brought downward, a summary of target items provided herein. It is known
       that this project cost is slowly escalating in terms of change notices and bid
       escalation, and the overall cost of the project may well, even after adjusting for
       City-mandated items, rise above the ~$290MM ceiling budget cost…The driver
       for much of this discussion is related to the upcoming station and park-and-ride
       contracts. It is very probable that the combined bids for Contracts 100, 110, and
       150 will far exceed the current $8.3MM budget for those items. It is prudent to
       have a contingency plan…” (emphasis added)

February 24, 2009 (94)

An email from the former HRT President and Chief Executive Officer to Norfolk Councilman
Randy Wright states,

       “…City staff is at the core of a potential delay from DVP on contract 40 which
       could potentially cause a $2,000,000 cost to the project. Nothing we have
       proposed to facilitate the attainment of our $288,000,000 has the city agreed with
       or allowed to go forward. Indeed the (sic) have created additional unforeseen
       costs and have insisted that we absorbs (sic) in the $288,000,000 even though
       they are not accounted in that number. It will be impossible for the project to
       successful unless the city takes a different attitude towards it….” (emphasis
       added)

February 2009 (95)

The FTA Project Management Oversight Norfolk Light Rail Transit Project Monthly Status
Report dated February 2009 included the following excerpt,

       “Schedule…Several critical issues are being addressed at this point that could
       have a potential impact on the project Revenue Operations Date and cost. These
       issues include utility relocation impact on Contracts 40 and 60 by an additional
       four months (Mitigation measures and utility work expeditions are being
       evaluated and considered by HRT at this time). Station design coordination and
       late changes have a potential parallel impact on the project critical path.”


                                               99
March 4, 2009 (96)

A memorandum from the Skanska USA Project Manager to an HRT Consultant Employee with
PBS&J with the subject heading “Schedule Delays” states,

      “…Some dates, specifically the availability of the Kirn Library, Baylor Building
      and EVMS had changed significantly:

          1. EVMS, an additional 44 days. (February 20, 2009 to April 6, 2009)
          2. Baylor Building, 45 days (March 15, 2009 to April 29, 2009)
          3. Kirn Library, 142 days (March 15, 2009 to August 4, 2009)

      Skanska is reminding HRT that there was no allowance within the contract for
      late acquisition of the above properties. All properties should have been
      available to Skanska at Notice to Proceed. Skanska, during initial schedule
      development, worked with HRT to ‘schedule out’ the apparent late acquisition of
      these properties. As a result any slippage would have a negative effect on the
      project completion…Under the terms of the contract Skanska is required to notify
      HRT promptly of ‘Delays to the Work’. This is addressed under General
      Conditions, Section 2 and 34 and within the Special Conditions, Section 14.
      Please accept this letter as notice in this respect…Skanska is required to provide
      an estimate of the cost of these delays.

      EVMS:                 $418,000.00
      Baylor Building:      $427,000.00
      Kirn Library:         $2,130,000.00

      Each delay has been assessed individually and are considered separate from the
      day for day delays at Monticello which will be addressed under separate cover.”
      (emphasis added)

March 23, 2009 (97)

An email from the Norfolk Assistant City Manager to the former HRT President and Chief
Executive Officer and Norfolk Councilman Randy Wright, with a copy to the former HRT
Senior Vice President for Construction states,

      “I spoke with Regina [Williams] over the weekend as we worked on our budget.
      She said ok to HRT being the entity that presents the presentation on the 31st….”

March 23, 2009 (98)

An email from the former HRT Senior Vice President for Construction to the former HRT
President and Chief Executive Officer in regards to the above email states,

      “What all do you want to cover?...Previously Stanley has suggested we address
      the VSMF façade, the non-ballested track downtown (where ballasted track is in
      the plans)…What do we want to say about budget and schedule? I understand
      budget is still $288.9999999999999999999999M” (emphasis added)


                                             100
   March 23, 2009 (99)

   An email from the former HRT President and Chief Executive Officer to the former HRT Senior
   Vice President for Construction states,

          “No, the budget is $288 PERIOD! Schedule…be vague-early fall 2010. Budget,
          be truthful-you’re going to bring it in at or under $288 PERIOD. I talked to Tim
          about the façade-it’s what their design-review board has endorsed. We
          committed to the ballasted track and we need to keep that commitment until they
          agree to a change; which isn’t likely to happen.” (emphasis added)

   March 23, 2009 (100)

   An email from the former HRT Senior Vice President for Construction to the HRT Project
   Specialist, with copies to the HRT Senior Vice President for Development, former HRT Senior
   Vice President of Finance, and former HRT President and Chief Executive Officer had the
   subject heading Light Rail Budget – SCCs 80.03 (Program and Consultant Management) and
   80.04 (Construction Administration & Management). The email read,

          “We need to meet, very soon, on the budget breakdown for SCCs 80.3 and 80.4. I
          am working desperately to determine what the remaining available budget –
          including all that I can reasonably transfer from other places in the $288M
          budget, for a PM/CM cost to complete….”


9. Starting in March 2009, HRT staff took steps to remove items from the LRT/Tide project budget
   to pursue reimbursement from other funding sources, including those made available through the
   American Recovery and Reinvestment Act (“ARRA”). Effectively, the aforementioned steps
   provided funding for the LRT/Tide project in excess of the $288 million budget.

   March 23, 2009 (Support Document 101)

   An email from the former HRT Senior Vice President for Construction to the Senior Vice
   President of Operations with a subject heading of “Pettibone Multi-purpose rail vehicle” states,

          “Just an FYI, the cost for this is $566,145.89 in contract 80 which is an increase
          of $52,145.89 over what was specified. If we can move this to stimulus money we
          should.”

   March 31, 2009 (102)

   An email from the HRT Senior Vice President for Development to the HRT Vice President of
   Rail Operations and HRT Senior Vice President of Operations with a subject heading of “Shop
   Tools” states,

          “…I just talked to Fred about the LRV Mover and $250K shop tool allowance in
          Cont. 80. These will be deducted from the contracts to achieve the savings from
          the $288m. Let me make sure I am absolutely clear on the info below. The full
          $961k is being put in the Shop Tool line item for Recovery Act funding. The first
          column was labeled Project and the other Rail Activation. Can you confirm that

                                                 101
          the full $961k is indeed part of the $288 estimate? Were the Project items
          included in a Construction Contract for purchase or items subsequently added
          separately? Just want to make absolutely sure so we don’t overestimate the
          savings from the $288. Either way, we can still buy them, but I want to be clear
          on what was included originally in the $288.”
   April 01, 2009 (103)

   An email from the HRT Vice President of Rail Operations to the HRT Senior Vice President for
   Development, with a copy to the HRT Senior Vice President of Operations states,

          “The list…is correct and were included in the $288M.”

   April 6, 2009 (104)

   A sole source justification was prepared for the Pettibone multi-purpose rail vehicle which states,

          “…The LRT Engineering and Development group discussed the matter with W.M.
          Slosser representatives, obtained a quote and issued written direction to order the
          vehicle. In the following weeks new funding streams opened up that afforded the
          opportunity to provide some economic relief for the currently taxed contract 80
          budget. Furthermore, a direct purchase outside of the contract 80 arena offered
          a substantial savings to the organization…”

   April 8, 2009 (105)

   An email from the HRT Senior Vice President of Operations to several HRT staff states,

          “Jim, can you explain to Wright [HRT Procurement Director] how we have
          removed the Pettibone from contract #80 to the Rail Start-up Budget with the
          anticipation of using ARRA funding…Wright, we (Jayne, Keisha, Jim and myself)
          should have a plan going forward by the end of the week with regards to making
          ARRA purchases and purchases that are still part of the LRT project (contract
          #120).”

   June 19, 2009 (106)

   An email from the HRT Vice President of Rail Operations to the former HRT Chief Engineering
   Officer, with copies to the HRT Senior Vice President of Operations, former HRT Senior Vice
   President for Construction, HRT Senior Vice President for Development and former HRT
   President and Chief Executive Officer states,

          “…However, the total project cost moved to ARRA is not $3,127,000, but is
          instead $3,386,000 (which is a good thing). The difference is the $250k shop
          tools and equipment removed from Contract 80 after the $3,127,000 number had
          been formulated…”


10. During the time period from April 2009 to July 2009, documentation supports the Norfolk
    Assistant City Manager, Norfolk City Manager, and Norfolk Councilman Randy Wright were
    provided information regarding threats to the LRT/Tide project budget/ schedule which would

                                                  102
cause the cost-to-complete to exceed the revised project budget of $288 million. Documents
support that full disclosure of threats to the project budget/schedule were not provided to all
members of the Norfolk City Council and that HRT management withheld certain cost
information from the HRT Board of Commissioners.

April 23, 2009 (Support Document 107)

The HRT Board of Commissioners approved a contract award of $8.1 million for the extension
of Program Management/Construction Management services provided by PBS&J. It was stated
this would provide for nine months of services beginning April 1, 2009 through December 31,
2009.

Commissioner Wright asked if this was within the $288 million LRT/Tide budget and the former
HRT President and Chief Executive Officer stated that it was within the $288 million budget.
While VDOT Inspector General staff was unable to conclude as to whether or not this $8.1
million was included within the $288 million budget, the email below indicates that as early as
May 13, 2009 the former HRT President and Chief Executive Officer had knowledge that the
$8.1 million would likely not be sufficient to cover the related PM/CM costs.

May 13, 2009 (108)

An email from the former HRT Senior Vice President for Construction to the former HRT
President and Chief Executive Officer with a copy to the former HRT Chief Officer of
Engineering states,

       “Based on numbers provided by PBS&J today, the PM/CM (PBS&J) have
       expended, and intends to invoice, $3,260,165 on the $2,800,000 that was
       authorized. This represents a 16.4% overage.

       It should be pointed out that the PM/CM was directed to add additional design
       staff and one construction administration staff to support the determination of
       merit and entitlement on change notices.

       I understand that PBS&J intends to use a portion of the authorized $8.114M to
       make up for the over budget amount. I further understand that PBS&J may have
       had a negative budget balance at the end of November 2008 that was funded with
       a portion of the $2.8M which would further exasperate the over budget of the
       $2.8M and PBS&J’s resulting funding from the $8.114M.

       As the $8.114M was intended to cover PBS&J from April 1, 2009 – December 31,
       2009, and it was made clear to the Commission that we would not seek additional
       funding for the PM/CM contract in 2009 I am greatly concerned about the burn
       monthly burn rate of the PM/CM and how far “in the hole” we are starting on the
       $8.114M.”

