Review of Policies, Procedures, and Practices of the Urban Mass Transportation Administration (UMTA) for Determining the Net Project Cost for Capital Grants

Published by the Government Accountability Office on 1971-06-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)




          Dear Mr.      Secretary:

                 The General Accounting      Office   has reviewed the policies,         procedures,
          and practices     of the Urban Mass Transportation          Administration     (IJMTA) for
          determining    the net project     cost for capital      grants authorized       under sec-
          tion 3 of the Urban Mass Transportation           Act of 1964, as amended (49 U.S.C.
          1601).     The purpose of the capital       grant program is to assist         State and
          local public     bodies and agencies thereof       in financing       the acquisition,
          construction,     reconstruction,     and improvement     of facilities     and equipment
          used for providing      mass-transportation      service    in urban areas.

                  Under the capital         grant program, the amount of a grant is related
          directly      to the net project         cost.   The maximum grant is two thirds      of the
          net project      cost, if the urban area has developed a program for a unified
          or officially        coordinated      urban transportation      system as part of the com-
          prehensive      planned development          of the area.    If plans for the unified     or
          coordinated       transportation       system have not been completed but are under
          active    development,        a community may qualify      for a grant equal to one half
          of the net project           cost; a grant for the balance of the full         two thirds    of
          the net project          cost will    be made if the community meets the full        planning
          requirements        within    3 years.

                   Section   4(a)    of the act   defines    net project    cost   and provides,         in
           part,    that:

                          "The Secretary,   on the basis of engineering           studies,     studies
                   of economic feasibility,      and data showing the nature and extent
                   of expected utilization      of the facilities        and equipment,      shall
                   estimate   what portion   of the cost of a project           to be assisted
                   under section    3 cannot be reasonabiy        financed    from revenues--
                   which portion    shall hereinafter    be called       'net project      cost."'

                                          50 TH ANNIVERSARY        1921- 1971

Improvements     needed in determining
net project     cost

        Our review of grants awarded under the capital                grant program
revealed that UMTA had not established              policies,     procedures,       and
guidelines     for obtaining     and evaluating      engineering      studies and
economic feasibility       studies   for determining          the availability        of
transit    system revenues in arriving         at the net project          cost.      The
net project      cost, as previously     indicated,       provides    the basis for
determining      the amount of the Federal grant that can be authorized.
We were advised by UMTA officials           that the mass-transit            industry
generally     was not financially     able to finance the repayment cost
of revenue bonds for capital         acquisitions.

      According    to UMTA records,    155 capital grants totaling  about
$735 million    were awarded through December 31, 1970. Information
contained    in the grant applications     showed that, as required  by,the
act, the costs for 64 of the projects        had been reduced as shown below:

                                             Number of
                                             projects                  Amount

       Gross project   cost                      155            $1,149,292,537
       Less reductions                            64                 17,283,665

       Net project     cost                                     $1,132,008,872

The reductions   consisted     principally of proceeds from the sale of real
estate or old assets,      such as buses, machinery,   or equipment.     In one
of the 64 projects,     system revenue was deducted in determining       the net
project  cost.   In this case UMTA did not make a review and evaluation
of engineering   and economic studies to determine      the availability    of
system revenues but accepted the data as shown in the application.

        We selected      grants awarded to the San Francisco       Bay Area Rapid
Transit    District       (BART) to determine whether UMTA adequately        had con-
sidered the availability           of system revenues prior to the award of the
grants.     We found that IJMTA had awarded a grant of $28 million             and had
approved an amendment to the grant,             which would increase     the amount to
$68 million,        without   adequately   considering  the availability     of system


       BART, created in 1957 by the California           Legislature,     is constructing
a 75-mile,    three-county-wide,rail,      rapid-transit       system.    In 1962 voters
of the member counties        of BART authorized     a bonded indebtedness,          totaling
$792 million      of general obligation    bonds.      Payments of both principal
and interest      on these bonds were to be provided from a levy of property
taxes.     The construction      of the BART system, except for a transbay              tube
between San Francisco        and Oakland, was to .be financed from the proceeds
of these bond issues.         The transbay   tube, estimated       to cost about $133 mil-
lion in 1962, was to be financed from surplus automobile                 tolls    from existing
bay bridges.       The purchase of rolling      stock, estimated       to cost about
$71 million     in 1962, was to be financed from future            revenues of the transit
system.     The total    system cost, including      construction      and rolling      stock,
was estimated      at that time to be $996 million.

