Host of re­views could shed light on months of tu­mult at Metro

The Washington Post Sunday - - FRONT PAGE - BY PAUL DUG­GAN

Metro’s win­ter and spring of dis­con­tent, in­clud­ing ma­jor op­er­a­tional fail­ures and rev­e­la­tions of deep fi­nan­cial prob­lems, are about to give way to a sum­mer of reckoning, with public hear­ings and sev­eral in­de­pen­dent re­ports of­fer­ing a look at why the be­lea­guered tran­sit author­ity is in such poor shape.

The Na­tional Trans­porta­tion Safety Board, the Gov­ern­ment Ac­count­abil­ity Of­fice and the Fed­eral Tran­sit Ad­min­is­tra­tion — those agen­cies, plus a group of tran­sit ex­perts as­sem­bled by the Amer­i­can Public Trans­porta­tion As­so­ci­a­tion (APTA), have been ex­am­in­ing Metro for weeks or months. Now each in­quiry is close to yield­ing public re­sults that could help an­swer some long-lin­ger­ing ques­tions.

So many re­views are un­der­way that Mor­timer L. Downey, chair­man of the tran­sit author­ity’s board of di­rec­tors, said, “I have trou­ble keep­ing them all straight.”

The NTSB is in­ves­ti­gat­ing the Jan. 12 calamity in which an elec­tri­cal mal­func­tion on Yel­low Line tracks filled a sub­way tun­nel with smoke, sick­en­ing scores of

rid­ers and leav­ing one dead. Af­ter months of be­ing mostly tight-lipped about its find­ings, the safety board will hold public hear­ings June 23 and 24. Hun­dreds of pages of re­lated doc­u­ments will be re­leased be­fore­hand, a spokesman said.

Although the NTSB’s fi­nal re­port on the in­ci­dent is not due un­til early next year, the hear­ings are bound to shed light on is­sues that have yet to be fully ex­plained. Th­ese in­clude the cause of the smoke-gen­er­at­ing elec­tri­cal melt­down; Metro’s botched use of tun­nel ven­ti­la­tion fans, which ex­ac­er­bated the cri­sis; and why a six-car train en­veloped by nox­ious fumes re­mained sta­tion­ary as chok­ing pas­sen­gers gasped for air.

In ad­di­tion, the tes­ti­mony and doc­u­ments could fur­ther il­lu­mi­nate the trou­bled state of Metro’s sub­way in­fra­struc­ture and emer­gency readi­ness.

The fa­tal smoke calamity also raised ques­tions about the per­for­mance of train con­trollers at Metro’s Rail Op­er­a­tions Con­trol Cen­ter in Lan­dover, Md. Be­sides be­ing a fo­cus of the safety board, the work­ings of the rail con­trol cen­ter have been un­der re­view by about a half-dozen ex­perts re­cruited by the public trans­porta­tion as­so­ci­a­tion.

As part of that APTA peer re­view, train-con­trol spe­cial­ists from out­side Metro spent weeks study­ing how the con­trol cen­ter func­tions. Downey said last week that he ex­pects to see the re­port “fairly soon” and will share it at an open meet­ing of Metro board mem­bers.

Spurred by the fa­tal smoke in­ci­dent, the FTA has been con­duct­ing a “safety man­age­ment in­spec­tion” of Metro’s sub­way and bus op­er­a­tions — only the sec­ond such re­view un­der­taken by the FTA since it re­ceived statu­tory author­ity to do so in 2012. The other in­spec­tion, of the Chicago Tran­sit Author­ity, was done last fall.

FTA act­ing ad­min­is­tra­tor Therese W. McMillan told Downey in a let­ter Thurs­day that the Metro safety re­port would be re­leased “in the near fu­ture” and that the FTA ex­pects Metro at that time to ad­dress big-pic­ture re­li­a­bil­ity is­sues.

Mean­while, the GAO in­quiry, or­dered by Congress, is partly fo­cused on what Metro has done to im­prove its op­er­a­tional safety and sound­ness since the 2009 Red Line crash near Fort Tot­ten that killed eight rid­ers and a train op­er­a­tor. The GAO said it ex­pects to pub­lish its re­port by early Au­gust.

The GAO re­port also will ad­dress Metro’s fi­nan­cial man­age­ment, specif­i­cally how the tran­sit author­ity han­dles fed­eral grant money. Metro’s lax con­trol of grants, and the re­sult­ing re­stric train tions im­posed by fed­eral of­fi­cials, are at the root of one of the agency’s in­tractable prob­lems: its cash-flow trou­ble and heavy de­pen­dence on short-term loans.

Tighter purse strings

The sys­tem for dis­burs­ing fed­eral grant funds to agen­cies such as Metro was de­signed to be fairly sim­ple and speed­ily ef­fi­cient.

First, Metro ap­plies to the FTA for money to fi­nance a project. Af­ter the grant is ap­proved, the project be­gins. Con­trac­tors do­ing the work sub­mit in­voices, and Metro pays the bills out of its own pocket. Then the agency nor­mally would re­im­burse it­self, al­most im­me­di­ately, by elec­tron­i­cally with­draw­ing money from a pool of grant funds held by the fed­eral gov­ern­ment.