May 13, 2009 (109)

An email from the former HRT Senior Vice President for Construction to the Norfolk Assistant
City Manager, with copies to the former HRT President and Chief Executive Officer and former
HRT Chief Engineering Officer states,

                                             103
       “...the following is an outline of presentation point for HRT’s Norfolk Light Rail
       project presentation on Monday…”

   •   Budget - Still within $288M budget and working very aggressively to maintain the
       budget
   •   Physical % complete on each project and overall program
   •   Revenue Operations Date - Late summer / early fall 2010
   •   Engineering / Design Update
   •   Threats to Project Budget / Schedule (emphasis added)

May 13, 2009 (110)

An email from the Norfolk Assistant City Manager to the former HRT Senior Vice President for
Construction, with copies to the former HRT President and Chief Executive Officer and former
HRT Chief Engineering Officer states,

       “Thanks I will let Regina know. I would suspect that she will wish to see and
       understand the last item of Threats to project budget and schedule and what will
       be said.” (emphasis added)

May 13, 2009 (111)

An email from the Norfolk Assistant City Manager to the former HRT Senior Vice President for
Construction, with copies to the former HRT President and Chief Executive Officer and former
HRT Chief Engineering Officer states,

       “I need for you all to tell me so I can tell her…My role as gatekeeper is to be sure
       nothing goes forward that is a surprise to her or that she does not wish to be
       said.”

May 13, 2009 (112)

An email from the former HRT Senior Vice President for Construction to the Norfolk Assistant
City Manager, with copies to the former HRT President and Chief Executive Officer and former
HRT Chief Engineering Officer states,

       “Threats would include the following:
       • Additional delays by DVP or other third party utilities (threat to both schedule
          and budget)
       • MOT permit requirements that go beyond the MUTCD (threat to budget)
       • Not having access to downtown streets for construction – permits (threat to
          schedule and potentially budget as delay claim)
       • Additional City-directed betterments (field directives) to project (threat to
          budget and potentially schedule).”




                                               104
May 13, 2009 (113)

An email from the former HRT President and Chief Executive Officer to the Norfolk Assistant
City Manager and former HRT Senior Vice President for Construction, with a copy to the former
HRT Chief Engineering Officer states,

       “We can remove the threats if everyone would prefer.”



May 13, 2009 (114)

The Norfolk Assistant City Manager replied via email,

       “Yes, please. Thank you.”

May 13, 2009 (115)

The Norfolk Assistant City Manager replied via email, again that same day, saying,

       “I would respectfully ask that this not be on the agenda this time. Further that we
       obtain a list from you of the specifics behind each of these elements so that the
       City Manager can understand each one and decide the details.”

May 13, 2009 (116)

An email from the former HRT Senior Vice President for Construction to the former HRT
President and Chief Executive Officer states,

       “Is Stanley on record as not wanting Council updated on threats to project budget
       and schedule?”

May 13, 2009 (117)

The former HRT President and Chief Executive Officer replied,

       “Yes”

May 14, 2009 (118)

The former HRT President and Chief Executive Officer forwarded the email string above to
Norfolk City Councilman Randy Wright with the notation,

       “fyi”

May 18, 2009 (119)

An email from the HRT Senior Vice President of Operations to the former HRT Chief Officer of
Engineering with copies to the former HRT Senior Vice President of Finance, HRT Vice
President of Rail Operations, and former HRT Senior Vice President for Construction states,

                                              105
       “There never was not a separate rail activation/start-up budget that was not part
       of the original FFGA to my knowledge. The budget for traction-power service
       feeder costs may have been missed in the original budget $232M, however, those
       costs are still inclusive to the $232M and now $288M construction/engineering
       budget.”

May 19, 2009 (120)

An email from the former HRT Chief Officer of Engineering to the HRT Senior Vice President
of Operations with copies to the former HRT Senior Vice President of Finance, HRT Vice
President of Rail Operations, former HRT Senior Vice President for Construction, and former
HRT President and Chief Executive Officer states,

       “Prior to Jim coming on board the start up budget was $2.084 million, which was
       included in the $288 million. After Jim joined HRT it become clear that the
       $2.084 million was not a sufficient start-up budget. Jim was asked to develop a
       complete cost estimate for startup, which he did. That estimate led to the start-up
       budget being revised upward to 6.1 and although only the original $2.084 million
       was included in the $288 million, a means of funding the revised budget was
       worked out.

       It is my opinion that the cost of energy used by the LRVs during the activation and
       pre-revenue period is a start up cost. If it is not a start-up cost it is an
       operational cost that is billed back to the city. Either way, if it wasn't included in
       the revised start-up budget Jim prepared, it is not included in the $288 million. If
       it is determined to be part of the $288 million then it will be attributed to the start
       up costs and will have to be funded by utilizing contingency funds.

       We all need to remember that contingency is not an unlimited pool of money that
       we can all keep drawing from to add unbudgeted items to the project.”

June 3, 2009 (121)

An email from the former HRT Chief Officer of Engineering to the Norfolk Assistant City
Manager, with copies to the former HRT President and Chief Executive Officer, City of Norfolk
Director - Department of Planning and Community Development, Norfolk Acting Director of
Finance, former HRT Senior Vice President for Construction, and PBS&J Project Director states,

       “Enclosed please find sketches as requested. These were developed in
       coordination with the Planning Department. Please speak to the planning
       department about any details that are not listed on the sketches…As an update on
       costs we expect the changes to the bid documents on contract 80 (the VSMF) I
       would provide the following explanation.
       1.    We estimate the design costs between $125,000 and $145,000. The big
           difference in the price will be how many more times the design changes. Once
           Design Review and Planning Commission approve the design we should be
           able to lock in the design price. The design is scheduled to go to design
           review on Monday for approval.
       2.    The good news is that it appears that the change will have very little impact
           to schedule. So for right now I will report that we have no financial impact to
           the schedule. If that changes I will inform you as soon as I know
                                                106
       3.    Since the redesign of the facade is still in the design stage, we have not sent
           the information to the contractor for pricing. As soon as Design Review and
           Planning Commission approve the design we should be able to lock in the
           construction price as well. Right now it is too soon to even guess magnitude
           of the construction costs.
       4.    These design, construction and schedule delay items are outside the
           current budgeted 288 million and outside any match from the other project
           partners. Since the design is fast paced I would expect that we will have the
           first invoices for the work in 60 to 90 days. When we receive these invoices
           we will follow the normal procedure to forward those costs to the city for
           payment.
          Please let me know if there are any other questions.” (emphasis added)

June 4, 2009 (122)

The Norfolk Assistant City Manager responded to the former HRT Chief Officer of Engineering,
with copies to the former HRT President and Chief Executive Officer and the Norfolk City
Manager. The email states,

       “Mr. Brown, as I have stated many times it is the position of the City that all the
       costs are borne within the $288 Million budget. That is what our City Council
       said to HRT and that is what I have to continue to state. If you send us the
       invoices we will in turn return them to you.”

June 17, 2009 (123)

An email from the HRT Public Affairs Manager to the former HRT President and Chief
Executive Officer states,

       “A couple of questions. Given the sensitivity of the Kirn asbestos situation, I made
       no comment on it in this month’s president’s report. There is a short note on it in
       the construction update, however, but nothing that will cause alarm. Still, I’m
       wondering if we will draw further unwanted attention to this situation by omitting
       comment. I’m not looking for trouble, but do you want me to add comment on the
       asbestos matter? I think it’s probably a bad idea, but I also don’t want
       commissioners reading through the report and then, not seeing anything, start
       asking you questions about it. I worry that it might undermine the report’s
       credibility.”

June 22, 2009 (124)

An email the former HRT Senior Vice President for Construction to the former HRT President
and Chief Executive Officer with the subject heading “Embedded Track Estimate and Work
Area” states,

       “I will provide the best information I have available to me at this time. Once
       again our PM/CM team has let a deadline slip by them without any sense of
       urgency and a rather laze’ fair attitude.

       The change order proposal received from Skanska is in the amount of
       approximately $2.7M or roughly $525 / TF for roughly 5,107 TF.
                                           107
       Based on these numbers the breakdown of cost by practical work area is:
       • EVMS and the west end of the Smith Creek Bridge there is approximately
          2,009 TF that would be embedded, totaling $1,054,725
       • East end of Smith Creek Bridge to Dunmor is approximately 1,580 TF that
          would be embedded, totaling $829,500
       • Harbor Park area is approximately 1,518 TF that would be embedded,
          totaling $796,950

       In addition to the above costs, Skanska estimates the time impact to between one
       (1) and three (3) months to switch from ballasted to embedded track.

       The PM/CM has not completed negotiations with Skanska. However, the
       independent cost estimate performed as well as the PM/CM’s “in-house” cost
       estimate is in the $1.8M range, although Skanska has already pointed out $200K -
       $300K missing in the estimates, raising the total to $2 - $2.1M, or $411 / TF
       based on the $2.1. Using this number the above calculations become
       • EVMS and the west end of the Smith Creek Bridge - $826,101
       • East end of Smith Creek Bridge to Dunmor - $649,696
       • Harbor Park - $624,202

       The time impact remains unchanged as one (1) – three (3) months

       I would recommend using the following cost ranges for each section in your
       discussions:
       • EVMS and the west end of the Smith Creek Bridge - $826,101 to $1,054,725
       • East end of Smith Creek Bridge to Dunmor - $649,696 to $829,500
       • Harbor Park - $624,202 to $796,950”

July 1, 2009 (125)

An email from the former HRT Senior Vice President of Finance to the former HRT Chief
Engineering Officer and the former HRT Senior Vice President for Construction, with a copy to
the former HRT President and Chief Executive Officer states,

       “I’m working on a recommendation to the Commission that would amend HRT’s
       change order policy to bring it into conformity with the Virginia Public
       Procurement Act. If approved, change orders would require Commission
       approval when on a cumulative basis they exceed 25% of the initial value of the
       contract or $50,000, whichever is greater. If the Commission approves this
       policy change this month (we may have an indication of its acceptance at the July
       10 O&O), any change orders in excess of $250,000 would likely not require
       Commission approval this month. However, you may want to consider options in
       case the Commission does not take the recommended action.”

July 1, 2009 (126)

An email from the former HRT President and Chief Executive Officer to the former HRT Senior
Vice President of Finance, former HRT Chief Engineering Officer, and former HRT Senior Vice
President for Construction states,


                                             108
          “$50,000 won’t do. $500,000 may not do. I was thinking of something around
          $750,000.”