        BART officials     recognized     that the $792 million    would be about
$150 million       short of the amount needed to finance construction         of the
75-mile system which excluded the transbay              tube and the rolling  stock.
To meet this financing         deficit,     BART sought Federal assistance   and, in
1966, obtained conditional           assurance from the Secretary     of the Department
of Housing and Urban Development (HUD) that BART might expect Federal
capital    grant assistance       of as much as $80 million     over the ensuing
5 years.

        BART, in a preliminary      application    dated November 1, 1967, requested
a grant of $28 million       to   assist   in financing   14 construction   contracts
totaling    about $72 million      and covering specific     segments of the construc-
tion work for the 75-mile         BART system. (Responsibility       for administering
the capital     grant program     was transferred     from HUD to UMTA in 1968 by
Reorganization      Plan No. 2    (33 F.R. 6965.)

       On June 5, 1968, BART requested that its preliminary              application
for a grant be increased       to include,     in lieu of six of the construction
contracts,     the acquisition   cost of about 140 rapid transit           vehicles.
The purchase of these 140 transit          vehicles     was included in a contract
for the purchase of 250 transit         vehicles     awarded by BART on July 3, 1969,
in the amount of $66,708,000,        which subsequently        was increased     to $78 million.
BART stated that, because of unresolved             funding problems affecting       the
entire     BART system, the sale of the revenue bonds to be repaid from system
revenues could not be made until         full financing       of the BART system was


       In its final       application      for the grant,   dated November 14, 1968,
BART stated that        no part of      the gross project    costs would be financed
from revenues of         the transit      system, because revenue service would not
be started     until    after    1969   and because system revenues would be ear-
marked for cost        of operation      , acquisition   of a portion of the total
required    rolling      stock, and     repayment to the State for certain     capital

      On November 21, 1968, DMTA awarded a grant of $28 million    to BART
to assist  in the construction of certain segments of the basic 75-mile
system and for the purchase of about 140 rapid-transit   vehicles.

        Apparently      UMTA accepted,    without question,  BART's      representation
that no portion         of project   costs could be financed   from      system revenues.
We found no evidence that UMTA had made an evaluation              of      BART's estimates
of operating        revenues and expenses to determine whether           there would be
sufficient      revenue to finance the purchase of all,        or a      part of, the total
required     rolling      stock.

       We believe that, had DMTA made an evaluation               of the availability       of
system revenues prior to the award of the grant,                it would have found that
system revenues could have been used to finance a bond issue for the pur-
chase of part of the required         rolling    stock.     This was indicated         by BART's
original   financing   plan, formulated        in May 1962, which provided           that the
purchase of rolling     stock be financed from future             revenues of the transit
system.    Also a consulting     engineering      firm's    October 1967 report on a
study of the coordinated      transit      system for the San Francisco         Bay area
showed that the BART system would be able to provide sufficient                     net reve-
nues to finance the purchase of rolling              stock.

        Moreover, an analysis    made by BART in December 1969 to test its
ability    to sell revenue bonds of $45 million      to finance the cost of
transit    vehicles   considered   several fare plans that would provide annual
operating     revenues ranging from $25.6 million      to $33.8 million.    Based on
a fare plan that would produce operating        revenues of $33.3 million,      the
annual net revenues would be about $200,000 less than the amount needed
to finance a revenue bond issue of $45 million.           Although the net reve-
nues would be insufficient       to finance a $45 million     bond issue,  they
could support an issue of a lesser amount.

