oversight

Corps Of Engineers: Improved Analysis of Costs and Benefits Needed for Sacramento Flood Protection Project

Published by the Government Accountability Office on 2003-10-27.

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

               United States General Accounting Office

GAO            Report to Congressional Requesters




October 2003
               CORPS OF
               ENGINEERS
               Improved Analysis of
               Costs and Benefits
               Needed for
               Sacramento Flood
               Protection Project




GAO-04-30
               a
                                                October 2003


                                                CORPS OF ENGINEERS

                                                Improved Analysis of Costs and Benefits
Highlights of GAO-04-30, a report to            Needed for Sacramento Flood Protection
congressional requesters
                                                Project



In 1996 and 1999, Congress                      Estimated costs for the Common Features Project rose from $57 million in
authorized the U.S. Army Corps of               1996 to between $270 million and $370 million in 2002—primarily because of
Engineers (the Corps) to                        design changes. For the American River, costs more than tripled from $44
strengthen sections of the                      million to $158 million in 2002, primarily due to changes such as deepening
American River and Natomas Basin                the walls built in the levees (cut-off walls) to prevent seepage and closing
levees that provide flood protection
for Sacramento, California. In 2002,
                                                gaps in the walls at bridge crossings. Cost estimates for the Natomas Basin—
the Corps reported that the cost of             still in planning—increased from $13 million in 1996 to between $112 million
this work, known as the Common                  and $212 million in 2002. The Corps has yet to analyze alternative flood
Features Project, had increased                 protection approaches for the Natomas Basin that might be more cost-
significantly. GAO was asked to                 effective. Furthermore, it has not analyzed its exposure to potentially
determine why costs increased, the              significant cost increases for the Natomas Basin work.
extent to which the Corps analyzed
and reported the potential cost                 The Corps did not fully analyze, or report to Congress in a timely manner,
increases to Congress in a timely               the potential for significant cost increases for the American River levee
manner, and whether the Corps                   improvements authorized in 1996. Specifically, a severe storm in the
correctly estimated economic                    Sacramento area in January 1997 indicated some cut-off walls would need to
benefits.
                                                be much deeper and therefore would be more costly. Corps guidance
                                                generally directs the Corps to seek new spending authority from Congress if
                                                it determines, before issuing the first contract, that it cannot complete the
To better inform Congress about                 project without exceeding its spending limit. However, the Corps began
the costs and benefits of flood                 construction in 1998 without analyzing or reporting potential cost increases.
protection for Sacramento, GAO                  By 2003, it had committed most of the funding authorized for the entire
recommends, among other things,                 Common Features Project to the 1996 American River work, leaving the
that the Secretary of the Army                  additional 1999 work and the Natomas Basin improvements without funding.
•    improve the accuracy of the
     cost-benefit analysis for the              In 1996, the Corps incorrectly estimated the economic benefits for the
     not yet constructed American               American River levee improvements by overcounting the residential
     River levee improvements;                  properties to be protected. In 2002, it incorrectly estimated benefits for the
•    improve the reporting of costs             1999 improvements by, among other things, miscalculating the size of the
     and benefits and analyze                   area that the improvements would protect. The Corps’ quality control
     alternative flood protection               process was ineffective in identifying and correcting these mistakes.
     measures for the Natomas
     Basin improvements; and
•    arrange for a credible,
     independent review of the
     completeness and accuracy of
     the revised analyses.

The Army concurred with GAO’s
recommendations but took issue
with the presentation of some
information.
www.gao.gov/cgi-bin/getrpt?GAO-04-30.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Anu Mittal at
(202) 512-3841 or mittala@gao.gov.
Contents



Letter                                                                                                   1
                             Results in Brief                                                            4
                             Background                                                                  6
                             Design Modifications Have Greatly Raised Costs for the Common
                               Features Project                                                          9
                             The Corps Did Not Adequately Analyze Likely Cost Increases for the
                               Common Features Project or Communicate Them to Congress in
                               a Timely Manner                                                          15
                             Corps’ Benefit Estimates for the American River Levee
                               Improvements Are Incorrect                                               19
                             Conclusions                                                                25
                             Recommendations for Executive Action                                       26
                             Agency Comments and Our Evaluation                                         26


Appendixes
              Appendix I:    Scope and Methodology                                                      29
             Appendix II:    Conversion of Costs to Constant Dollars                                    31
             Appendix III:   Comments from the Department of the Army                                   32
                             GAO Comments                                                               38
             Appendix IV:    GAO Contact and Staff Acknowledgments                                      42
                             GAO Contact                                                                42
                             Staff Acknowledgments                                                      42


Tables                       Table 1: The Corps’ Original 1996 Cost Estimate and Estimated
                                      Cost Increases for the American River Levee
                                      Improvements Authorized in 1996                                   10
                             Table 2: The Corps’ Original 1996 Cost Estimate and Potential Cost
                                      Increases for the Natomas Basin Component                         12
                             Table 3: Common Features Project’s Cost Estimates in Original
                                      1996 Dollars and in Adjusted 2002 Dollars                         31


Figures                      Figure 1: Location of the Common Features Project                           3
                             Figure 2: Seepage under and through Levees and a Cut-off Wall to
                                       Prevent Seepage                                                   8
                             Figure 3: Location of the Fremont Weir and the Yolo Bypass                 14




                             Page i                                   GAO-04-30 Sacramento Flood Protection
Contents




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Page ii                                           GAO-04-30 Sacramento Flood Protection
A
United States General Accounting Office
Washington, D.C. 20548



                                    October 27, 2003                                                               Leter




                                    The Honorable Don Young
                                    Chairman, Committee on Transportation
                                     and Infrastructure
                                    House of Representatives

                                    The Honorable John T. Doolittle
                                    House of Representatives

                                    The Honorable Richard Pombo
                                    House of Representatives

                                    The city of Sacramento, California, located where the American and
                                    Sacramento Rivers meet, has faced significant risks of major flooding since
                                    its founding in the 1840s. A major flood in the Sacramento area could cause
                                    loss of lives; toxic and hazardous waste contamination; disruptions to the
                                    city’s downtown business and government areas, including the state
                                    capitol; and billions of dollars in property damage. To help protect against
                                    these risks, in 1991 and again in 1996, the U.S. Army Corps of Engineers
                                    (the Corps) identified several alternatives for long-term flood protection.
                                    On both occasions, the Corps recommended building a new dam on the
                                    American River near Auburn, California. Concerns were raised about the
                                    proposed dam’s high cost and environmental impacts, and Congress did not
                                    authorize its construction.

                                    In light of the decision not to proceed with the new dam, the Corps
                                    recommended improving the existing levees on the American and
                                    Sacramento Rivers to increase the level of flood protection for the greater
                                    Sacramento area. Levees provide flood protection by raising the height of
                                    river banks, which helps prevent rivers from overflowing during storms.
                                    The Corps primarily proposed constructing “cut-off” walls in the center of
                                    the existing levees. These walls, composed primarily of soil, cement, and
                                    clay, become impermeable when they harden and prevent water from
                                    passing through the levees. These levee improvements were common to all
                                    of the alternatives that the Corps had considered for Sacramento flood
                                    protection in 1996 and became known as the Common Features Project.




                                    Page 1                                    GAO-04-30 Sacramento Flood Protection
The Water Resources Development Act (WRDA) of 1996 authorized $57
million for the project.1

The Common Features Project consists of two related but separate
components—the American River levee improvements and the Natomas
Basin levee improvements. The levees on the American River protect
downtown Sacramento, while the levees on the Sacramento River protect
the Natomas Basin, a largely agricultural area just north of downtown
Sacramento where new development is occurring at a rapid rate. Figure 1
shows the greater Sacramento area and the location of the Common
Features Project.




1
 In this report, costs and benefits are presented in the dollar values for the years in which
they were estimated, not in constant dollars, except for the work authorized in 1999, which
is presented in 2002 dollars. We did not adjust cost and benefit figures to constant dollars to
account for inflation in order to maintain consistency with the figures in published Corps
reports on the Common Features Project. However, when discussing changes in project
cost, we do report cost increases due to inflation. In addition, appendix II shows 1996
project costs converted to 2002 dollars.




Page 2                                               GAO-04-30 Sacramento Flood Protection
Figure 1: Location of the Common Features Project




                                         The WRDA of 1999 authorized additional work for the Common Features
                                         Project, directing the Corps to raise or strengthen some American River
                                         levee sections and raise some levees in the Natomas Basin; it also
                                         increased project authorization to $92 million. Several years after this
                                         authorization, however, the Corps stated that project costs would go
                                         significantly higher.



                                         Page 3                                   GAO-04-30 Sacramento Flood Protection
                   In the context of these issues, in response to your request, this report
                   addresses (1) why the costs have increased for the Common Features
                   Project, (2) the extent to which the Corps analyzed the likelihood of
                   significant cost increases for the project and reported this information to
                   Congress in a timely manner, and (3) whether the Corps correctly
                   estimated the economic benefits of the American River levee
                   improvements. Our scope and methodology in addressing these questions
                   can be found in appendix I.