   July 1, 2009 (127)

   An email from the former HRT Senior Vice President of Finance to the former HRT President
   and Chief Executive Officer, former HRT Chief Engineering Officer, and former HRT Senior
   Vice President for Construction states,

          “Reconsider the ‘whichever is greater’ clause. The practical effect of that clause
          is to provide an amount greater than your $750,000 for the contracts likely
          requiring major change orders….”


11. During July and August 2009 there were discussions of LRT/Tide project budget issues relating
    to Public Involvement (“PI”) and the creation of a DRAFT schedule (which included the column
    headings FFGA, FFGA Overrun, Enhancements, and Cost-to-Complete) which calls into
    question the accuracy of reports prepared and disseminated by HRT.

   July 24, 2009 (Support Document 128)

   An email from the former HRT Chief Officer of Engineering to the FTA’s PMOC included a
   DRAFT budget summary schedule labeled “As of July 20, 2009”. This schedule included the
   column headings FFGA, FFGA Overrun, Enhancements (Existing), Enhancements (Proposed),
   and Cost-to-Complete. Although the schedule reflected a cost-to-complete of $288,000,000, the
   schedule contained computational errors and the cost-to-complete figure did not include any
   amount from the line item labeled “Unallocated Contingency.” The presentation of the schedule
   indicates that the unallocated contingency reserve had been exhausted.

   The Project Execution Strategy (“PES”), which is an appendix to the Project Management Plan,
   stipulated the following requirements with respect to contingency reserve management:

           “Grantee’s plan shall also ensure that the amount of total undistributed
          contingency (inclusive of its reserve portion) throughout project implementation
          meets the following two requirements: 1. The amount of undistributed
          contingency in aggregate is, at all times, above the Contingency Analysis
          minimums specified in the plan schedule. 2. The management reserve portion is
          at all times above the minimums at the following specified times. These periods
          set forth below are defined in terms of physical completion of sealed bid
          procurement actions for construction (‘Bid’) and the construction contract
          completion itself (‘Constructed’)…
          • $34 million through 100% Bid or 20% Constructed, whichever is later.
              Currently, this is forecasted to occur during the second quarter of 2008.
          • $20 million through 50% Constructed. Currently, this is forecasted to occur
              during the fourth quarter of 2008…
          In the event that any of the above requirements are not met, Grantee shall
          immediately initiate efforts to develop and implement a recovery plan (in
          conformance with the FFGA requirements).”



                                                 109
According to internal documents, construction was only 44% complete in August 2009 and
therefore the LRT/Tide project was required to have $20 million in contingency reserves. An
internal document dated 11/2/2009 states, “…[t]he July 2009 Memorandum of Understanding
between HRT and VDRPT re-established a contingency fund of $18.8 million and requested that
HRT provide advance notification to VDRPT of any intent by [H]RT to use any of these
contingency dollars….”

The internal DR002 Project Summary Report dated August 31, 2009 included an “Unallocated
Contingency” amount of $18,766,208 and still reflected a Total Project Budget at Completion of
$288 million. Several line item cost categories were reduce significantly from the July 20, 2009
Draft schedule submitted to FTA in order to accommodate the additional line item cost category
of “Unallocated Contingency.” Examples of line item cost categories that were reduced include:

                                         July 20, 2009   August 31, 2009
                                       Budget Summary    DR002 Project
                                       Submitted to FTA Summary Report
                                                          Total Project       Variance between
                                                           Budget @          July & August 2009
              Item Description       Cost to Complete      Completion              Reports
         Contract 20               $        15,060,290 $     13,805,528      $       (1,254,762)
         Contract 30               $        44,442,150 $     40,833,112      $       (3,609,038)
         Contract 100              $         9,800,886 $       5,455,847     $       (4,345,039)
         80.03 - Project
         Management                $         13,161,345     $   12,385,345   $          (776,000)
         80.04 - Construction
         Admin & Mngt              $         13,670,704     $    8,500,000   $        (5,170,704)
         80.08 - Start-up          $          4,047,674     $    2,064,000   $        (1,983,674)
         Unallocated Contingency   $                  -     $   18,766,208   $        18,766,208


The reduction of the above line item cost categories seemed arbitrary and unjustified, especially
in light of HRT’s internal cost-to-complete analysis that was completed in October 2009. This
analysis established a new project budget of approximately $325 million with the following line
item costs for the above referenced categories:

                                                              October 2009
                                                       Cost-to-Complete Analysis
                                                        Estimated Total Cost @
                        Item Description                      Completion
                    Contract 20                   $                      16,046,173
                    Contract 30                   $                      47,552,121
                    Contract 100                  $                       6,862,016
                    80.03 - Project
                    Management                    $                     20,008,208
                    80.04 - Construction
                    Admin & Mngt                  $                     14,677,737
                    80.08 - Start-up              $                      5,505,156

July 27, 2009 (129)

An email from the HRT Vice President for Public Affairs and Communications to the former
HRT Senior Vice President for Construction and HRT Budget Director, with copies to the HRT
Senior Vice President for Planning and Public Affairs, former HRT President and Chief
Executive Officer, and former HRT Senior Vice President of Finance states,

                                                      110
        “Based on our discussions and direction from Michael last year, I’ve made every
        effort to charge PI soft costs (mostly printing of brochures) to the ’09 operating
        budget. My understanding is that Brandon has transferred all staff costs too.
        Generally, the only expenses we’ve been paying out of the project budget – that I
        am aware of – are for Dovetail. However, as we have entered this new fiscal
        year, it is unclear to me how to charge expenses that remain from the agreed
        upon $700,000 cost of completion. What is the total amount for PI in the project
        budget until Revenue Operations Date?”


July 27, 2009 (130)

An email from the former HRT Senior Vice President for Construction to the HRT Vice
President for Public Affairs and Communications and HRT Budget Director, with copies to the
HRT Senior Vice President for Planning and Public Affairs, former HRT Senior Vice President
of Finance, and former HRT Chief Engineering Officer states,

        “As you recall, the PI budget included in the $288M was $0. Unless the $288M
        budget has been increased, it is my understanding that the PI budget is still
        $0….”

July 27, 2009 (131)

An email from the former HRT President and Chief Executive Officer to the former HRT Senior
Vice President for Construction, HRT Vice President for Public Affairs and Communications,
and HRT Budget Director, with copies to the HRT Senior Vice President for Planning and Public
Affairs, former HRT Senior Vice President of Finance, and former HRT Chief Engineering
Officer states,

        “Fred, I don't think you are correct.”

August 13, 2009 (132)

An email from the HRT Vice President of Public Affairs and Communications to the HRT
Senior Vice President for Planning and Public Affairs with a subject heading Public Involvement
(PI) funding issue timeline states,

        “Approximately $2.3 mil budget established for project (that’s less than 1% of
        total project costs)…PI budget zeroed out by Development/Construction staff; no
        notification to PI…Brought the issue to Townes, Davenport to Sullivan and
        presented PI budget with ‘cost to complete’ figure of $700,000. Townes agreed
        (and everyone aware) that $700,000 was appropriate. Townes instructed James
        to work with Finance to charge any eligible costs to FY09 operating budget.
        Townes also instructed Fred that $400,000 should come out of LRT to include
        support work for Dovetail.” (See footnote 5)


5 Public Involvement (PI) is included in the original FFGA budget under SCC 80.03 “Project Management for
Design and Construction,” which among other things includes community relations and outreach. The overall
budget for SCC 80.03 is $5.881 million. The HRT internal report “DR002 Project Summary Report – July 31,
2009” identifies approximately $1.664 million as the total expended to date on PI. This report lists the PI current
budget as $881,505 and reflects that they have exceeded their budget by $782,447.
                                                       111
   August 13, 2009 (133)

   The HRT Senior Vice President for Planning and Public Affairs forwarded the above email to
   the former HRT Senior Vice President of Finance and inquired,

          “Can you help clarify for me what is going on regarding the Public Involvement
          budget for the LRT project? James says he has been told there is no longer any
          budget for PI activities by Fred, yet he is insisting a deal was ‘brokered’ that
          there was supposed to be a $700,000 budget set aside… I am completely at a lost
          of what is going on here…”


12. Documentation from August 2009 to January 2010 supports effort on the part of HRT to quantify
    a revised cost-to-complete number and to disseminate this information to external stakeholders.

   August 2009 (Support Document 134)

   An internal cost-to-complete study of the LRT/Tide project was initiated at the request of senior
   executive management at HRT, according to a document dated November 30, 2009 that was
   prepared by HRT staff in connection with an upcoming meeting with Norfolk City employees.

   September 9, 2009 (135)

   An email from the former HRT President and Chief Executive Officer to various HRT project
   staff and HRT senior management states,

          “The city wills [s]ay that the cost for police at Ballentine was not a request or an
          extra but rather a requirement that we should have planned for. This is a grey
          area and they have a point we should be careful about this one. They are likely to
          say that about the brick pavers, sidewalks and driveways (maybe not the
          driveways)…{they will say its in the code}…and the plastic fence as well.”

   September 9, 2009 (136)

   An email from the former HRT Chief Officer of Engineering to the HRT Senior Vice President
   of Operations with copies to the former HRT Senior Vice President for Construction and former
   HRT Senior Vice President of Finance states,

          “This is a policy decision that needs to be vetted through Homer. Fred and [I]
          have had conversations and I believe that these three elements seem to have
          bearing on the issue.
          1. These items were requested after the CON [City of Norfolk] approved the
             plans for construction.
          2. None of these items were listed on the risk list that established the 288 m
             budget
          3. most if not all cases we have previously communicated to the CON that these
             items were not in the 288.”

   October 30, 2009 (137)


                                                  112
An internal cost-to-complete analysis was presented to the former HRT President and Chief
Executive Officer and HRT Senior Vice President for Operations, which reflected a cost-to-
complete totaling approximately $324.5 million. The cost-to-complete study included an
executive-level comparison of the August 2009 FTA Report to the projected cost at completion
developed as part of this study. Expenses referred to as “soft costs” (for example, legal,
insurance, preliminary engineering, design, program management, project management, public
involvement, construction management, and start-up and pre-revenue operations) showed a
variance of $32,553,578 (46.8%) from what was reported in the August 2009 FTA Report.

There was no documentation to support this internal report was distributed to any external
stakeholders.

November 1, 2009 (138)

HRT engaged a consulting firm, AECOM to review and validate the total estimated cost of the
LRT/Tide project at completion and the projected commencement date for revenue operations.
The work performed by AECOM included a review of the internal cost-to-complete analysis.