The process works on a sort of honor sys­tem: The FTA nor­mally doesn’t re­quire an agency to file sup­port­ing doc­u­men­ta­tion ev­ery time money is with­drawn. It as­sumes that the agency has fol­lowed fed­eral pro­cure­ment and spend­ing reg­u­la­tions and has kept proper records. To make sure, how­ever, the FTA pe­ri­od­i­cally con­ducts au­dits.

Metro was au­dited by the FTA in early 2014, re­sult­ing in a scathing re­port de­scrib­ing ex­ten­sive grant-re­lated mis­man­age­ment that had gone on for sev­eral years.

The agency’s record keep­ing was shoddy and con­fus­ing, the re­port said. It added that Metro of­ten spent money on projects be­fore grants had been ap­proved. In some cases, grants hadn’t even been ap­plied for. Pro­cure­ment and spend­ing rules were reg­u­larly vi­o­lated, the au­dit found. And it said that Metro with­drew re­im­burse­ment funds for grant-el­i­gi­ble projects and im­prop­erly used the money for other ex­penses.

The honor sys­tem abruptly ended for Metro. The FTA de­creed that un­til the agency con­vinces fed­eral of­fi­cials that its grant-man­age­ment prob­lems have been rec­ti­fied, there will be no more quick, un­doc­u­mented elec­tronic self-re­im­burse­ments. It was as if the tran­sit author­ity’s ATM card had been taken away.

For the past 13 months, since the au­dit, the agency has been forced to func­tion un­der what the FTA calls a “re­stricted draw down.” It means that af­ter Metro pays bills for grant-ap­proved projects, fed­eral re­im­burse­ments are slow in com­ing.

“We have to bun­dle up all the doc­u­ments and ver­ify we’re fully in com­pli­ance, and then the FTA has to re­view it,” said Downey, the Metro board chair­man. “And if all goes well, then they open up the win­dow and give us the money.”

That pro­tracted process is the main rea­son for Metro’s se­vere cash-flow gap, which has forced the agency into a cy­cle of short­term bor­row­ing, re­pay­ments and more bor­row­ing. One fi­nan­cial of­fi­cial out­side Metro likened the sit­u­a­tion to “some­one living pay­check to pay­check.”

Af­ter the grant-re­lated trou­ble came to light, then-Gen­eral Manager Richard Sar­les blamed the prob­lems largely on his pre­de­ces­sors. He said Metro had poor fi­nan­cial con­trols when he ar­rived in 2010 and that he had been work­ing to im­prove them. Still, his chief fi­nan­cial of­fi­cer, who had been at Metro only slightly longer than Sar­les, re­signed shortly af­ter the au­dit was com­pleted. Sar­les re­tired in Jan­uary.

Downey said that most of the agency’s grant-man­age­ment prob­lems have been fixed and that the rest soon will be. But he said he has no idea how long it will take for Metro to get back in the good graces of fed­eral tran­sit of­fi­cials.

“They’ve told us, when they’re com­fort­able that we’re do­ing a good job, they’ll con­sider re­open­ing the elec­tronic process,” he said. “When will that be? I think we’re mak­ing progress. But I can’t read their minds.”

The FTA of­fered no de­fin­i­tive an­swer in a state­ment last week, say­ing it “will lift the fi­nan­cial re­stric­tions ... only af­ter [the FTA] has had suf­fi­cient time to re­view, ver­ify and fol­low up on cor­rec­tive ac­tions, as well as de­ter­min­ing that [Metro] has ad­e­quate fi­nan­cial man­age­ment sys­tems in place and they are ef­fec­tively ap­plied.”

The first for­mal word on where Metro stands in deal­ing with its grant-man­age­ment is­sues could come from the GAO, in the re­port it ex­pects to pro­duce by early Au­gust. In a state­ment, the GAO said that in ad­di­tion to re­view­ing Metro’s op­er­a­tional con­di­tion, it has been “look­ing at what, if any, progress [Metro] has made in ad­dress­ing” the prob­lems dis­closed by the FTA au­dit.

Downey sounded less than ea­ger for the re­port.

“My ex­pec­ta­tion is, we’ll get the clas­sic GAO au­dit: ‘Much progress has been made; much more can be done.’ You can put that ti­tle on ev­ery­thing the GAO has ever is­sued.”

Flirt­ing with de­fault?

Mean­while, to help cope with its cash squeeze, Metro has re­peat­edly re­sorted to short-term bor­row­ing, in­clud­ing tap­ping large lines of credit with banks. As re­cently as April, the agency’s short-term debts ex­ceeded $500 mil­lion.

Be­cause Metro’s records are so mud­dled, the agency has been un­able to pub­lish an an­nual fi­nan­cial re­port that was due seven months ago. As a re­sult, “all their short-term bor­row­ing can be called by the banks ... at any time for fail­ure to pro­duce fi­nan­cial state­ments,” said a gov­ern­ment of­fi­cial familiar with Metro’s fi­nances.