      We believe     that,  had UMTA, in November 1968, obtained and evaluated
the studies    required    by the act, the net project  cost would have been
reduced and would have eliminated        the need for a grant or resul'zed in a


much smaller  capital   grant.     We met with the Administrator,            UMTA, on
July 15, 1970, to advise him of our findings         and to apprise          him of
the need for UMTA to require        that the studies  provided    for      in the act
be obtained  and evaluated     prior    to awarding capital   grants.

        On March 26, 1971, however, UMTA approved an amendment              to the
grant increasing       the amount from $28 million     to $68 million.        The
$40 million     additional   was to help finance    certain  additional       con-
struction     costs and the remaining     transit  vehicles  included       in BART's
contract    for 250 rapid-transit     vehicles.

         The need for considering     BART's revenues as a possible         reduction
of gross project      cost in connection     with the request      for the $40 mil-
lion additional      was discussed    with DMTA officials      subsequent     to our
meeting with the Administrator.           Notwithstanding    assurance    from these
officials     that BART's revenue situation        would be appropriately       evaluated,
however, we found no evidence that UMTA, prior             to approving     the amend-
ment to the grant,      had made an evaluation        of BART's representations        that
no part of the additional        project   cost could be reasonably       financed     from
system revenues.

       In view of BART's December 1969 analysis      which indicated    the
availability     of system revenues for financing,    to a significant     degree,
the purchase of rolling      stock,  LIMTA should have obtained    and evaluated
the required     engineering   and economic studies  before approving     an
increase     of $40 million  in the amount of the grant.

      On April   7, 1971, UMTA officials     advised us that BART was reanalyzing
its ability    to sell revenue bonds and that the results       should be available
to UMTA shortly.      We were assured that,    even though the grant had been
awarded, the amendment increasing        the amount by $40 million    would not be
executed until     UMTA had an opportunity    to review the data developed during
BART's reanalysis.


        We believe   that UMTA should not have awarded the grant of $28 million
nor have approved the amendment increasing        the amount by $40 million        with-
out obtaining      and evaluating studies  or analyses    of projected   operating
revenues and expenses of the BART system.         We believe    also that UMTA should
not execute the amendment until       it has evaluated   BART's reanalysis      of its
ability    to sell revenue bonds.


       The award of the grant and the approval       of the               amendment without
reasonable      assurance that system revenues would not                  be available     to
finance    the purchase of rolling     stock (1) were not               in consonance with
the intent      of the act and (2) reduced the amount of                  grant funds availa-
ble to other communities,       which might place them at                 a disadvantage      in
their   efforts     to seek Federal assistance   in relieving                their  transporta-
tion financial        problems.


        We recommend that the Administrator,             UMTA, be, required       to establish
policies,       procedures,    and guidelines      for ensuring      that applications      for
capital      grants are supported      by engineering       studies,      studies   of economic
feasibility,        and data showing the nature and extent of expected utiliza-
tion of the facilities          and equipment and that these studies              and data are
evaluated       in determining    the availability        of system revenues and the net
project      cost to be financed,      in part,      with Federal grant funds.          We recom-
mend also that the Administrator,             UMTA, be required         to adequately    document
the evaluations        and conclusions     on the basis of such studies.

      We appreciate     the cooperation       and courtesy      extended to us by UMTA
personnel   during our review.         Your attention      is invited     to section    236
of the Legislative      Reorganization      Act of 1970 which requires          that you
submit written     statements    of the action      taken with respect        to the above
recommendations.       The statements      are to be sent to the House and Senate
Committees on Government Operations            not later     than 60 days after      the
date of this report       and to the House and Senate Committees on Appropriations
in connection    with the first      request    for appropriations        submitted    by your
agency more than 60 days after          the date of this report.            We would appreci-
ate being furnished       with copies of your statements            to the Committees.

      A copy of this      report   is being    sent         to the UMTA Administrator.

                                                           Sincerely   yours,

                                                 ,’/: ‘,                 son
                                                                         vi1 Division
The Honorable
The Secretary     of Transportation