See entry for “December 9, 2009” below, where AECOM submitted a task order proposal
entitled Phase I of the Norfolk LRT Root Cause Analysis and Cost Recovery Plan development
to HRT’s legal counsel, Williams Mullen. HRT staff advised the purpose of having this work
performed through Williams Mullen was so that the information could be kept confidential.

November 30, 2009 (139)

A letter from the Norfolk City Manager to the former HRT President and Chief Executive
Officer, with copies to the Norfolk Assistant City Manager and Norfolk City Attorney requested
documents to include copies of all contracts executed related to the LRT/Tide project, copies of
all contract amendments and change orders pertaining to all light rail contracts, and copies of the
most recent and prior project progress reports covering the last twelve months. The letter states,

       “Please prepare the following information and documents so that they are ready
       for me to pick up at our meeting this afternoon…I spoke with Secretary Homer
       and the City of Norfolk has a very short window of opportunity by which we can
       submit a request and reasonably expect his assistance in acquiring any additional
       funds for the Norfolk starter line light rail project…My anticipated outcome for
       our meeting this afternoon is to understand why the project is further delayed and
       why there are overages projected to the amended budget…”

Topics for the meeting included identification of those aware of the funding and completion date
dilemmas, funds that HRT might have to cover a portion of the overages, amount and impact of
any American Recovery and Reinvestment Act (ARRA) being reprogrammed if the new HRT
Southside maintenance facility was delayed and funds used for the light rail project,
identification of any grant funding programs that might provide additional federal funds for the
light rail project, realistic date for completion of the light rail project, and the City’s plan for
understanding and beginning to address the budget overages.




                                                113
December 4, 2009 (140)

An email from the FTA’s Project Management Oversight Consultant (“PMOC”) to the former
HRT Chief Officer of Engineering with an attachment labeled “07-20-09 HRT budget summary
FTA.pdf” states,

       “I got this request from Katie yesterday but was traveling back from a meeting in
       NY. The pdf version of the July budget was the version I received from you.
       When I retyped the numbers into an Excel form and put in the formulas
       (attached), the totals are $11,757,000 over the $288M. This is something I should
       have caught in July but didn’t check the math. Can you recreate the numbers to
       add up to the $288M? As usual, Katie needs this immediately.”

December 4, 2009 (141)

The former HRT Chief Officer of Engineering forwarded this email to the HRT Senior Vice
President of Operations, former HRT Senior Vice President of Finance, and HRT Project
Specialist. The email read,

       “Help”

December 7, 2009 (142)

The FTA’S PMOC met with HRT to conduct a monthly progress meeting for the work
performed in November. Excerpts of the monthly report include the following,

       “At the time of the monthly meeting HRT stated that on Friday December 11th the
       General Manager would be meeting with the FTA Regional Administrator to
       present the results of the just finalized Cost to Complete evaluation. HRT staff
       were not at liberty to divulge the conclusions of this effort during the monthly
       meeting. The summary characterization of the results provided was ‘significantly
       more expensive than the current budget, and a delay to the Revenue Operations
       Date (ROD), but not as bad as originally feared….’”

December 9, 2009 (143)

An email from an HRT consultant from AECOM to the HRT Senior Vice President for Planning
and Public Affairs, former HRT President and Chief Executive Officer, and HRT Senior Vice
President of Operations included an attachment labeled “CTC Adjustments.xls.” The email read,

       “Here are the adjustments that were made during our phone call today.”

The attached spreadsheet labeled “Cost-to-Complete Analysis Executive Summary” included a
column heading labeled “11/24/09 Review Estimated Total Cost at Completion”, which showed
a Total Project Costs of $333,817,427.

December 9, 2009 (144)

AECOM submitted a task order proposal entitled Phase I of the Norfolk LRT Root Cause
Analysis and Cost Recovery Plan development to HRT’s legal counsel, Williams Mullen. HRT

                                             114
staff advised the purpose of having this work performed through Williams Mullen was so that
the information could be kept confidential.

December 10, 2009 (145)

An email from an HRT consultant from AECOM to the HRT Senior Vice President for Planning
and Public Affairs, HRT Senior Vice President of Operations, former HRT President and Chief
Executive Officer, and an HRT legislative services consultant with Holland & Knight had a
subject heading “FW: FTA Meeting documents” with two attachments entitled “Outline for FTA
Briefing.doc” and “Agenda for FTA Briefing.doc.” The email stated,

       “Please review – we may want to have a phone call about these tonight. The first
      file is really a long version for us; the second version is potentially a hand out.
      We may need to edit some things out of the second one in particular if you don’t
      want it all in writing.”

One of the attachments was labeled “FTA Briefing on HRT Norfolk LRT Project December 11,
2009.” Included within the document was the following:

                                Original FFGA         Dec 2008 Budget       Dec 2009 Cost-to-
                                Budget                Estimate              Complete Estimate
  FFGA Scope Items                          $232.1                $264.0                 $305.8
  State-Requested Safety and                                        $6.9                   $6.9
  Security Enhancements
  City-Requested Enhancements                                       $17.1                 $21.1
  Total Cost                                 $232.1               $288.0                 $333.8
  Revenue Operations Date               Jan 1, 2010          Oct 25, 2010           May 1, 2011

      “In Dec 2008, after some of our largest early contracts had been bid, HRT was
      concerned that the high cost of the downtown construction contract and many of
      the scope changes being sought by our contractors and the City of Norfolk would
      make the original schedule and budget unattainable. At that time, we estimated
      total project expense at $288 million and a revenue operations date of October
      25, 2010, and we diligently secured commitments from the City of Norfolk and the
      state to provide the additional funding. We entered into an MOU with the
      Commonwealth of Virginia, and as of summer 2009, we finalized a funding
      package that covered the gap between projected cost and FFGA funding,
      including $21.3 million of additional state funding and $32.2 million of additional
      city funding. The City is now preparing to issue the bonds necessary to cover its
      share of the additional cost.”

      “However, in the fall of 2009, after nearly all of our contracts had been awarded,
      we began preparing a detailed cost to complete for the project, including review
      of delay claims and pending change orders proposed by our contractors. We
      started this review in house, and in November 2009 sought the additional
      assistance of AECOM, in order to have a more detailed and independent
      understanding of the risks and potential solutions. That initial review is now
      completed, and HRT is now developing a detailed root-cause analysis and a
      recovery plan that we expect to submit to FTA in February 2010.”

      “Our current total cost estimate is $305.8 million, with a revenue operations date
      of May 1, 2011. In addition, we have $21.1 million of city-requested scope
                                             115
       additions, and $6.9 million of state-identified safety and security upgrades, that
       bring the total investment in the Norfolk LRT line to $333.8 million. Some of these
       cost items will be borne specifically by state or local partners, as they are funding
       scope additions requested by these parties. Examples of these include pedestrian
       crossing upgrades and upgraded station finishes in the local community.
       However, many of the cost additions are related to changes necessary to complete
       the project.”

       “The challenges we are now facing have built up over time, and while they have
       been partially addressed, we are now making an effort to fully address all these
       challenges and mitigate them to the greatest extent possible, so that we open a
       successful light rail line when the project is complete.

           •   Material cost escalation
           •   Downtown construction bids averaged 77% above the FFGA and 27%
               above the bid package engineer’s estimate; the low bids were double the
               engineer’s estimate
           •   Sales tax exemption sought by the project and incorporated into the
               contractual provisions but not approved
           •   Time impacts resulting from Norfolk State University design changes, at
               its elevated station, and Vehicle Storage and Maintenance Facility
           •   Considerable delays with underground electric utility relocation that
               slowed construction progress
           •   Unforeseen and unidentified utility issues affecting all contracts
           •   Design changes triggered by State requested additions related to safety
               and security, partly driven by a new safety climate following high-profile
               transit accidents
           •   Repeated management changes of key Project Management and
               Construction Management staff
           •   Unresolved delay claims and unapproved change orders
           •   Significant redesign during construction resulting in significant impacts
               on soft costs and schedule
           •   No cost escalation permitted between end of PE (summer 2006) and
               permission to enter into final design, despite delays in getting approvals
           •   Length of time needed to develop internal organization necessary to
               oversee and operate new service (now in place)

       HRT accepts that it has ultimate responsibility for identifying these problems and
       managing the project in a manner that reduces the risk. We have learned some
       hard lessons during the largest capital project we have ever been responsible for.
       We are now taking action to resolve these problems and reduce the risk to all
       partners in the project.”

The document concluded with a section entitled “HRT Wrap Up”, which contained the following
items: request to consider additional funding, assistance and concurrence with actions and
strategies put in place to bring this project to a successful completion, and partner to develop full
cost recovery plan.




                                                116
December 2009 (146)

According to HRT staff, a meeting was held in early December 2009 between the former HRT
President and Chief Executive Officer and the FTA Administrator to seek additional funding for
the LRT/Tide project. NOTE: There is no specific document to support this event. The
information is based on discussion with HRT staff.

December 19, 2009 (147)

An article in The Virginian-Pilot states,

       “HRT officials said this week they need $38 million to $40 million more to finish
       the 7.4-mile transit system, which is just over 50 percent complete…The latest
       cost estimate is $326 million to $328 million, HRT President Michael Townes
       said…Most Norfolk City Council members and elected leaders who make up
       HRT’s governing board were not aware of the cost overruns and delays until they
       were contacted Friday by The Virginian-Pilot. The issue came to light when the
       Commonwealth Transportation Board voted Thursday to spend an extra $20
       million on the project…Virginia Beach Councilman Jim Wood, who chairs HRT’s
       board, used the words ‘incensed’ and ‘indignant’ regarding the latest
       developments. ‘I’m very disturbed by the quality of the information received from
       HRT’s senior staff and the lack of accurate information received from HRT senior
       staff,’ Wood said. ‘When every single meeting we have we’re told we’re on
       budget and on schedule when we’re not, that’s a major issue’…Townes said he
       did not inform the board because he did not have solid numbers and because he
       was awaiting the Transportation Board’s action first. ‘We’ve been refining these
       numbers and we didn’t have a number to give to the board – we still don’t have
       an exact number to give to the board,’ he said…Townes noted that the original
       design of the light-rail project was ‘bare bones’ to meet stringent criteria for
       federal money. He said the newest budget is close to the price tag HRT estimated
       several years ago before slashing more than $100 million in a ‘value engineering’
       exercise to reduce costs. ‘Many of the elements removed have now been put back
       in the project,’ Townes said.”