Results in Brief   The estimated costs for all components of the Common Features Project
                   have risen from $57 million in 1996 to between $270 million and $370
                   million in 2002, primarily because of design modifications. With respect to
                   the American River component, estimated costs for the levee
                   improvements authorized in 1996 have more than tripled, from $44 million
                   in 1996 to $143 million in 2002. This increase occurred primarily because
                   the Corps modified the original design of the cut-off walls to close gaps at
                   bridge crossings and other areas and to greatly increase the depth of the
                   walls to prevent water from seeping under the levees. In addition to the
                   cost increases related to the 1996 authorized work, new flood protection
                   measures authorized in 1999 added about $15 million in costs to the
                   American River component of the project. For the Natomas Basin
                   component—which is still in the early planning stage—the Corps’ cost
                   estimates increased from $13 million in 1996 to between $112 million and
                   $212 million in 2002. These projected cost increases are largely due to
                   design changes in the planned improvements to the Sacramento River
                   levees and additional work that the Corps has proposed for this part of the
                   project.

                   The Corps did not fully analyze likely cost increases for the Common
                   Features Project or report them to Congress in a timely manner. Corps
                   guidance generally directs the Corps to seek new spending authority from
                   Congress if it determines, before issuing the first construction contract,
                   that it cannot complete the project without exceeding its spending limit. A
                   severe storm in January 1997 demonstrated vulnerabilities in the American
                   River levees and alerted the Corps of the need to do additional work to
                   close the gaps in the cut-off walls at bridges and other areas and extend the
                   depth of some cut-off walls from about 20 feet to about 60 feet. Although
                   these design changes were likely to increase project costs significantly, the
                   Corps did not use cost risk analysis, or any other analysis, to determine the
                   potential extent of the increases. The Corps then began constructing the
                   redesigned American River levee improvements without communicating to



                   Page 4                                     GAO-04-30 Sacramento Flood Protection
Congress the project’s potential exposure to substantial cost overruns. In
2002, when the Corps finally updated project costs, it had already
completed or contracted at a much higher cost for most of the American
River levee improvements that were authorized in 1996. Because of the
reporting delay, Congress did not have the opportunity to determine
whether, at these higher costs, building these levee improvements was an
efficient and effective use of public funds. By 2003, the Corps had
committed most of the funding authorized for the entire Common Features
Project to the 1996 American River work, thereby leaving the 1999 work
and the Natomas Basin improvements without funding.

The Corps made several mistakes in estimating the economic benefits for
the American River levee improvements. First, in 1996, the Corps
incorrectly calculated the economic benefits by overcounting the
residential properties that the levees would protect. The actual number of
protected residential properties was about 20 percent less than the number
that the Corps estimated. Although the Corps updated its benefit estimate
in 2002, it again made mistakes in estimating benefits because it incorrectly
determined that the levee improvements authorized in 1999 would protect
a larger area from flooding than they will and used an inappropriate
methodology to determine the amount of flood damages the levee
improvements would prevent. However, it is also important to recognize
that the levee improvements may reduce the loss of human lives in the
event of a flood, which is a benefit that is not included in the Corps’
analysis. Second, although the Corps’ policy calls for reporting a range of
benefits from the levee improvements and the likelihood of realizing them,
in 2002 the Corps reported only a single estimate of benefits. The Corps did
not provide a range of benefits to Congress because it did not use the most
current version available of its computer software, which could have
performed the analysis. Finally, although the Corps has a three-tiered
quality control process to ensure that it prepares economic analyses
accurately and appropriately, this process did not identify the mistakes we
found, which raises questions about the effectiveness of the Corps’ quality
control process.

In light of the concerns we identified with the Common Features Project
and to better inform Congress about its costs and benefits, we are making
several recommendations to the Secretary of the Army regarding the need
for the Corps to (1) improve the accuracy of its cost-benefit analysis of the
American River levee improvements that it has not yet constructed and (2)
improve its reporting of the costs and benefits of the planned work as well
as analyze alternative flood protection measures for the Natomas Basin. In



Page 5                                     GAO-04-30 Sacramento Flood Protection
             commenting on a draft of this report, the Department of the Army
             concurred with our recommendations, but took issue with our presentation
             of some information. Specifically, the Army believes that this report does
             not recognize the significant role Congress played in 1999 when it added
             additional work to the project and authorized funds for construction before
             the Corps had developed reliable cost estimates. In addition, the Army
             states that the consistent provision of funds to the Corps by Congress, at or
             exceeding the Corps’ budget request, created the situation of which our
             report is critical. We have considered the Army’s comments; however, we
             believe that our report is factually accurate and that our findings are
             presented in their proper context.



Background   Sacramento, California, was established at the confluence of the American
             and Sacramento Rivers shortly after gold was discovered upstream at
             Sutter’s Mill in 1848. Frequent flooding has been a problem in Sacramento
             since its founding. To help reduce flooding, over time a complex system of
             levees, dams, and other related facilities were built. Levees line both sides
             of the American River from where it meets the Sacramento River upstream
             for a distance of about 17 miles, and the Natomas Basin is completely
             surrounded by levees. In addition, the Folsom Dam, completed in 1956 and
             located upstream from Sacramento on the American River, uses a portion
             of its storage capacity for flood protection.

             The Sacramento area flood protection system was designed on the basis of
             records of rainfall during the first half of the 20th century. However, since
             1950, the American River watershed has experienced five floods that were
             larger than any recorded in the pre-1950 period, although downtown
             Sacramento was not flooded during any of these events. Nonetheless, the
             Sacramento area has less protection than the designers of the original flood
             protection system realized. In fact, much of urbanized Sacramento is
             located in areas where a flood has a 1 percent chance of occurring every
             year—known as the 100-year floodplain. Because of this limited level of
             protection, the Corps estimates that a very large flood—one with a 0.25
             percent chance of occurring every year—would flood the 400-year
             floodplain, resulting in residential, commercial, industrial, and public
             property damage of about $15.5 billion as well as loss of lives. According to
             the Corps, about 305,000 people live in more than 100,000 residential
             properties located within the American River floodplain. A major flood also
             would cause toxic and hazardous waste contamination; disrupt the city’s
             downtown business and government areas, including the state




             Page 6                                     GAO-04-30 Sacramento Flood Protection
capitol; and interfere with the transportation system, including two
interstate highways.

A major flood in 1986, the largest one ever recorded on the American and
Sacramento Rivers, severely strained the levee system protecting
Sacramento. Although the levees held and downtown Sacramento was not
flooded, the event spurred efforts by federal, state, and local entities to
identify measures to increase Sacramento’s level of flood protection. In
1987, the Corps began work on a comprehensive study of flood protection
alternatives for Sacramento. In its 1991 report,2 the Corps’ Sacramento
district office considered six flood protection options and recommended
building a new dam on the American River at Auburn, California, but
Congress did not approve the dam’s construction.3 Subsequently, in
response to the Department of Defense Appropriations Act of 1993, the
Corps reevaluated three alternatives for increasing flood protection. In its
1996 report,4 the Corps examined (1) building a new dam near Auburn,
California; (2) modifying the existing Folsom Dam; and (3) increasing the
amount of water released from Folsom Dam during a flood, coupled with
other flood protection measures. The Corps again recommended building a
dam at Auburn, but, again, Congress did not approve its construction.

Recognizing the magnitude of the opposition to the proposed Auburn Dam,
in June 1996, the Corps recommended the Common Features Project,
which included improving sections of the American and Sacramento
Rivers’ levees, primarily by constructing cut-off walls, to provide small-
scale improvements to flood protection for the Sacramento area while the
options for more extensive improvements continued to be considered. The
WRDA of 1996 authorized $57 million for the Common Features Project,
which included 24 miles of levee improvements on the American River and
12 miles on the Sacramento River along the western border of the Natomas

2
 See U.S. Army Corps of Engineers and the State of California Reclamation Board,
Feasibility Report, American River Watershed Investigation, California (Sacramento,
Calif.: December 1991).
3
 Constructing a dam near Auburn is not a new idea. In 1965, the U.S. Bureau of Reclamation
was authorized to construct a dam near Auburn for increasing water supply, providing
hydropower, controlling floods, and other purposes. Construction at the site was halted in
1975 because of concerns over the proposed dam’s ability to withstand earthquakes, and
was never resumed.
4
 See U.S. Army Corps of Engineers, State of California Reclamation Board, and the
Sacramento Area Flood Control Agency, Supplemental Information Report, American
River Watershed Project, California (Sacramento, Calif.: March 1996).