That means the tran­sit author­ity tech­ni­cally is flirt­ing with de­fault, which is “a prob­lem, for lack of a bet­ter word,” said the of­fi­cial, who spoke on the con­di­tion of anonymity be­cause he is not di­rectly in­volved in Metro’s dis­cus­sions with its cred­i­tors.

In an e-mail to Metro board mem­bers last week, in­terim Gen­eral Manager Jack Re­qua said the agency has four lines of credit with Bank of Amer­ica, Wells Fargo and US Bank. Metro made $84 mil­lion in pay­ments to the banks this spring, re­duc­ing the cur­rent credit-line bal­ances to $219 mil­lion, Re­qua told the board.

Also, while Metro waits for slow-ar­riv­ing fed­eral grant re­im­burse­ments, the agency raised $200 mil­lion by sell­ing short­term “grant an­tic­i­pa­tion notes.” In his e-mail, Re­qua said the agency re­cently paid back $117 mil­lion on the notes, low­er­ing the en­cum­brance to $83 mil­lion. As of June 1, com­bin­ing the notes and credit lines, Metro’s short-term debts stood at $302 mil­lion, ac­cord­ing to Re­qua.

A ma­jor chal­lenge for Metro is how to per­ma­nently re­duce those short-term debts.

One way would be if the FTA re­opened the grant-re­im­burse­ment spigot. But that ap­pears to be a long way off. An­other so­lu­tion would be sell­ing long-term bonds to pay off the short-term debts. To do that, how­ever, Metro would first have to pub­lish a new fi­nan­cial re­port.

Like most big public en­ti­ties, Metro rou­tinely pro­duced a “com­pre­hen­sive an­nual fi­nan­cial re­port.” Done by an out­side ac­count­ing firm, a new Metro an­nual fi­nan­cial re­port is due each Oc­to­ber, four months af­ter the close of the agency’s fis­cal year. But the McGladrey au­dit­ing firm, hired by the tran­sit author­ity, has had dif­fi­culty try­ing to pre­pare a re­port for the fis­cal year that ended last June.

“The au­di­tors come in, they take a look at the FTA au­dit, they’re look­ing at the fi­nan­cial man­age­ment sys­tem, and they have a hard time fig­ur­ing out the books, be­cause it’s so messed up,” said the gov­ern­ment of­fi­cial familiar with Metro’s fi­nances.

Thus, it seems no one knows when the au­dit will be ready.

Downey said the Metro board was briefed last month on McGladrey’s progress but got few clear an­swers. “They’re con­tin­u­ing to work,” he said. “I wouldn’t set any cal­en­dar ex­pec­ta­tion on when it will be done.”

With the cur­rent fis­cal year end­ing this month, is it pos­si­ble that the agency, come Oc­to­ber, will fall two years be­hind on pub­lish­ing fi­nan­cial state­ments? “I would cer­tainly hope not,” Downey said. “But I can’t say.”

Although Metro’s fail­ure to pro­duce a fi­nan­cial re­port is grounds for the banks to de­mand im­me­di­ate re­pay­ment of the $219 mil­lion owed on the credit lines, Downey said he has “no ex­pec­ta­tion the banks will take that ac­tion.” In his e-mail, Re­qua also said there was no im­mi­nent threat of the agency be­ing cut off by the banks.

The over­all limit on Metro’s credit lines with Wells Fargo, Bank of Amer­ica and US Bank is $302.5 mil­lion, and the agency’s out­stand­ing bal­ances to­tal $219 mil­lion, Re­qua told the board. “All cur­rent dis­cus­sions with our [lend­ing] part­ners are that the full $302.5 mil­lion ... will con­tinue to be avail­able,” he wrote, adding, “at least for the near fu­ture.”

Metro’s myr­iad op­er­a­tional and fi­nan­cial woes are the main rea­sons that the search for a new gen­eral manager has dragged on for months. Board mem­bers have been un­able to agree on a job de­scrip­tion for Sar­les’s re­place­ment, whether the ideal can­di­date should be grounded more in fi­nan­cial man­age­ment or in nuts and-bolts en­gi­neer­ing.

While those dis­cus­sions con­tinue, mem­bers are think­ing about com­mis­sion­ing yet an­other re­view, this one by a “world class” con­sult­ing firm. The board might soon seek bids from con­sul­tants for a “wall-to-wall” study of the tran­sit author­ity— start­ing this sum­mer and last­ing maybe nine months— with a sim­ple goal in mind, Downey said:

“We want to know if we’re do­ing a good job.”

EVE­LYN HOCKSTEIN FOR THE WASH­ING­TON POST

The Na­tional Trans­porta­tion Safety Board, the Gov­ern­ment Ac­count­abil­ity Of­fice and the Fed­eral Tran­sit Ad­min­is­tra­tion have been ex­am­in­ingMetro for weeks or months.

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