December 20, 2009 (148)

A story on 13 NEWS WVEC stated,

       “The Tide light rail system under construction is about $40 million behind
       schedule…HRT President and CE Michael Townes…is expected to brief
       [Norfolk] City Council members on Tuesday about the cost overrun…The
       Chairman of the Transportation District Commission, Jim Wood, says he is very
       upset about what he calls ‘a lack of communication’ from HRT. In a letter to
       board members and lawmakers, Wood says he repeatedly asked for an update on
       the light rail project, but did not get it until Dec. 10, 2009. Wood says he will
       demand answers from HRT officials at a meeting Wednesday.”

December 22, 2009 (149)

A Special Session of the Norfolk City Council was held, in which an update to the LRT/Tide
project was provided. Updates included the following:
                                             117
       "…City Manager, Regina Williams introduced the presentation to provide the
       most recent information on a full cost to complete the project, commenting this
       assessment is still a work in progress…

       •   Rather than the $288 million budgeted, present estimates to complete the
           project are now between $326 and $328 million…
       •   Hard costs are now estimated at $217 million; soft cost at $99.2 million;
           finance charges of $1.5 million and an unallocated contingency of $10
           million...
       •   While the City’s role in the project cannot change, the following steps have
           been taken:
           1. Active involvement and review of financial assessment.
           2. Participation in contract negotiations to obtain guaranteed fixed prices
               for completion where obtainable.
           3. Insistence on more consultation with the City and prior approvals going
               forward.
           4. Establishment of a dedicated City team led by John Keifer, Director of
               Public Works, to be co-located with HRT staff.
           5. City has retained former VDOT Commissioner, Philip Shucet for
               assistance with construction management.

       Michael Townes, President of HRT, reported:

       •   In July 2009, it was discovered schedules were slipping and, as a result, an
           internal cost to complete assessment was initiated.
       •   The internal review revealed the $288 million and October 2010 operational
           date were not attainable and that the cost to complete the project had
           increased $38 - $40 million and the operational date pushed back to 2011.
       •   Mr. Townes attributed cost overruns and delays to project enhancements,
           unidentified underground utility issues, State requested additions for safety
           and security, unresolved delay claims and unapproved change orders,
           repeated management changes for project and construction management and
           failure to get the State sales tax exempted.
       •   Additional funding is being pursued through the State, the Federal Transit
           Administration and other sources.”

December 23, 2009 (150)

An article in The Virginian-Pilot states,

       “A frustrated Norfolk City Council demanded answers Tuesday from Hampton
       Roads Transit head Michael Townes as to why the cost of Norfolk’s light-rail
       project rose $40 million over budget…City officials learned last week that the
       cost of the project…has risen to about $328 million… [City Councilman Randy]
       Wright…and Townes disagreed on how well HRT kept the city informed. Townes
       said he told Wright in October that there would be cost overruns. Wright said he
       did not know until he heard rumors about it from [Mayor Paul] Fraim in early
       November. Wright said he asked for a meeting with Townes, who told him Nov.
       19 that there was no conclusive number for the overruns but that the project cost

                                             118
       could range up to $340 million. Townes said he became concerned about
       potential overruns in July, when officials noticed ‘discrepancies in construction
       and scheduling documents.’ In October, he said, HRT began an internal review
       and discovered costs were spiraling. A consulting firm, AECOM, was hired in
       November to analyze the problems… ‘It was apparent to you in July that you were
       running out of money,’ Fraim said. ‘At that point, you were getting into the city’s
       checkbook. Somebody should have come to the city.’ Townes replied: ‘I wasn’t
       aware of these problems until October. I worked through the commissioner you
       appointed’ to the HRT board, referring to Wright.”

January 11, 2010 (151)

A special session of the HRT Board of Commissioners was held to discuss the LRT/Tide project
and other concerns. The result was that Michael Townes resigned as President and Chief
Executive Officer of HRT with an effective date of September 30, 2010. The regularly
scheduled Commission meeting was held on January 28, 2010 and Mr. Townes wrote in his
President and CEO report that “the project is now projected to exceed the previously stated cost
of $288 million and revenue service will begin in 2011.”




                                              119
APPENDIX B-REVENUE OPERATIONS EXHIBITS 1-7




                   120
             .r.
                                                                                                          Page 1 of 1



                     '.- '­

  From :           Larry Davenport
  Sent:            Tuesday, September 01,20092:19 PM
  To:              Barry Herring
  Cc:              Paul Croston
  Subject:         Cash fraud
  Importance:      High
  Sensitivity:     Confidential
  Attachments: Id book.pdf

Barr y ,

Pleas e see the a t t a c h e d t a b le from an auditing textbook and n o t e t he fol low i ng :

    •	     The table identi fies internal control risks related to cash .

    •	     Th e last sect ion in t h e table is entitled " De f i c i e n c y , U The sect ion identifies a
           " Prel isti ng of c a s h is not used to ve rif y cash receipts U with the designation ' W     1.' Note
           that oW' i s defined as a "signifi cant deficiencyu or "material weaknes s , u b oth of whi ch
           a re c ondi tions we want to avoid.

    •	     Our GFI data is our o nly " p r el is t i n g of c a s h u f r om fareboxes . As s uch it should be used
           continuousl y to v e r i fy recorded-i.e ., cou n t e d and deposited-cash.

To avoid be ing cited b y o u r externa l auditors for a material wea kn e s s , we need t o monitor d aily
the GFI dat a re lated to appl icab le cash count s . Th i s is amo ng the most important i n t e r n a l
control me chanisms and requirements related to Re venue Management .

Pe r our discussion yesterday, we need to de vel op a mon thl y report that re fle cts daily GFI data
vs . cash c o u n t s . Th a t report s hould spec ifically identi fy extraordinary va riances .      I am
r e questing th at you and Paul dev e lop the format f or that report and present it t o me by Fr i d a y
o f this week.        I ' l l ask J ud y to se t a meeting fo r Friday when we ca n d is cuss that and other
measures we want t o imp lement immediatel y.

La r r y W. Dav enport
Treasurer and Senior Vice Pres ident for Finance & Administrati on
Hampt on Roads Tr ansit
3400 Vict oria Blvd
Ha mp t o n, VA 2 3 6 6 1
(W) 757 -222 -616 4
Ldavenport@hrtrans it. org
Follow Hampton Roads Transit on Twi t t e r o r find us on Facebook.




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                                                                                                                                                                    ........ lq.-((.I).                                                                                    .     C
                                                                                                                                                                                                                                                                                                  ~
                                           based on.tbeinforrnatloninlhe sales ilnd                ¥receipts t10wchar t ili Figure I+-} (I" ~ l                                                                                                                                                   !
                                           " ' j(ey ultern'lti>~irol~ comrtJontests"fcontrols; ~itdCPll1rn.o~ subst:lntiYC IdlS                                     -         rtUiIo.bIe mo_li. lJleClndIed 10 !he
                                            tfarisid iousto SatisfY<:ach ofthe ,traris# ilon;~ted 'ltiidit .'MeCt tyt:" for cash rc«i                               ,.............. "" • .-fir bo>I> (c:!I).                                                                     C
                                                                                                                                   thlt
                                           'are listed iriT:lble14"3(PP;42.8'-429)far HiJlsbufg Hard"",reCo.lkClu.se
                                            follows the ~rne formal as tht'prtvious oneJors~l~s ,no further eJ<plaiiatioDof il>
                                                                                                                                        SUIll'"

                                         · meaningIs ne~ary.;Th';te5ti 'ofcorill'01s and sUbStantlve tests nftritn~ttlon . fore• .l'
                                          · rcciip'ts a cri c\,~ iii ed wit!l tbose'f<ir :saI;;s in theperfotjn ;in~ formatiludit ~" i.
                                                                                                                                                          I~ ~ oI...n "
                                                                                                                                                             ..     . . . . . (WI).
                                                                                                                                                                                            /lO(   used 10 - ,   ''''''rdod caIh            W
                                                          re
                                             Figure 14&(pA3O). . .' . "             .           . . "             '.       : . ."
                                                                                                                                                    I
                                                                                                                                                           .s.,
                               ". :"	        •...• ''!lie deiiiled dlscussion of theintemalcoim,,]$;t6ts of contro1s.and ;ubsun~ It                                 I\o>n"'d <llI1llol ml                                                  -.      t"",
                                             of tt:lnsaetiopS'tbat "as n1clt dtd Ear ihe midi! Of'sales is not irid~dcd }Dr eitsh r«rir'~
                                                                                                                                                                                                                                   ~                        ~       low        ~
                                                                               i
                                             Instead"tIle audit proccd~resthal arc most!ikelyto,!>e misundentooJ 'ari: ~"nI
                                                                                                                                                           L.     e-ot w.      ~            - . , "'n-.lo/ _ _
                                              lnotedctaU ", '" ': " .. ', :, ' . . . ': ' ,," ., .... : , ', " " .' ,' ....
                                                             :
                                             ... . An essentia .pat,lofllie.:audltOfsresponsibility ln,a.uditillg' .cish.. ""irt; I
                                                                  l
                                                                                                                                                .        -
                                            iden~fi~tionof d ~ficienc\es,                                       se
                                                                                illinternahautr!Ji ,that inctel1 thelikdihood          (r.t~~
                                                                                                                                       of
                                                                                                                                                    J:'< mUll difficult ~ of c.u/I ddalarion for the auditor 10 detect bth.t ><hich OlXUll

                                              ""!,,,nd!ng on Tabl:14-3;lhe :t~phasis Will b~ OI1Jhose aud itrroCedu,~ iliatarc~ .J
                                               pnroarUy fot .the.dlscovery offr:utd.lhosepro<:edUl'es'lhat?re,not,dr~cussed . rc O",,~I I
                                                                                                                                                        fore 'Ir< enlh;, rcamkd in the cuh rocripu JownolDr other cash listinl;...pcci.uy if the

                                               only,because iheJrpurpo~ ,and,the methodologyflir apply            ,mgthem shollld be _P!"'1f'
                                                                                                                                                    "!< '1Id Ql h rettipl.rt re.:ordN .im uJ~nco ...ly.For =unp!e. if • ~mccry ItOr< derk

                                                                                                                                                    It""   <'U!l ~d intentionally fails to proc"$ th~ ~eiPL of o,hj>n the cash'regisier"it';s

                                               fromthciideScription; ·            .                  , .                . , ..
                                                                                                                                                                                                                       , ,¢HApT 4 I AUOlT OFlHESA1.ES AND Colllt!ioN¢VCLE
                                                                                                                                                                                                                              ERJ                                                         ..27
                                      E
           PAATrHREE l'APPUCAnbN Of Tlj AuDrrPROCESS TOTHE sAlESAND COLLECn0N CycLE
 426 .
.