Page 7                                            GAO-04-30 Sacramento Flood Protection
                                         Basin. Subsequently, the Corps concluded that it could provide the same
                                         level of flood protection on the American River by modifying only about 21
                                         miles of levees. Figure 2 shows how a cut-off wall, which is composed
                                         primarily of a soil, cement, and clay mixture that forms an impermeable
                                         barrier when it hardens, can prevent water from seeping under or through a
                                         levee.



Figure 2: Seepage under and through Levees and a Cut-off Wall to Prevent Seepage




                                         In January 1997, numerous rivers in northern California flooded causing
                                         extensive damages, although not in the Natomas Basin or downtown
                                         Sacramento. This flood, which was nearly as large as the 1986 flood,
                                         highlighted the continuing vulnerabilities of the existing flood protection
                                         system. In response, the WRDA of 1999 (1) modified the Common Features
                                         Project by adding about 3.8 miles of additional levee modifications along
                                         the American River and 10 miles on the Natomas Cross Canal, located on
                                         the northern border of the Natomas Basin, and (2) increased the project’s
                                         authorization from $57 million to $92 million.

                                         When Congress approves a flood protection project, it authorizes a specific
                                         amount of money for the project, which provides the basis for the
                                         maximum project cost. According to section 902 of the Water Resources
                                         Development Act of 1986, as amended, the maximum project cost is the
                                         sum of (1) the original authorized amount, with the costs of unconstructed
                                         project features adjusted for inflation; (2) the costs of modifications that do



                                         Page 8                                      GAO-04-30 Sacramento Flood Protection
                       not materially alter the scope of the project, up to 20 percent of the original
                       authorized amount (without adjustment for inflation); and (3) the cost of
                       additional studies, modifications, and actions authorized by the 1986 Act or
                       any later law. As a result of these provisions, the $92 million that Congress
                       authorized for the Common Features Project in 1999 translates to an
                       allowable maximum project cost of about $120 million in 2003.

                       When Congress authorized the Common Features Project in 1996, federal
                       law required that nonfederal partners pay 25 percent of the cost of flood
                       protection projects.5 For the Common Features Project, these partners are
                       the State of California Reclamation Board and the Sacramento Area Flood
                       Control Agency. In this report, when we refer to project costs, including the
                       maximum allowable project cost, we are referring to the combined federal
                       and nonfederal expenditures.



Design Modifications    Estimated costs for the Common Features Project grew from $57 million in
                       1996, when the project was first authorized, to between $270 million and
Have Greatly Raised    $370 million in 2002, primarily because the Corps changed the design of the
Costs for the Common   levee improvements.6 For the American River levee improvements
                       authorized in 1996, estimated costs more than tripled, due largely to
Features Project       changes in the design of the cut-off walls. New work authorized in 1999
                       added another $15 million to the cost increase. The Corps has completed
                       much of the American River work authorized in 1996, but it has not begun
                       construction on the work authorized in 1999. Regarding the Natomas Basin
                       component, estimated costs increased from $13 million to between $112
                       million and $212 million. Costs rose primarily because the Corps changed
                       the design of the levee improvements and proposed adding other
                       improvements to this component. The Natomas Basin work is in the early
                       planning stages, and the Corps has not begun construction. As of July 2003,
                       the Corps had spent or made plans to spend nearly all of the money
                       authorized for the Common Features Project. It therefore will not be able
                       to finish constructing the American River work authorized in 1996, begin
                       constructing the American River work authorized in 1999, or complete

                       5
                        Current law requires the nonfederal partner to pay a minimum of 35 percent of the costs of
                       flood protection projects. This increased cost share requirement only applies to projects
                       authorized after the WRDA of 1996 and therefore does not apply to the Common Features
                       Project.
                       6
                        About 3 percent ($9 million) of this increase is the result of price inflation between 1996
                       and 2002.




                       Page 9                                               GAO-04-30 Sacramento Flood Protection
                            planning for the Natomas Basin work unless Congress increases the
                            project’s authorized funding.



Estimated Costs for the     The Corps’ cost estimate for the American River levee improvements
American River Levee        authorized in 1996 has more than tripled, from $44 million in 1996 to about
                            $143 million in July 2002, as shown in table 1.
Improvements Authorized
in 1996 Have More Than
Tripled Because of Design
Changes                     Table 1: The Corps’ Original 1996 Cost Estimate and Estimated Cost Increases for
                            the American River Levee Improvements Authorized in 1996

                            Dollars in millions
                                                                                                 Estimated       Total estimated
                                                                                Original 1996          cost          costs as of
                            Project element                                     cost estimate     increasea            July 2002
                            Cut-off walls                                                $30           $76                 $105b
                            Response to construction
                            accidents                                                    N/A             11                   11
                            Planning, design, and other
                            costs                                                         14              6                   20
                            Inflation related to the original
                            1996 cost estimate                                           N/A              7                    7
                            Total                                                        $44          $100                 $143b
                            Source: GAO analysis of U.S. Army Corps of Engineers data.
                            a
                            In 2002 dollars.
                            b
                            Does not sum to the total due to rounding.


                            As table 1 shows, costs rose primarily because of the increased costs of the
                            cut-off walls. The Corps’ original design called for building cut-off walls to
                            a depth of between 20 and 30 feet to prevent water from seeping through
                            the levees and for allowing gaps in the cut-off walls at bridge and utility
                            crossings. However, after the 1997 flood, the Corps realized it also needed
                            to address the problem of water seeping under levees. It therefore
                            increased the depth of the cut-off walls to between 60 and 80 feet and
                            closed the gaps in the cut-off walls at bridge and utility crossings. For some
                            sections of the levees, the Corps could not close the gaps using its standard
                            approach for cut-off walls because of problems accessing the sites. As a
                            result, the Corps employed a new and more expensive approach—known
                            as jet grouting—to build cut-off walls by drilling and injecting concrete
                            material into areas that were difficult to access. Closing the gaps in the cut-
                            off walls by jet grouting raised estimated costs by $52 million and



                            Page 10                                                         GAO-04-30 Sacramento Flood Protection
increasing their depth raised costs by $24 million, according to the Corps’
July 2002 cost estimate. However, in September 2002, the Corps
determined that fewer gaps needed to be closed using jet grouting, which
should reduce costs to some extent. As of June 2003, however, the Corps
had not incorporated these potential cost reductions into an official project
cost update.

As table 1 also shows, the Corps’ response to accidents that occurred
during construction of the 1996 authorized work added $11 million to
project costs. On three occasions, liquid material from the cut-off walls
accidentally leaked into either the American River or the backyards of
homes that are built against the levees. As a result, the Corps incurred costs
cleaning up these spills and responding to new work requirements
mandated by the Environmental Protection Agency to help prevent future
leaks.

Lastly, in addition to the cost increases related to the 1996 authorized work,
new flood protection measures authorized in 1999 added about $15 million
in costs to the American River component of the project.7 These measures
include raising levee banks at two locations, installing gates and pumps at
an existing drain, and installing cut-off walls in two additional levee
segments.

Of the American River work authorized in 1996, the Corps has completed
about 90 percent and must still close gaps in the cut-off walls at some
remaining bridge and utility crossings to complete this work. For the levee
improvements authorized in 1999, the Corps has done some planning but
has not begun any construction. However, as of July 2003, the Corps had
spent or had plans to spend $116 million of the $120 million authorized for
the entire Common Features Project. The Corps could not give an exact
accounting of how much of the $116 million it had spent on the 1996
American River work. However, on the basis of the information that the
Corps provided, we estimate the Corps has spent, or made plans to spend,
at least $103 million for planning and constructing the 1996 American River
work. Because the Corps has spent or made plans to spend most of the
project’s authorized funds, it will not be able to complete the 1996 and 1999
work on the American River unless Congress increases the project’s
authorized funding.



7
These costs are in 2002 dollars.




Page 11                                     GAO-04-30 Sacramento Flood Protection
Natomas Basin Costs Are       The Corps’ preliminary cost estimates for the Natomas Basin component of
Expected to Increase          the project increased from $13 million in 1996 to between $112 million and
                              $212 million in 2002, as shown in table 2.
Significantly, and Lack of
Funds Has Halted Planning
and Cost Estimating Efforts
                              Table 2: The Corps’ Original 1996 Cost Estimate and Potential Cost Increases for the
                              Natomas Basin Component

                              Dollars in millions
                                                                             Original 1996        Potential cost Total potential costs
                              Project element                                cost estimate            increasea    estimated in 2002
                              Original levee
                              improvements authorized in
                              1996                                                         $13        $47 to $88          $60 to $101
                              New work the Corps
                              proposed in 2002                                             N/A          37 to 84              37 to 84
                              Work authorized in the
                              WRDA of 1999                                                 N/A          14 to 26              14 to 26
                              Inflation related to the 1996
                              cost estimate                                                N/A                 2                    2
                              Total                                                        $13      $99 to $199b        $112 to $212b
                              Source: GAO analysis of U.S. Army Corps of Engineers data.
                              a
                              In 2002 dollars.
                              b
                              Does not sum to the total due to rounding.


                              As table 2 shows, the Corps estimates that the costs for the original levee
                              improvements will increase by between $47 million and $88 million due to
                              design changes to add cut-off walls or provide other methods of flood
                              protection to control seepage under levees. The Corps proposed new work
                              in 2002 that will increase costs by between $37 million and $84 million. This
                              work is located in an area of the levee where the Corps previously had
                              constructed a cut-off wall to stop water from seeping through the levee.
                              However, the Corps later determined that the cut-off wall was not deep
                              enough to prevent water from seeping under the levee, and the proposed
                              new work will address this problem. Finally, the Corps estimates that the
                              additional work authorized in 1999 to modify levees along the Natomas
                              Cross Canal, which empties into the Sacramento River at the north end of
                              the Natomas Basin, will add between $14 million and $26 million to the cost
                              of this component of the project.




                              Page 12                                                            GAO-04-30 Sacramento Flood Protection
The Natomas Basin work—authorized in 1996 and 1999 and the additional
work the Corps identified—is in the planning stages and no construction
has yet begun. The Corps has been updating information on the extent of
the levee problems and the costs of the improvements identified in the
original plan and intends to submit a more precise cost estimate to
Congress when it completes its planning. However, the Corps halted its
Natomas Basin planning work in June 2003 because it had spent or made
plans to spend nearly all of the money authorized for the entire Common
Features Project.

Given that the Natomas Basin levee improvements will cost significantly
more than originally estimated and no construction has yet begun,
identifying and evaluating alternative flood protection measures could
result in cost savings. For example, one possible alternative method for
flood protection identified by the Sacramento Area Flood Control Agency,8
as well as the Corps, involves lowering the water level in the Sacramento
River during floods by diverting water through the Fremont Weir and into
the Yolo Bypass, which is located at a point just before where the
Sacramento River flows past the Natomas Basin.9 The Fremont Weir is a
low dam that controls the movement of large volumes of floodwater from
the Sacramento River by diverting it into the Yolo Bypass. The Yolo Bypass
is a continuous, 40-mile open space corridor that is protected from urban
development pressure by flood easements. (See fig. 3.)




8
 The California state legislature established the Sacramento Area Flood Control Agency to
coordinate flood protection efforts for the Sacramento area on a regional basis.
9
 See U.S. Army Corps of Engineers and the State of California Reclamation Board,
Sacramento and San Joaquin River Basins, California, Comprehensive Study, Interim
Report (Sacramento, Ca.: Dec. 20, 2002).




Page 13                                           GAO-04-30 Sacramento Flood Protection
Figure 3: Location of the Fremont Weir and the Yolo Bypass




Lowering the water level in the Sacramento River as it passes the Natomas
Basin could, among other things, improve the reliability of the Natomas
Basin levees and may provide more cost-effective flood protection than the
current Natomas Basin levee improvement plan. However, as of June 2003,
the Corps had not yet analyzed the costs and benefits of modifying the weir
and the bypass or any other alternative method for Natomas Basin flood
protection.



Page 14                                      GAO-04-30 Sacramento Flood Protection
The Corps Did Not           After the 1997 storm demonstrated vulnerabilities in the American River
                            levees, the Corps significantly changed the design of the levee
Adequately Analyze          improvements but did not analyze the likelihood of cost increases for the
Likely Cost Increases       Common Features Project. The Corps then began constructing the
                            American River levee improvements without informing Congress that the
for the Common              changes could greatly increase the overall costs of the project. By the time
Features Project or         that the Corps reported the significant cost increases in 2002, it had already
Communicate Them to         spent or made plans to spend more than double its original estimate for the
                            American River levee improvements authorized in 1996. Furthermore, as
Congress in a Timely        previously discussed, the Corps estimates that it will spend more than
Manner                      three times its original estimate by the time it completes this work. The
                            Corps has been able to pay for these levee improvements by spending
                            funds originally planned for the Natomas Basin and the additional
                            American River improvements authorized in 1999.



The Corps Did Not           The Corps did not analyze the risk of cost increases after changing the
Adequately Analyze Likely   design of the American River levee improvements in 1997 and, therefore,
                            did not provide Congress with information on the project’s exposure to
Cost Increases for the
                            significant cost increases. A storm in January 1997 demonstrated that the
American River Levee        American River levees were vulnerable to floodwaters seeping under them,
Improvements                which could cause them to fail. On the basis of this information, the Corps
                            significantly changed the design of the levee improvements but did not
                            conduct a cost risk analysis, or any other type of analysis, to determine the
                            extent to which these changes would increase the costs for the Common
                            Features Project.




                            Page 15                                    GAO-04-30 Sacramento Flood Protection
According to the Corps’ policy, project management teams should consider
conducting a cost risk analysis when developing cost estimates for projects
with considerable uncertainties.10 A cost risk analysis identifies the areas of
a project that are subject to significant uncertainty about costs and
provides decision makers with a range of potential costs for a project and
the probability that these costs will be exceeded. For example, a cost risk
analysis might determine that there is a 50 percent chance that costs for a
particular project will exceed $5 million but only a 20 percent chance that
costs will exceed $8 million. According to a report from the Corps’ Institute
for Water Resources, this type of estimate is more accurate than a single
point cost estimate and provides decision makers with better and more
complete information.11

However, the Corps did not analyze the risk of cost increases after
changing the design of the American River levee improvements even
though it had identified several factors that could lead to significant cost
increases. For example, by July 1997 the Corps recognized that it had to
close the gaps in the cut-off walls at bridges and other areas and extend the
depth of some walls from about 20 to about 60 feet, although the Corps had
not developed a final design for these improvements. By identifying a
project element with significant cost uncertainty—the design and depth of
the cut-off walls—the Corps essentially performed the first step of cost risk
analysis. However, the Corps did not follow through by quantifying this
uncertainty and determining a range of potential costs for the cut-off walls
or the likelihood that the potential costs within that range would be
exceeded—the second and third steps of the cost risk analysis. Given that
the Corps’ original cost estimate for the American River work was nearly
equal to its estimates of the benefits, if the Corps had conducted a cost risk
analysis, it would have shown whether there was a significant likelihood
that project costs would be greater than the economic benefits.

Furthermore, despite experiencing significant cost increases for the 1996
work, the Corps did not conduct a cost risk analysis to determine its
exposure to potentially significant cost increases for the 1999 work. In
addition, the Corps is not planning to conduct a cost risk analysis for the
Natomas Basin improvements. According to Sacramento district officials,


10
     See U.S. Army Corps of Engineers, Engineer Regulation 1110-2-1302.
11
 Charles Yoe, Risk Analysis Framework for Cost Estimation, a report prepared for the
U.S. Army Corps of Engineers, Institute for Water Resources, December 2000.




Page 16                                              GAO-04-30 Sacramento Flood Protection
                             the Corps did not conduct a cost risk analysis because it did not believe
                             such an analysis was necessary to account for uncertainties in the project.



The Corps Did Not Provide    The Corps’ planning guidance generally directs the Corps to seek new
Congress with Timely         spending authority from Congress if it determines that a project’s estimated
                             costs exceed the maximum project cost before it has awarded a project’s
Information about            initial contract.12 However, after making significant changes to the project’s
Significant Potential Cost   design in 1997, the Corps did not reevaluate its cost estimate to determine
Increases for the American   if it could still implement the project without exceeding the maximum
River Levee Improvements     project cost. For example, the Corps did not estimate the potential for cost
                             increases due to tripling the depth of some cut-off walls, which eventually
                             added $24 million in estimated costs to the project. In addition, the Corps
                             did not estimate the potential for cost increases due to closing the gaps in
                             the cut-off walls at bridges and other areas. This expense was not
                             considered in the Corps’ original 1996 cost estimate and potentially
                             involved the use of jet grouting—a technology the Corps had not previously
                             used to construct cut-off walls. Closing the gaps in the cut-off walls
                             eventually added $52 million in estimated costs to the project.

                             In spite of significantly changing the project’s design, the Corps awarded
                             the project’s first contract without updating its cost estimate to determine
                             whether it would need additional spending authority to complete the
                             project. In June 1998, the Corps issued the first Common Features Project
                             solicitation for bids to construct about 1.6 miles of the redesigned cut-off
                             wall on the north bank of the American River. These levee improvements
                             represented only about 8 percent of the total miles of planned American
                             River levee improvements, but the bid that the Corps selected amounted to
                             24 percent of the estimated cost for all of the American River levee work.
                             We believe that this difference should have (1) alerted the Corps to the
                             possibility that costs were likely to be much higher than it had originally
                             estimated and (2) warranted an update of the Corps’ cost estimate before it
                             awarded the initial contract.