                                                                                                       Certified PublicAccountants
                                                                                                                  SpecializedServkes
                                                                                                                    Business Solutions



      Audit Committee
      Transportation District Commission or Hampton Roads


      In planning and performing our audit of the financial statements of the Transportation District "

      Commission.of Hampton Roads (County) us of and for the year ended June 30. 2009, in accordance with

      auditing standards generally accepted in the United States of America, Government Atlditillg Standards.

      we considered the Commissions.internal control over financial reporting (internal control) as a basis for

      designing our auditing procedures for the purpose of expressing our opinion 01'1 thefin~ncial statements,

      but not for the purpose ofexpressing an opinion on the effectiveness of the Commis~i(}n's Internal control. .

      Accbrdingly, we do not express an opinion on the effectiveness of'the Commission 'g'internll{ control.     r- .





      However; during our audit we becameaware of the following matters. These circumstances and the

      possible solutions have been reviewed with the President and Chief Executive Officer. Senior Vice

      President for Finance. and Chief Accounting Officer and we believe they present an opportunity to

      strengtheninternal controls and improve operating efficiency.


      Money Room Cash Reconcllfatlon .

       Jn connection with our audit. it came to our attention that there was a.discovery of fraud involving the
       money room from the Southside location. The 01"[ receivers that were located at the Trolley Base
       Facility that were transported to the money room were not analyzed with OFl reports on 3 ' consistent
       basis. As a result, it was noted by the Commission's staff that cash was being taken over a period of six
       months. The total amount of ·cash that was taken approximated S80,OOO. While the Commission has
       strengthened procedures after the fraud was discovered. we recommend that these procedures be
     ' continually updated and the money room cash is analyzed withGFI reports ona daily basis.


      This communication is intended solely for the information and use of the management of the

      Transportation District Ccmmissionof'Hamptcn Roads and is not intended to be and should not be used

                                                  ,
      by anyone other than these specified parties.


                                              C
                                              I

      NewportNews, Virginia
      December 8, 2009




                                                                                                                  Fountain Plazd One
                                                                                                  701 l()W Cen ter Drive , Suite 700
                                                                                                          n
                                                                                                    Newp ort News, VA 23606·4295

       .M ~ jH ", t'W"l ' ''''''''
     MOORE"STEPHENS                                                                                                   ph 757.873.1033
           !Wo.. 3I _ _
        y,r,
                                                                                                                      fill(   757,873.11 06



                                                                                                       A C (O{l " I"' ~ (Of    our
                                                                                                                              Y Future
                                                      Exhibit 2
1:.
                                                                                                                        Page 1 of 1




      From:            Larry Davenport
      Sent:           Friday, December 18, 2009 3:19 PM
      To:             Michael Townes; Don Clark (dclark@williamsmullen.com)
      SUbject:        Auditor's discussion of theft of Trolley Base cash
      Attachments: Auditor's Internal Communication.pdf

Michael & Don,

You are both aware of the theft of a purported $80,000 in Trolley Base cash which occurred over a period of months dUring the
first half of 2009. You are also aware that this theft involved collusion, combined with a deviation from established procedures .
  At December's Budget & Audit Committee meeting, our auditor Goodman & Co. discussed this matter as an 'internal
communication ' (see attached pdf) with the Commissioners in attendance. However, while $80,000 is certainly a meaningful sum,
Goodman did not consider the situation a 'reportable condition' given that collusion was necessary for the loss to have occurred­
in other words, HRT's policies and procedures were sufficient to avoid this type of loss in all but an instance of collusion which,
obviously, can circumvent any policies and procedures. Goodman also considered their discussion with HRT's oversight body
(B&A) to fulfill their professional responsibility, given that B&A could then elect to discuss the matter with tile full Commission
during an executive session if it so chose. For those reasons, Goodman did not discuss the loss with the full Commission at the
follow ing day's meeting.

Commission Chair Wood called me today expressing concern that this matter was not discussed with the full Commission in a
closed session . I made him aware that there was a comprehensive discussion of the matter with the Budget & Audit Committee
the day before the Commission meeting and assured him there was no intent by either staff or Goodman & Co. to suppress or
otherwise avoid sharing this information. As I recall from my conversation with Commissioner Wood, he indicated he heard about
the matter from Commissioner Milteer, whom he said expected that it would be discussed in an executive session at the
Commission meeting. (I presume Commissioner Milteer could have requested an executive session, but perhaps he was
expecting staff to do that. It does not seem appropriate that Goodman would request an executive session .) I do not recall the
need for an executive session being discussed at the B&A meeting. Had it been, I would have immediately presented it to you for
your action. I suggested to Mr. Wood that we could certainly have Goodman discuss it in executive session at January's
Comm ission meeting when the audit will be formally considered for acceptance by the Commission.

Commissioner Wood also asked me to expla in how the cash theft occurred. He also was interested in why we did not seek
prosecution against the individuals suspected . I explained my view that all of the evidence was circumstantial and that I had
talked with legal counsel about prosecution, noting that counsel advised against it.

I presume we'll hear more about all of this.

Larry W. Davenport
Treasurer and Senior Vice President for Finance & Administration
Hampton Roads Transit
3400 Victoria Blvd
Hampton, VA 23661
(W) 757-222-6164
LdaY@PJlrt@hrttansit.org
Follow Hampton Roads Transit on Twitter or find us on Facebook.




                                                                   Exhibit 3
 08/26/2010
                                                                                                   CertifiedPublicAccountamv
                                                                                                             Sp~llz~~             es
                                                                                                              Bu .n   ~   Solut ions



Audit Committee
Transportation DistrictCommission of Hampton Roads


 In pl:l n ll i ll ~ ,l lld performing tour- <\lld lt of theTlnnncial st atemcntsvof the T ransportation .Dlstrict"
 Commission of Hampton Roads (County) us ofand forthe yeare nded June 30, 2009 ~ hi accordance with
 auditing standards generally accepted intheUnited States of America, Government Auditing Standards.
 W considered the-Comrfrisslous intenial coritl"()1 ov~r finqncia l rcpo rt i n g (iru mal control) as a basi (or
   e
 designhlgouf 'auditing procedures for the-purpose of expressing our opinion on the financial statements;
'but not for the purpose cf' cxpressing an opinion on the effectiveness of the Commission's internal control.. '
 Accordingly. we ~6hQttixp ~~s an 9pinioh ,on the effectiveness of the Commission's internal control, .

 However; ,loring our audit we became aware of the follt)\ ing mailers. These ci rcumstnnccsandthe
                                                              v
 possible solutions have been r~vie"""ed with the P resident and Chief Executive Officer, Senio r Vice.
 Presidcllt for Finailce. and Chief Accoullting Officer and webelieve they presen t an opportunity to
.strcngthen:intemal colltrolsulld Improve operating efficiency.                         '         .

 "loney ROOlil           a ~h   Recoriciliilt ion

In connection with our audit. it carne to our attention that there was a discovery of fraud .involving the

money room f rom the Southside location. The. GFI receiv ersthat were located at the Trolley Base

Facility thnt we re irnnsporied to the money roomwere 1l0t: analyzed with GF I reports on a consis tent

basis. As a result. it wasnotedbythe Comruissiori'sstaff'thateasli was being taken oyer a period of six

months. The total amount ofCilSk that was taken approximated $80,000. While the Commission has

s trengthened proccdurcsufter the fraud was discove red. we recommend that these proce ures be
  d
coutluuallyupdatcd.end I hcll1()l1 ~Y room cash is ana lyzed with GFI rcpertson.adaily basis.



.Thiscomtnunicatiol1 is intended sol ¢~y Jor the fllf0 rl11,lt io ti arid usc of the management of the
 TransportationDistrict Commission ,of Hampton RO lldg a lid~s not intend d to be and should hot be used
 byariyoli¢otber than I hC{ic ~ p~cmed pa rtics.
      .                                             "




                         )~                             , (J~ ~L-t.
                                                        '-"I   -r-f!
Newport News,'Virginia
Deccmber'8,:2009


                                                                                                                                              '­
                                                                                                            ~ount I P " o n '
                                                                                               701 Town C n t ! Dr ,..,~ , Suue 700
                                                                                                     'POrt J \>,J: V !36Ob 19 5

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MOORESTEPHENS                                                                                                    ph 757 87J .IOn
                                                                                                                 fd" 7 7 873 II




w...-w .~dm.1n{O com                                                                                AccoulI!illg (0' '(our FUIIJ'~     '.:.
                                       ~4;QO ,\fiqtQr;p :Sol!leYat d, Hcimpton" VirgifJ/a 2366J
                                       phone: 71;-1-222 "6.000 ~"'SQilthsidi!. F(lx {7S1-222~6'7 03
. Ha TP t~r' :6oQd'$' -r;:q i1 !<{ r   Penins'ula Fax :757-222~6T95     '''i   www.hrtransibo':9

          J:~lJ.l.lafY15,;tOtb

          GCl11)I;nissiQn~r$

          Transportation<District ~oU1Jlli~~Qp.         O,f'J-r~mptgnR(laQ$ '


              R¢~	 ExternaLfluditoi:'Goodmail & Company's.tinternal com!11\,lJJ,i9~tionLto
                     Budgejand AUdit Ccmmittee

         ,As part ofitsPY2009 allclit·rj;',PP'rl~Oo9Wnanlfi.,"EQ.movid~d ati'interhaL
         ,coril mllhrcatibli;·related loalleged'ftaudtilent actiyi1Y, .Thi$.fra,l.ld;ilJ.v.:oly~g .1he:suspe,pted
         taJd11g ofcashlJeiilgtrailsported fromdneof'tlie Commfssien's outlying loeationS ioits
          ceV:~at t:nppey.rooU,) qp¢r~tio.l1, As,such,,thiSfnitid \vmH ha.veJ nvolVed l he taking of
                                                                                 d
         .cash priorto :i1~ "peipg iC()llntt;d. al1dpreparced 'for.d~po.s i t, ,'6ne of theil1ostCiffficti.l t foriils,of
          frmiCitiieiltactivity to :defect              '            .