                             According to a headquarters official, the Corps issued the first contract
                             without updating its total project cost estimate because it would have been
                             impractical to delay the project while the agency revisited cost estimates.
                             Furthermore, according to the Corps, the first contract was expected to be


                             12
                                  See U.S. Army Corps of Engineers, Engineer Regulation 1105-2-100.




                             Page 17                                              GAO-04-30 Sacramento Flood Protection
more costly than future contracts because, among other reasons, it
involved work on only a small stretch of the levee, which limited possible
cost efficiencies. However, because the Corps did not analyze the potential
for cost increases for the remainder of the American River levee
improvements, it did not determine the likelihood that it would need
additional spending authority to complete the project before it awarded the
first contract.

The Corps has paid for the significantly increased costs of the American
River levee improvements by using funds planned for the Natomas Basin
and for the additional American River work authorized in 1999. Although
the Common Features Project has two separate components, and Congress
approved parts of the project in 2 different years, the project is subject to a
single maximum project cost. The Corps has the flexibility to spend
Common Features Project funds as it sees fit and is not required to allocate
funds in proportion to its original cost estimates for each component.

Following project authorization in 1996, the Corps began to construct the
American River levee improvements before the Natomas Basin
improvements. Although the Corps exhausted the funds it had originally
estimated that it would need to construct the American River levee
improvements, it was able to continue implementing the American River
work by spending funds it had originally planned to use for the Natomas
Basin work. With the authorization of additional work in 1999, effectively
raising the project’s maximum cost to about $120 million, the Corps also
was able to use funds planned for this work to pay for the increased costs
of the American River work authorized in 1996.

After it awarded the first Common Features Project contract, the Corps
was not required to inform Congress of project cost increases until it could
not contract for additional work without exceeding the maximum project
cost. According to the Corps, in March 2001 it briefed a number of
Members of Congress on its intention to prepare a report that would
evaluate the potential for the cost of the Common Features Project to
exceed the project’s maximum cost. However, it was not until February
2002, more than 4 years after it significantly modified the design of the
American River levee improvements, that the Corps reported to Congress
for the first time that due to significant cost increases, it could not
complete the project without exceeding the maximum project cost. By this
time, the Corps had spent or awarded contracts for more than twice the
amount it originally planned to spend on the American River levee
improvements authorized in 1996 and had completed about 90 percent of



Page 18                                     GAO-04-30 Sacramento Flood Protection
                              the work. Furthermore, the Corps estimates that it will spend more than
                              three times its original estimate by the time it completes this work.
                              Because the Corps did not update its cost estimate or report the significant
                              cost increases to Congress until most of the 1996 American River work was
                              complete, Congress did not have the opportunity to determine whether the
                              significantly more expensive levee improvements were still the most
                              appropriate means of providing flood protection for Sacramento.



Corps’ Benefit                The Corps made mistakes in estimating the benefits for the American River
                              levee improvements because it incorrectly counted and valued the
Estimates for the             properties that the levee improvements would protect and used an
American River Levee          inappropriate methodology to determine the amount of flood damages they
                              would prevent. Seven years after Congress authorized the project, the
Improvements Are              Corps has not yet prepared an accurate assessment of the benefits of the
Incorrect                     American River levee improvements. In addition, contrary to its guidance,
                              the benefit estimate the Corps prepared in 2002 did not describe the range
                              of possible benefits and the likelihood that the values in this range would
                              be realized. This additional information, describing the uncertainty of the
                              benefit estimate, would have provided decision makers with information
                              on the likelihood that the project’s benefits would be greater than its costs.
                              Furthermore, the Corps’ three-tiered quality control process did not
                              identify the mistakes that we found during the course of our review.



The Corps Made Mistakes in    In its original 1996 analysis of the benefits and costs of the American River
Counting and Valuing          levee improvements, the Corps incorrectly counted the residential
                              properties that the proposed levee improvements would protect. As a
Properties and Determining
                              result, the Corps incorrectly calculated the benefits that these
Flood Damages When            improvements would provide. According to the Corps, the methodology it
Estimating Project Benefits   used to count the number of residential properties in 1996 was “accepted
                              practice and consistent with Corps guidance and technology applicable at
                              the time.” In 2002, the Corps used a different methodology that
                              incorporated new technologies and provided a more precise estimate of the
                              number of properties protected. Using this new approach, the Corps
                              determined that the actual number of residential properties protected by
                              the levee improvements is about 20 percent less than its original estimate.
                              The Corps did not calculate the amount that benefits would decrease due
                              to this change. However, given the small difference between the original
                              estimated annual benefits ($5.6 million) and the annual costs ($5.5 million)
                              of the American River levee improvements, if the Corps had incorporated a



                              Page 19                                     GAO-04-30 Sacramento Flood Protection
more accurate estimate of the property inventory in its 1996 analysis, the
benefits of these improvements may have been less than the costs.

For flood protection projects, such as the Common Features Project, the
Corps calculates benefits as the dollar value of the physical damages to
residential, commercial, industrial, and public properties and
infrastructure that the levee improvements prevent. To calculate the
reduction in flood damage to properties, the Corps counts the number of
properties located in the potential flood area—known as the floodplain—
and then assesses the monetary value of the structures and their contents.
The Corps uses this information to determine the property damage that
would result from floods of various depths and to estimate the impact that
the levee improvements would have in preventing this damage.

It is important to remember that, in addition to the economic benefits from
preventing property damage, levee improvements may reduce the risk of
loss of human lives, which is a benefit that is not included in the Corps’
calculations.13 According to the Corps, about 305,000 people live within the
American River floodplain and the number of lives lost because of levee
failure would depend on a variety of factors, such as the size of the flood,
warning time, time of day, and availability of evacuation routes. Because of
the many factors involved and the lack of historical data, the Corps was not
able to estimate the number of lives that would be lost as a result of levee
failure and flooding in the Sacramento area.

Although the Corps updated its benefit estimate in 2002 to incorporate the
benefits from the new levee improvements authorized in 1999, a
Sacramento district official acknowledged that the Corps again made
mistakes in estimating the number of properties the levee improvements
would protect. For the American River levee improvements authorized in
1999, the Corps identified an area that was larger than the area the levee
improvements would actually protect. As a result, the Corps overestimated
the number of properties protected and the benefits provided by the work
authorized in 1999. According to a Sacramento district official, the Corps
currently does not have the information it needs to determine the correct


13
  The Corps’ guidance (Engineer Regulation 1105-2-100) directs the Corps to address the
issue of prevention of loss of life when evaluating alternative plans—which the Corps did.
However, the Corps is not required to formally estimate the number of lives saved or lost as
a potential effect of a project. In situations where historical data exist, the Corps has the
option to estimate the number of persons potentially affected by a project, and include this
number as an additional factor for the consideration of decision makers.




Page 20                                             GAO-04-30 Sacramento Flood Protection
area the levee improvements would protect and therefore is unable, at this
time, to provide a reliable estimate of the benefits from the 1999 work.

In addition, the Corps made mistakes in its 2002 analysis in estimating the
value of the residential properties the American River levee improvements
would protect. The Corps’ policy calls for calculating a property’s value as
the cost of replacing the structure less any depreciation, which accounts
for a reduction in a structure’s value due to deterioration prior to flooding.14
Because the Corps had more than 100,000 residential properties to assess
and a limited amount of time and resources, it determined depreciated
replacement values for a small sample of 365 properties and then used the
results to estimate the depreciated replacement values for all properties.
However, the Corps did not correctly select the sample of properties.
According to members of both the Appraisal Institute and The Appraisal
Foundation, to accurately appraise a large number of properties by
sampling requires a separate sample for each residential property type,
such as single-family homes, condominiums, and apartment buildings.15
Instead of conducting a separate sample for each type of property, the
Corps sampled all property types together and calculated an average
depreciated replacement value for all property types. As a result, it is
unclear whether the Corps accurately calculated depreciation, which in
turn raises questions about its estimates of the value of the residential
properties the American River levee improvements would protect.

Moreover, the Corps did not use a consistent, objective appraisal
methodology to calculate depreciation for the properties in the sample.
Instead, the Corps subjectively determined depreciation. For example, if
the Corps determined a structure was in “very good” condition it was
assigned a zero percent, 5 percent, or 10 percent level of depreciation.
However, the Corps could not provide us with its criteria for assigning the
level of depreciation. Furthermore, the Corps’ economists who made these
subjective decisions did not consult with the professional appraisers in the
Corps’ Sacramento district office to identify alternative appraisal
methodologies that may have been more appropriate. According to the


14
     See U.S. Army Corps of Engineers, Engineer Regulation 1105-2-100.
15
   The Appraisal Institute is an international membership association of professional real
estate appraisers whose mission is, in part, to uphold professional credentials and standards
of professional practice and ethics consistent with the public good. The Appraisal
Foundation is a nonprofit education organization that, among other things, develops and
promulgates professional appraisal standards and appraiser qualifications.




Page 21                                              GAO-04-30 Sacramento Flood Protection
Corps, the methods it used to determine depreciation are “standard
practice at the Corps and are consistent with prior and existing guidance.”
Nonetheless, we believe that the shortcomings identified above raise
questions about the accuracy of the Corps’ property value estimates and, in
turn, the project benefit estimates that are, in part, based on them. The
Corps said it recognizes the need to strengthen its methodologies and is
currently developing a new tool to estimate property values.

Finally, the Corps’ 2002 analysis did not use the methodology described in
Corps guidance to determine the number of properties that are located in
the 100-year floodplain and the damages they would sustain in a 100-year
flood.16 The 100-year floodplain is the land area that may be affected during
a flood that has a 1 percent chance of occurring every year. Instead of
following Corps guidance by directly counting the properties located in the
100-year floodplain and calculating the damages they would sustain in a
100-year flood, the Corps estimated the damages using a methodology that
relied on the results from its incorrect 1996 count of properties. The Corps’
use of this alternative methodology further calls into question the accuracy
of its benefit estimate for the American River levee improvements
authorized in both 1996 and 1999, which is based in part on this flood
damage assessment. The Corps told us that it could have directly counted
the properties in the 100-year floodplain but the necessary information was
not available in a “user friendly” format, and that the additional effort
needed to collect more accurate information was not expected to change
the results. As a result, the Corps did not believe this was an effective use
of resources. However, the Corps did not provide us with any evidence to
support the validity of calculating the 100-year flood damages as it did or to
validate its contention that the results would not change if it had used the
methodology prescribed in its guidance.




16
     See U.S. Army Corps of Engineers, Engineer Manual 1110-2-1619.




Page 22                                             GAO-04-30 Sacramento Flood Protection
The Corps Has Not Provided   The Corps has not followed its policy to provide Congress with an estimate
Congress with Information    of the range of possible benefits from the American River and Natomas
                             Basin levee improvements and the likelihood that these benefits will
on the Range of Possible     actually be realized. In 1996, the Corps established a policy calling for
Benefits from the Levee      benefit estimates and benefit-cost comparisons for flood protection
Improvement Work or the      projects to be reported with their associated probabilities.17 For example,
Likelihood They Will Be      rather than reporting that the benefits for a particular project are exactly
Realized                     $1.5 million, the Corps could report that it is 80 percent confident that
                             project benefits will be at least $1 million but it is only 30 percent confident
                             that benefits will reach $2 million. The Corps recognizes that this
                             information can assist Congress in understanding the uncertainty involved
                             in achieving various levels of benefits and in determining whether those
                             risks justify funding the project. According to the Corps, it did not estimate
                             a range of benefits for the Common Features Project in 1996 because the
                             computer software used to assess the project’s benefits and costs was
                             developed prior to the 1996 guidance and did not have the capability to
                             calculate a range of values.

                             However, in its 2002 reanalysis of project benefits, when a new version of
                             the software capable of calculating benefit ranges and probabilities was
                             available and costs for the American River work had significantly
                             increased, the Corps chose not to calculate a range of benefits and instead
                             continued to report a single estimate. Because the Corps’ 2002 estimates of
                             benefits and costs for the American River work were so close in value (1.1
                             to 1), an analysis of the potential range of benefits would have revealed
                             whether there was a significant probability that project benefits could be
                             lower than the single estimate the Corps reported and perhaps lower than
                             project costs.18 According to a Sacramento district official, the Corps did
                             not use the new version of its software that could have calculated the range
                             of benefits to maintain consistency with information on flood protection it
                             had previously released to the public. For example, the Corps has reported
                             to the public that the American River levees have about a 1 percent chance
                             of being breached by floodwaters in any given year. This estimate of flood
                             protection could be different if calculated using the newer version of the
                             software. The Corps was concerned that using the newer software would
                             require it to report a different, and perhaps slightly lower, level of flood


                             17
                                  See U.S. Army Corps of Engineers, Engineer Regulation 1105-2-101.
                             18
                              The Corps’ 2002 estimate includes the benefits of both the expanded 1996 work and the
                             additional 1999 levee improvement work.




                             Page 23                                              GAO-04-30 Sacramento Flood Protection
                             protection, which would confuse the public. However, by taking this
                             approach, the Corps did not provide Congress with important information
                             about the uncertainty surrounding the amount of benefits the project
                             would provide.



The Corps’ Quality Control   Three organizational levels within the Corps—district, division, and
Process Did Not Identify     headquarters—reviewed and approved the 1996 and 2002 benefit analyses
                             for the American River component of the Common Features Project, but
Flaws in Its Benefit
                             these reviews did not identify the mistakes that we found. This issue raises
Analyses                     questions about the adequacy and effectiveness of the Corps’ review
                             process. We raised similar concerns about the Corps’ review process in our
                             report on the Delaware River Deepening Project, which found significant
                             miscalculations and invalid assumptions in the project’s economic analysis
                             that the Corps did not find during its reviews.19

                             For the Common Features Project, the Corps’ Sacramento district office
                             conducted the 1996 study that analyzed the technical and economic aspects
                             of the proposed project and the 2002 report updating that information. The
                             Corps’ Los Angeles district office reviewed the 2002 economic analysis for
                             technical accuracy. Next, the Corps’ South Pacific division reviewed the
                             analysis; although, following the Corps’ policy, it did not review the
                             district’s work for technical accuracy or verify the underlying analysis.
                             Rather, the division checked that the district’s reports had undergone a
                             technical review, and that the district had issued a quality control
                             certification report with the necessary district office-level approvals. The
                             division then forwarded the project to headquarters. Corps headquarters
                             also did not conduct a technical review of the analysis. Rather,
                             headquarters checked that the district’s report adhered to Corps policies
                             for conducting a benefit-cost analysis and addressed any concerns
                             headquarters had raised.

                             These review processes, however, were ineffective in detecting and
                             correcting the mistakes in the benefit analyses we identified. For example,
                             for the 2002 study, we found no indication that the mistakes made in
                             calculating the number and the value of residential properties or the
                             mistake made in calculating flood damages were detected during the
                             Corps’ review process. For the 2002 analysis of the American River levee

                             19
                              See U.S. General Accounting Office, Delaware River Deepening Project: Comprehensive
                             Reanalysis Needed, GAO-02-604 (Washington, D.C.: June 7, 2002).




                             Page 24                                        GAO-04-30 Sacramento Flood Protection
              improvements, a Corps economist from another district independently
              reviewed the benefits analysis. However, the review was not
              comprehensive enough to sufficiently identify methodological problems.
              The review primarily focused on process-oriented issues, such as assessing
              whether the Sacramento district conducted certain analyses, rather than
              examining the technical aspects of how the analyses should have been and
              were conducted.



Conclusions   It is critical that decision making and priority setting be informed by
              accurate information and credible analysis. Reliable information from the
              Corps about the costs and benefits for the American River component of
              the Common Features Project has not been present to this point. The
              analysis on which Congress has relied contained significant mistakes. And
              of most relevance today, the analyses for the remaining work do not
              provide a reliable economic basis upon which to make decisions
              concerning the American River levee improvements authorized in the
              WRDA of 1999. To provide a reliable economic basis for determining
              whether these improvements are a sound investment, the Corps’ analysis
              needs to adequately account for the risk that project costs could increase
              substantially, correctly count and value the properties the project would
              protect, and include information on the range of potential project costs and
              benefits.

              Moreover, because the Corps has not made some critical decisions
              regarding the Natomas Basin work, it is not yet known whether the Corps
              will be able to identify cost-effective flood protection options for this area.
              Specifically, the Corps has not determined whether it will (1) conduct a
              cost risk analysis of its current plan to identify its exposure to potentially
              significant cost increases or (2) evaluate the costs and benefits of
              alternatives to the current levee improvement plan to identify the most
              cost-effective flood protection option. In addition, identifying cost-effective
              flood protection involves reporting the range of potential project benefits
              and the probability of achieving them, which the Corps has not done for the
              Natomas Basin work. If the Corps begins implementing the authorized
              Natomas Basin work before it completes a comprehensive, accurate cost-
              benefit analysis, significant unanticipated cost increases could materialize,
              as they did with the American River work. Finally, for Congress to have
              confidence that the Corps’ economic analyses have been prepared
              accurately, the Corps’ quality control process would need to be sufficiently
              independent and detailed to identify the types of mistakes that our review
              revealed.



              Page 25                                     GAO-04-30 Sacramento Flood Protection
Recommendations for   For the American River levee improvements authorized in 1999 and for the
                      planned Natomas Basin work, we recommend that the Secretary of the
Executive Action      Army direct the Corps of Engineers to

                      • determine whether it is appropriate to conduct risk analyses of project
                        costs and document the basis for that decision in its project files;

                      • report information to Congress on the range of potential project benefits
                        and the probability of achieving those benefits, as called for in the
                        Corps’ guidance, in future benefit-cost analyses; and

                      • arrange for a credible, independent review of the completeness and
                        accuracy of the revised benefit-cost analyses.