         Nevertl1~less, COrtlitdssiofistarfWasaole to detect Suspicious acthdtyhydbserving
         yari~11~~§b~YP1.1d;th~:n9n.llb~tweel1GfIrateb'Qx ~QftwareCiataand tlie'actua:lcash
         deposits fur the outlying f<lcqUy, Stgffcpmpl~teQjtsap~lysis p[this:sittlation infhelate­
                                                                                         '
         Augl.lstto.i11id~S¢pteinbeHimeftame..atthe time-when ,tl~~ Conll1,1ission's ext~rtnll
         audltors:lypica:llyatr1ve:to;begih thelrdleId work on thepreviol;l§'ye<lr'saudit{i1rthjs
         illstmW~. IheF\'2QO:9 alldit), $taffd¢t¢t1111oed'tobring this111 atter'to the attention-of'thc
         tJ.,l.lqitors 'whei~.'they so, an}Ye!l.~hp9iilg sb"sla:ff'presiltJledthe ,hilditors \Vdtildiiriclttde·a
         discussiou.of'theauatter ip,onef6IQl,or anotlreras PattoJtheif;t.~pOJt,typica.l1y attlle'
         Commission' sOctoben or-November.meeting- .(1'liis;yeat"~'feport, :h~wey et; was ,
         Jlilexpecteclly th~layedtlritil .tite-December.Commissicn meeting due ,to the' Il t::~g;fQr staff
         to\coJ11plete granraccounting Wotk,.polnbinedwithtlle:eaflyoccurrence'oftheNovember·
         Commi~sion111eethlg~) FI~vjllg'th,t:: .au.dit9r's r~porttheirJinClingsrelatl¥e to this matter->         '.
         ratherthanstaffprovidingarep9Ii.-'wo~ldprovj4~ the CQnuuis!>ipl1an.olndependent,
         third party:perspective,.td includeanydiscussicn o.£\possibb;:'l11acteql.laciesjn
         m lgeU1lIDt,: s,dntetiml.cPrltfo)s.
          anl'

         Staffis pleased.the.audltorsconcluded Jhe:rraudulerlt-actfV dicilhot.resu It,fronLan
                                                                                  ity
         inadequacy 6ftilterllalcontrols. Nevertheless,'sta,ffhl!$wnepde4its,pr9cedurestelate(i to
         this spccifiC 'activitYl611elp preclirdepossible.future.instances 9.ffra,ud, baseduporrthe
         Inl'lnci~rjnWl1ich staffoelleves;tl1e,fratidrfiay Jluv.e'toccliited. And while.staff may take
         con.lfpl,ttbanhy:;allditor~ f'ou.nd.Qosign:i'{i'callt defideiicies'Ju'procedutes .orintenlaF
         controls; . ,staff 'regret~ <the :l1egat~yeat~ellfiql1 .tht$Jllattet: hasdr:il.\vn to the;Cottin1i$si()11;




         l ;alTYW. .Thl:verma
         'Ireasurer'

         Senior'Vicc,Presiderttfor R111al1Ce,&.Adluinistration





                                                              Exhibit 4
                      Exhibit 5


        Contact Hampton Roads Transit for the:

                     Final Report
Revenue Operations Task Force of Hampton Roads Transit
                      April 2010
                       Exhibit 6


         Contact Hampton Roads Transit for the:

                FINAL REPORT
                       OF THE

AMERICAN PUBLIC TRANSPORTATION ASSOCIATION


            PEER REVIEW PANEL

                         FOR


        HAMPTON ROADS TRANSIT
                Hampton, Virginia
   Provided for the sole and proprietary use of the
              Hampton Roads Transit


                     January 2010
                 Trolleybase Audits
                   2007 - 2009
             Analysis Of Differences
           Actual Deposit less than GFI

Deposit Date                                   Difference
4/26/2007                                          $152.00
5/10/2007                                          $580.00
5/17 and 18/2007                                  $1,715.00
5/23/2007                                         $3,592.00
5/25/2007                                            $81.00
5/29 & 30/2007                                    $1,327.00
7/5 & 6/2007                                        $882.00
8/7, 9, & 10/2007                                   $394.00
8/16/2007                                         $3,396.00
8/20 & 21/2007                                    $2,783.00
8/28/2007                                         $3,036.00
9/14/2007                                         $1,651.00
9/20 & 21/2007                                    $3,227.00
10/5/2007                                         $1,310.00
10/11/2007                                        $1,419.00
10/18/2007                                        $1,803.00
10/25 &26/2007                                    $2,324.00
10/30/07 & 11/1 & 2/2007                          $1,060.00
11/8 & 9/2007                                     $1,254.00
11/21/2007                                        $1,004.00
12/27 & 28/2007                                    $584.00
1/10/2008                                         $1,071.00
1/17/2008                                         $1,007.00
1/24/2008                                         $1,145.00
2/14 and 15/2008                                   $627.00
2/29/2008                                          $985.00
3/13/2008                                          $148.00
3/20/2008                                          $881.00
4/10/2008                                         $1,049.00
4/17/2008                                          $656.00
4/24/2008                                          $830.00
5/1 and 8/2008                                    $2,751.00
5/15/2008                                         $2,341.00
5/27 and 28/2008                                  $4,772.00
6/9/2008                                          $1,509.00
6/16, 18 and 19/2008                               $605.00
6/23 and 24/2008                                  $1,460.00
6/25, 26, 27, 30, 7/1/2008                        $2,921.00
7/2/2008                                          $3,355.00
7/3 and 7/2008                                    $3,145.00
7/14/2008                                          $677.00
7/16/2008                                         $2,107.00
7/21, 22, 23, 24, 28 and 29/2008                   $473.00
8/4/2008                                          $1,284.00
8/11/2008                                         $7,561.00
8/21/2008                                         $1,732.00
9/2/2008                                          $3,747.00
9/15/2008                                          $668.00
9/29/2008                                         $4,822.00
10/6 and 7/2008                                    $103.00
10/27/2008                                        $1,477.00
11/10 and 12/2008                                 $1,505.00
11/17/2008                                        $1,470.00
11/24/2008                                         $899.00
12/1/2008                                          $841.00
12/8/2008                                         $1,212.00
12/15/2008                                        $1,253.00

                                   Exhibit 7
                Trolleybase Audits
                     2007 - 2009
               Analysis Of Differences
             Actual Deposit less than GFI

Deposit Date                            Difference
12/29/2008                                 $1,633.00
1/10/2009                                    $142.00
1/14/2009                                      $7.00
1/17/2009                                  $1,113.00
1/31/2009                                  $1,623.00
2/4/2009                                     $100.00
2/7/2009                                   $1,427.00
2/14/2009                                  $1,462.00
2/19/2009                                  $1,322.00
2/21/2009                                    $835.00
2/28/2009                                  $1,382.00
3/7/2009                                      $91.00
3/11/2009                                    $975.00
3/14/2009                                  $1,349.00
3/18/2009                                    $935.00
3/21/2009                                  $1,411.00
3/25/2009                                    $858.00
3/28/2009                                  $1,471.00
4/1/2009                                   $1,016.00
4/4/2009                                   $1,476.00
4/8/2009                                   $1,384.00
4/11/2009                                  $1,522.00
4/15/2009                                  $1,344.00
4/18/2009                                  $1,428.00
4/21/2009                                    $119.00
4/25/2009                                  $1,643.00
5/2/2009                                   $1,403.00
5/6/2009                                   $1,416.00
5/9/2009                                   $1,773.00
5/13/2009                                  $2,209.00
5/16/2009                                  $2,194.00
5/20/2009                                      $5.00
5/23/2009                                    $928.00
5/28/2009                                    $820.00
5/30/2009                                  $4,288.00
6/6/2009                                   $1,748.00
6/13/2009                                  $3,954.00
6/20/2009                                  $5,028.00
6/27/2009                                  $4,899.00
7/8/2009                                      $39.00
7/11/2009                                  $5,065.00
7/18/2009                                  $6,116.00
7/25/2009                                  $5,016.00
8/1/2009                                   $6,186.00
8/8/2009                                   $4,201.00
8/15/2009                                  $5,333.00
8/29/2009                                  $2,065.00
Total                                    $189,417.00




                            Exhibit 7
             APPENDIX C-TABLE OF ACRONYMS


ACRONYM                              Description


APTA           American Public Transportation Association
ARRA           American Recovery and Reinvestment Act
A&E            Architectural and Engineering Services
CAA            Cost Allocation Agreement
CBD            Central Business District (Downtown Norfolk, VA)
CEB            Contractor Evaluation Board
CEI            Cost Effectiveness Index
CEO            Chief Executive Officer
CM             City Manager
CM             Construction Management
CNFA           Concurrent non-FFGA
COI            Conflict of Interest
CON            City of Norfolk
CTC            Cost-to-complete
CWE            Current Working Capital Cost Estimate
DEIS           Supplemental Draft Environmental Impact Statement
DHS            United States Department of Homeland Security
DOT            Department of Transportation
DRPT/VDRPT     Virginia Department of Rail and Public Transportation
DVP/VEPCO      Dominion Virginia Power
EE             Engineer’s Estimate
EVMC/EVMS      Eastern Virginia Medical Center
E2F            Enterprise and Empowerment Foundation of NSU
FAQ            Frequently Asked Questions
FD             Final Design
FICA           Federal Insurance Contributions Act
FFGA           Full Funding Grant Agreement
FOIA           Virginia Freedom of Information Act
FSS            Filler Security Strategies, Inc.
FTA            Federal Transit Administration
GEC            General Engineering Consultant
GFI            Fare Collection System
HRSD           Hampton Roads Sanitation District
HRT            Hampton Roads Transit
IRS            Internal Revenue Service
LLC            Limited Liability Corporation
LOOP           Downtown Portsmouth Bus Service
LRT/Tide       Light Rail Transit
LRV            Light Rail Vehicle
LTR            Light Rail Transit (as used in various e-mail
               attachments)
MAX            Metro Area Express
MOS            Minimum Operational Segment
                               121
ACRONYM                             Description