                      For the American River project component, we also recommend that the
                      Secretary of the Army direct the Corps of Engineers to reanalyze the
                      benefits of the improvements authorized in the WRDA of 1999, correcting
                      for the mistakes made in counting and valuing properties and the
                      inappropriate methodology used to calculate flood damages.

                      Additionally, for the Natomas Basin project component, we recommend
                      that the Secretary of the Army direct the Corps of Engineers to

                      • analyze the costs and benefits of alternatives to the current levee
                        improvement plan and identify the flood protection plan that provides
                        the greatest net benefits and

                      • submit a report to Congress that includes a cost estimate for all of the
                        planned Natomas Basin work, and wait until Congress authorizes
                        funding that is based on the report before beginning construction of any
                        Natomas Basin levee improvements.



Agency Comments and   We provided a draft of this report to the Secretary of the Army for review
                      and comment. In commenting on the draft report, the Army concurred with
Our Evaluation        all of our recommendations. Perhaps most significantly, the Army
                      acknowledged that on the basis of the Corps’ experience in constructing
                      the American River levee improvements, there is a potential for substantial
                      cost increases for the Natomas Basin levee improvements, and therefore
                      the Corps needs to investigate a wider array of alternatives for providing
                      flood protection for the Natomas Basin. In addition, although the Army



                      Page 26                                   GAO-04-30 Sacramento Flood Protection
concurred with our recommendation to reanalyze the benefits of the
improvements added to the American River component of the project in
1999, it contended that the Corps has already completed the reanalysis. We
disagree. In 2002, the Corps prepared an analysis of the economic benefits
for the work added to the project in 1999. However, our review found
several mistakes in this analysis, including mistakes in counting and
valuing properties and using an inappropriate methodology to calculate
flood damages. We continue to believe that before the Corps begins
construction of the work added to the American River project component
in 1999, it should reanalyze this work to ensure it is cost beneficial.

The Army stated that the report does not recognize the significant role
Congress played in 1999 by adding additional work to the project and
providing funds for construction before the Corps had developed reliable
cost estimates, which created the situation of which our report is critical.
By focusing its comment on the relatively small amount of work added in
1999, the Army avoided the main issues regarding the American River levee
improvements discussed in our report. Specifically, that (1) the costs for
the American River component of the project approved in 1996 are more
than triple the original estimate; (2) the Corps had information, before
construction began, that should have alerted it that costs would likely
increase greatly; and (3) the Corps should have communicated this
information to Congress at that time, but it did not. Furthermore, the
additional funding provided by Congress for the work authorized in 1999
has not been used for that purpose, but rather has been used to fund the
cost overruns for the work authorized in 1996. The full text of the Army’s
comments, and our responses to them, are presented in appendix III.


As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
date of this letter. At that time, we will send copies of this report to the
appropriate congressional committees, other interested Members of
Congress, and the Secretary of the Army. We also will make copies
available to others upon request. In addition, the report will be available at
no charge on the GAO Web site at http://www.gao.gov.




Page 27                                     GAO-04-30 Sacramento Flood Protection
If you, or your staff, have any questions about this report, please contact
me at (202) 512-3841. Key contributors to this report are listed in appendix
IV.




Anu Mittal
Director, Natural Resources
 and Environment




Page 28                                   GAO-04-30 Sacramento Flood Protection
Appendix I

Scope and Methodology                                                                      AA
                                                                                            ppp
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             To determine the reasons for the cost increases for the Common Features
             Project, we obtained the key cost estimation documents prepared by the
             U.S. Army Corps of Engineers’ (the Corps) Sacramento district office.
             Specifically, we obtained the Corps’ 1996 Supplemental Information
             Report, American River Watershed Project; the 1997 Addendum to the
             Supplemental Information Report; the 2002 Second Addendum to the
             Supplemental Information Report; and other related documents. We
             reviewed the Supplemental Information Report, which examined a
             number of different flood protection alternatives, because it provided the
             foundation, including cost estimates, for the project elements that the
             Corps later grouped together as the Common Features Project. The
             Addendum to this report documented the Corps’ first cost estimate that
             specifically and exclusively addressed the Common Features Project and
             included separate costs for both the American River component and the
             Natomas Basin component of the project. We reviewed the Second
             Addendum, the Corps’ most current official cost estimate, to establish the
             amount of and the reasons for the increased costs. We also analyzed
             construction contracts to determine the cost of responding to accidents
             constructing the levee improvements authorized in 1996. We calculated the
             extent of inflation for both components of the project, using the Corps’
             Civil Works Construction Cost Index System and a cost index from the
             Office of Management and Budget. Finally, we discussed the reasons for
             the cost increases with economists, cost estimators, project managers,
             engineers, and other staff from the engineering, constructions operations,
             and planning divisions of the Corps’ Sacramento district office.

             To determine whether the Corps analyzed the likelihood of significant cost
             increases for the project and reported them to Congress in a timely manner,
             we reviewed the Corps’ (1) policy regarding the use of cost risk analysis in
             estimating costs for civil works projects (Engineer Regulation 1110-2-1302)
             and (2) requirements for updating project cost estimates and informing
             Congress of cost increases (Engineer Regulation 1105-2-100). We also
             reviewed a document from the Corps’ Institute for Water Resources on
             incorporating risk and uncertainty into cost estimation. We examined the
             American River levee improvement construction contracts to determine
             when the Corps became aware of cost increases for this component of the
             project. In addition, we reviewed the Corps’ annual budget documents
             related to the Common Features Project, which contained information on
             the project’s status and any changes or cost increases. We examined the
             Corps’ cost estimates from 1996, 1997, and 2002 for compliance with
             relevant Corps cost estimating guidance and to determine if the Corps
             provided Congress with accurate information about significant expected



             Page 29                                   GAO-04-30 Sacramento Flood Protection
Appendix I
Scope and Methodology




cost increases. Finally, we discussed the Corps’ cost estimating procedures
and awareness of likely cost increases with cost estimators, project
managers, and other staff from Corps headquarters and the Sacramento
district office.

To determine whether the Corps correctly estimated the economic benefits
of the American River levee improvements, we reviewed the extent to
which the Corps followed accepted economics practices and whether the
major assumptions used in the analysis were reasonable and well
supported. We obtained the Corps’ 1996, 1997, and 2002 economic analyses
for the Common Features Project and discussed the sources of these data
and conduct of the analyses with the Corps economists responsible for
preparing them. We also discussed the basis for the hydrologic and
engineering assumptions used in the economic analysis with the Corps
specialists who provided this information. In addition, we obtained the
Corps’ guidance (Engineer Regulations 1105-2-100 and 1105-2-101 and
Engineer Manual 1110-2-1619) on the accepted economic and engineering
methodologies for incorporating risk and uncertainty into benefit
estimation. To verify and supplement the information we received from
officials in the Corps’ Sacramento district office, we spoke with, among
others, Corps officials at the Hydrologic Engineering Center and the
Institute for Water Resources and experts in real estate appraisal from the
Appraisal Foundation and the The Appraisal Institute. Where we identified
problems that affected the accuracy of the benefit analysis, we discussed
them with the responsible Corps staff and considered any new data or
revisions that they provided. Finally, we identified the roles and
responsibilities of the Sacramento district office, South Pacific division,
and headquarters in the Corps’ internal quality control process for the
Common Features Project. We also obtained copies of the quality control
reviews and the reviewers’ comments on the economic analysis and
discussed the comments and their resolution with Corps officials.

We conducted our review from September 2002 through September 2003 in
accordance with generally accepted government auditing standards.




Page 30                                   GAO-04-30 Sacramento Flood Protection
Appendix II

Conversion of Costs to Constant Dollars                                                                               Appendx
                                                                                                                            Ii




               In this report, unless otherwise noted, we present costs in the dollar values
               for the years in which they were estimated, not in constant dollars. For
               example, the Corps estimated the original cost of the project as $57 million
               in 1996, and that is how we present it in this report. We did not adjust the
               costs to constant dollars to account for inflation to maintain consistency
               with the figures in published Corps reports on the Common Features
               Project. However, table 3 shows the Corps’ 1996 cost estimates for key
               components of the Common Features Project and also shows the same
               estimates adjusted to 2002 constant dollars to account for inflation.



               Table 3: Common Features Project’s Cost Estimates in Original 1996 Dollars and in
               Adjusted 2002 Dollars

               Dollars in millions
                                                                                                   Amount authorized
                                                                            Amount authorized                in 1996
                                                                                      in 1996          plus inflation
               Common Features Project                                          (1996 dollars)         (2002 dollars)
               American River component
                 Levee improvements                                                        $30                     $33
                 Planning, design, and other costs                                          14                      18
               Subtotal                                                                    $44                     $51
               Natomas Basin component                                                      13                      15
               Total                                                                       $57                     $66
               Source: GAO analysis of U.S. Army Corps of Engineers data.