MOT           Maintenance of Traffic
MOU           Memorandum of Understanding
MUTCD         Manual on Uniform Traffic Control Devices
NET           Norfolk Electric Transit
NRHA          Norfolk Redevelopment and Housing Authority
NS            Norfolk Southern
NSU           Norfolk State University
NTP           Notice to Proceed
OMB           White House Office of Management & Budget
PB            Parsons Brinckerhoff
PBS&J         Post, Buckley, Schuh, & Jernigan
PE            Preliminary Engineering
Pentran       Peninsula Transportation District Commission
PEP           Project Execution Plan
PES           Project Execution Strategy
PFM           Public Financial Management, Inc.
PI            Public Involvement
PMC           Project Management Consultant
PM/CM         Project Management/Construction Management
PMP           Project Management Plan
PMO           Project Management Oversight
PMOC          Project Management Oversight Contractor
PW            City of Norfolk Public Works
RFP           Request for Proposal
ROD           Revenue Operations Date
ROE           Right of Entry
ROM           Rough Order of Magnitude
ROTF          Revenue Operations Task Force
ROW           Right of Way
SCC           Standard Cost Code
SCC           Virginia State Corporation Commission
SOEI          Statement of Economic Interest
SOW           Statement of Work
TDCHR/        Transportation District Commission of Hampton
Commission/   Roads/Board of Commissioners
Board
TRT           Tidewater Regional Transit
TVM           Ticket Vending Machines
UDA           Urban Design Associates
VA            Commonwealth of Virginia
VDOT          Virginia Department of Transportation
VNG           Virginia Natural Gas
VPPA          Virginia Public Procurement Act
VSMF          Vehicle Storage and Maintenance Facility
WAVE          Virginia Beach Wave


                              122
                 APPENDIX D-SUMMARY OF RECOMMENDATIONS



                       HAMPTON ROADS TRANSIT

                 SUMMARY OF RECOMMENDATIONS
#       Item   Page   Recommendation
        Number Number
MANAGEMENT PREPARATION, TIMING AND DISCLOSURE OF BUDGET,
ACTUAL, AND COST-TO-COMPLETE ANALYSIS FOR THE TIDE
1     Item 1  27      We recommend the HRT Chief Executive Officer take
      (a)             appropriate action to ensure accurate and timely
                      development and routine disclosure of LRT/Tide project
                      budget-to-actual and cost-to-complete analysis to key
                      stakeholders. We also recommend the HRT Chief
                      Executive Officer consider having discussions with FTA
                      and possibly the United States Department of
                      Transportation, Office of Inspector General regarding
                      whether HRT made full and timely disclosure of the
                      LRT/Tide project cost-to-complete.
2       Item 1    28       We recommend that the HRT Chief Executive Officer
        (b)                take immediate steps necessary to ensure the LRT/Tide
                           project is in compliance with all terms and conditions
                           included in the FFGA. Such steps should include at a
                           minimum, obtaining “written” approval from the FTA
                           extending the Revenue Operations Date beyond that
                           contained in the FFGA.
3       Item 1    29       We recommend that the HRT Chief Executive Officer
        (c1)               consult with legal counsel to evaluate existing remedies
                           and alternatives available to reduce and/or mitigate the
                           risk associated with actions taken by HRT staff in
                           connection with their duties. If such remedies exist, then
                           evaluate the probability of recovering damages related to
                           actions involving LRT/Tide project.
4       Item 1    29       We recommend that the HRT Chief Executive Officer
        (c2)               take the steps necessary to effect a binding agreement
                           regarding the usage of the NSU property.
5       Item 1    30       We recommend that the HRT Chief Executive Officer
        (d)                communicate to all HRT staff the requirement to comply
                           fully with the provisions of the Virginia Freedom of
                           Information Act.




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                        HAMPTON ROADS TRANSIT

              SUMMARY OF RECOMMENDATIONS
#     Item   Page    Recommendation
      Number Number
CONSULTANT/VENDOR SELECTION PRACTICES
6     Item 2 36      We recommend the HRT Chief Executive Officer ensure
      (a)            that solicitation and subsequent evaluations of offerors’
                     bid/proposals are conducted in an impartial and
                     comprehensive manner, including consideration of
                     pricing as an evaluation criterion where required. We
                     also recommend the HRT Chief Executive Officer,
                     through the Director of Procurement, ensure that
                     procurement files are complete and provide a complete
                     background, including the basis for each step in the
                     process and for the final decision.
7       Item 2    41       We recommend the HRT Chief Executive Officer take
        (b)                appropriate action to ensure compliance with federal and
                           state procurement laws and internal procurement policies
                           and procedures regarding full and open competition. At
                           a minimum, such activities should include required
                           organization-wide training of all management and
                           administrative personnel involved with procurement
                           activities. We also recommend the HRT Chief Executive
                           Officer study current federal, state, local and internal
                           procurement laws, regulations, policies and procedures
                           and ensure that HRT is appropriately complying with the
                           correct statutory authority for particular procurement
                           situations.
8       Item 2    43       We recommend the HRT Chief Executive Officer take
        (c)                appropriate steps to ensure the complete, open, and
                           timely disclosure of contract matters to the Board. We
                           also recommend the HRT Chief Executive Officer take
                           appropriate steps to ensure all required Board approvals
                           are obtained in accordance with applicable federal and
                           state laws and HRT policies and procedures.
REVENUE OPERATIONS
9     Item   51            We recommend that management evaluate the need for
      3(a)                 corrective and/or disciplinary action for those employees,
                           currently employed, who failed to perform their duties.




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                     HAMPTON ROADS TRANSIT

             SUMMARY OF RECOMMENDATIONS
#    Item   Page   Recommendation
     Number Number
10   Item   52     As the missing funds at the Trolley Base Facility
     3(b)          occurred prior to September 2009, we recommend that
                   HRT evaluate the need to perform reconciliations for
                   collections prior to September 2009, at least on a sample
                   basis, to look for patterns of shortages at fare collection
                   locations other than the Trolley Base Facility.
11   Item      52        We recommend that funds other than fare collections be
     3(c)                put in a separate daily deposit in order to simplify the
                         fare revenue reconciliation process.
12   Item      52        We also recommend that the other funds (i.e. ticket
     3(d)                vending machine money, customer service cash/credit
                         cards, petty cash) be collected and deposited separately.
13   Item      52        Due to the lack of following procedures in cash receipts,
     3(e)                we recommend HRT look at the controls over all cash
                         revenue operations.
14   Item      52        We recommend that HRT management review the GFI
     3(f)                system and evaluate implementing any software or
                         hardware that could enhance the performance of the HRT
                         GFI system.
15   Item      52        We also recommend that HRT management evaluate the
     3(g)                personnel that will be using the GFI system and ensure
                         that employees are capable of using the GFI system, and
                         are held accountable for doing so.
16   Item      52        We recommend that management evaluate the need for
     3(h)                an audit of the GFI system at HRT to determine whether
                         it is accurate and reliable.




                                       125
                    HAMPTON ROADS TRANSIT

                SUMMARY OF RECOMMENDATIONS
#    Item      Page  Recommendation
     Number Number
17   Item 3(i) 53    We recommend that HRT consider hiring an independent
                     third party consultant to assist in implementing the
                     recommendations from each of the revenue studies.
18   Item 3(j) 53      We recommend that HRT document responses to each of
                       the ROTF and APTA recommendations.
19   Item     54       We recommend that HRT review the different ways in
     3(k)              which funds are transferred to the money room and
                       develop a consistent method for all locations which
                       ensures security of the funds and the employees
                       transporting the funds.
20   Item 3(l) 54      We recommend that management review the staffing
                       qualifications of the revenue operations unit to ensure
                       they have adequately qualified employees and an
                       adequate number of employees to perform the duties of
                       the unit at all times.
21   Item     54       Management may want to consider using contract
     3(m)              employees or paying more money to get better qualified
                       staff in some of the positions in the revenue operations.
22   Item     54       HRT could also prepare a cost benefit analysis of using a
     3(n)              professional security firm, like Brinks or Dunbar, to
                       move vaults. Some banks may also provide money
                       counting services, and HRT could also consider if there
                       is enough benefit to outsource some or all of these
                       operations.
23   Item     54       We recommend that Human Resources consider
     3(o)              developing policies to address shortages or thefts of
                       funds and determine what actions should be taken when a
                       shortage or theft is noted.




                                     126
                      HAMPTON ROADS TRANSIT

              SUMMARY OF RECOMMENDATIONS
#     Item   Page   Recommendation
      Number Number
24    Item   55     We recommend that management consider conducting
      3(p)          more thorough criminal background checks on
                    employees working in the revenue operations. We also
                    recommend that management keep the requirement that
                    employees must have a positive credit history report to be
                    hired in the revenue operations unit.
ADDITIONAL FINDINGS
25     Item 4 56          We recommend that the HRT Chief Executive Officer
       (a1)               take immediate steps to ensure compliance with all terms
                          and conditions of grant agreements, including but not
                          limited to:

                             •   Review, identification and repayment of funding
                                 associated with the purchase of vehicles used for
                                 commuting purposes.
                             •   Review, identification and repayment of funding
                                 associated with the maintenance of vehicles used
                                 for commuting purposes.
                             •   Review recent surplus property disposals to
                                 ensure documentation is maintained to establish
                                 the fair market value at time of disposal.
26    Item 4    57        We recommend that the HRT Chief Executive Officer
      (a2)                consider pursuing action to revoke the authority granted
                          under Commission Resolution No. 13-2001 relative to
                          the donation of surplus property.
27    Item 4    57        We recommend the HRT Chief Executive Officer ensure
      (b)                 that adequate controls exist over the payment of invoices.
                          At a minimum, current policies and procedures should be
                          reviewed and updated, as necessary, and there should be
                          mandatory training for all Project Managers to ensure
                          they have a complete understanding of their
                          responsibilities in this critical role.




                                        127
                     HAMPTON ROADS TRANSIT

             SUMMARY OF RECOMMENDATIONS
#    Item   Page   Recommendation
     Number Number
28   Item 4 58     We recommend that the HRT Chief Executive Officer
     (c)           immediately take the steps necessary to ensure
                   compliance with the State and Local Government
                   Conflict of Interest Act contained in Title 2.2, Chapter 31
                   of the Code of Virginia and that such actions apply to all
                   key management and procurement personnel whatever
                   the employee type.
29   Item 4    58        We recommend that the HRT Chief Executive Officer
     (d)                 establish a position to independently evaluate HRT’s
                         network of internal controls. The position should report
                         functionally to the HRT Chief Executive Officer under a
                         Charter that permits the position to report directly to the
                         Chairman of the HRT Commission or to the Federal
                         Transit Administrator when situations require such a
                         direct reporting relationship.
30   Item 4    58        We recommend that the HRT Chief Executive Officer
     (e)                 perform an evaluation of the existing HRT organizational
                         structure and staffing to ensure core functions are
                         supervised by experienced and knowledgeable staff with
                         the right skill level.
31   Item 4    60        We recommend that the HRT Chief Executive Officer
     (f)                 ensure that local contributions are calculated, billed,
                         collected, or refunded in accordance with the terms and
                         conditions specified in the Cost Allocation Agreement
                         negotiated with the seven participating cities.




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