               Page 31                                                            GAO-04-30 Sacramento Flood Protection
Appendix III

Comments from the Department of the Army                               Appendx
                                                                             iI




Note: GAO comments
supplementing those in
the report text appear
at the end of this
appendix.




Now GAO-04-30.




                         Page 32   GAO-04-30 Sacramento Flood Protection
                 Appendix III
                 Comments from the Department of the Army




Now GAO-04-30.




See comment 1.




See comment 2.




See comment 3.



See comment 4.




                 Page 33                                    GAO-04-30 Sacramento Flood Protection
                 Appendix III
                 Comments from the Department of the Army




See comment 5.




See comment 6.




                 Page 34                                    GAO-04-30 Sacramento Flood Protection
                 Appendix III
                 Comments from the Department of the Army




See comment 7.




                 Page 35                                    GAO-04-30 Sacramento Flood Protection
                 Appendix III
                 Comments from the Department of the Army




See comment 8.
See comment 9.




                 Page 36                                    GAO-04-30 Sacramento Flood Protection
                  Appendix III
                  Comments from the Department of the Army




See comment 10.




See comment 11.
See comment 12.




                  Page 37                                    GAO-04-30 Sacramento Flood Protection
               Appendix III
               Comments from the Department of the Army




GAO Comments   The following are GAO’s comments on the Department of the Army’s letter
               dated September 22, 2003.

               1. Although the Army asserted that we made some factual errors, its
                  subsequent comments failed to identify any specific factual errors.

               2. The Army believes that the report does not recognize the significant
                  role Congress played in 1999 when it added additional work to the
                  project and authorized funds for construction before the Corps had
                  developed reliable cost estimates. While the Congress did add work to
                  the Common Features Project in the Water Resources Development Act
                  (WRDA) of 1999 without a Corps report, the cost of this work is
                  relatively small in comparison to the work authorized in 1996. We
                  believe the Army’s comment is not relevant to the main focus of our
                  report, which is the significant cost increases for the work the Corps
                  recommended and the Congress authorized in 1996. For example, the
                  costs for the work the Corps recommended on the American River
                  more than tripled from $44 million in 1996 to $143 million in 2002. In
                  contrast, the estimated cost for the work on the American River levees
                  the Congress added in 1999 is about $15 million. We believe our report
                  accurately reflects the limited impact the addition of work in 1999 had
                  on the American River component of the project’s overall cost.
                  Furthermore, the additional funding provided by Congress for the work
                  authorized in 1999 has not been used for that purpose, but rather has
                  been used to fund the cost overruns for the work authorized in 1996.

               3. The Army stated that the consistent provision of funds to the Corps by
                  Congress, at or exceeding the Corps’ budget request, created the
                  situation of which our report is critical. We do not agree. Two of the
                  main issues in our report are that the costs of the American River
                  component of the project nearly tripled due to design changes, and that
                  the Corps began construction of the American River levee
                  improvements without analyzing the likelihood of these cost increases
                  or reporting the potential cost increases to Congress. The fact that
                  Congress provided funding for the project does not absolve the Corps
                  of its responsibility to communicate project cost increases in a timely
                  manner.

               4. The Army implied that Congress was informed of potential cost
                  increases for the Common Features Project during the yearly
                  appropriations process. This is not the case on the basis of our review



               Page 38                                    GAO-04-30 Sacramento Flood Protection
Appendix III
Comments from the Department of the Army




    of all of the Corps’ submissions for the annual appropriations process
    from 1997 through 2001. As our report states, it was not until February
    2002, more than 4 years after it had significantly modified the design of
    the American River levee improvements, that the Corps informed
    Congress for the first time of the significant cost increases for the
    American River component of the project.

5. The Army stated that the levee improvements were not originally
   designed to withstand the destructive effect of seepage and that this
   design was not an error. Rather, an unknown condition (i.e., the
   potential for destructive seepage under the levees) resulted in design
   changes and increased costs. Our report does not criticize the Corps for
   not anticipating the need for a levee improvement design that would
   stop seepage under the levees. We acknowledge that the flood of
   January 1997 caused the Corps to change the design of its levee
   improvements. However, as our report notes, the Corps did not develop
   new cost estimates after making these design changes and did not
   communicate the resulting significant cost increases to Congress in a
   timely manner.

6. We do not consider the separable elements of the Common Features
   Project as separate projects. This report makes clear that there is one
   Common Features Project comprised of an American River component
   and a Natomas Basin component.

7. We agree with the Army that, in 1996, the Corps was not aware of any
   significant areas of cost uncertainty for the proposed American River
   levee improvements. However, as the Army recognizes, the flood of
   January 1997 showed that the Corps’ design for the levee improvements
   should be significantly modified. After making these design changes,
   though, the Corps did not estimate the potential for cost increases due
   to tripling the depth of some cut-off walls or closing the gaps in cut-off
   walls at bridges and other areas. These design changes eventually
   added $76 million to the cost of the project.

8. The Army stated that the Corps believes that its review process results
   in decision documents that form the basis for sound recommendations.
   However, in two recent cases, we found that the process did not serve
   its intended purpose. As this report documents, the Corps’ review
   process was ineffective in detecting and correcting the mistakes in the
   benefit analyses we identified. We raised similar concerns about the




Page 39                                    GAO-04-30 Sacramento Flood Protection
Appendix III
Comments from the Department of the Army




    review process in our June 2002 report on the Delaware River
    Deepening Project.

9. We did not recommend that the Corps reanalyze the costs and benefits
   of the work authorized in 1996. We agree that a reanalysis of this work,
   which is nearly complete, would be of little value. However, we
   continue to believe that a reanalysis of the economic benefits from the
   work authorized in 1999 is necessary because the Corps’ initial analysis
   contained significant mistakes and construction of the work has not yet
   begun. Before beginning construction of this work, the Corps should
   verify that the work is in fact cost beneficial. In addition, the Corps
   should arrange for a credible, independent review of the completeness
   and accuracy of its reanalysis.

10. The Army contends that the Corps has already completed the
    reanalysis we recommended of the work added to the American River
    component of the project in 1999. We disagree. The Corps analyzed the
    economic benefits for the 1999 work added to the project for the first
    and only time in 2002. Our review found several problems with the
    Corps’ 2002 analysis of the benefits from this work. For example, we
    found that the Corps had made mistakes in how it counted and valued
    properties and had used an inappropriate methodology to calculate
    flood damages. As a result, the Corps has not yet prepared an accurate
    assessment of the benefits resulting from the 1999 work. The Corps has
    not begun any construction for the work authorized in 1999, and it is
    not currently known if the benefits provided by this work are greater
    than the costs. Consequently, we recommend a reanalysis of these
    benefits in order to correct the mistakes that we identified.

11. The Army stated that the Corps does not conduct individual real estate
    appraisals to determine the value of each property that could be
    damaged in a flood. Our report does not suggest that the Corps should
    conduct such appraisals. Rather, we identified weaknesses in the
    sample the Corps used to estimate property values and its methodology
    for calculating depreciation for the properties in the sample. For
    example, to accurately appraise a large number of properties by
    sampling requires a separate sample for each residential property type,
    such as single-family homes and apartment buildings. However, the
    Corps sampled all property types together. In addition, the Corps did
    not use a consistent objective appraisal methodology to calculate
    depreciation for the properties in the sample. These weaknesses raise




Page 40                                    GAO-04-30 Sacramento Flood Protection
Appendix III
Comments from the Department of the Army




    questions about the accuracy of the Corps’ property value estimates
    and the project benefit estimates that are, in part, based on them.

12. The Army claims that there are approximately 163,000 residential
    structures in the 400-year floodplain. This is not correct on the basis of
    the Corps’ most current analysis. The estimate of 163,000 residential
    structures comes from the Corps’ 1996 economic analysis. However, in
    2002, the Corps updated its analysis and found that it had
    overestimated the number of residential structures in 1996. The Corps’
    2002 analysis estimated that there were 115,347 residential structures in
    the 400-year floodplain.




Page 41                                    GAO-04-30 Sacramento Flood Protection
Appendix IV

GAO Contact and Staff Acknowledgments                                                          Appendx
                                                                                                     iIV




GAO Contact       Anu Mittal, (202) 512-3841



Staff             In addition to the individual above, Jeff Arkin, Chuck Barchok, Judy
                  Hoovler, Richard Johnson, Mark Metcalfe, Ryan Petitte, and Stephen
Acknowledgments   Secrist made key contributions to this report.




(360273)          Page 42                                  GAO-04-30 Sacramento Flood Protection
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