Audits in the News: ODOT could do more to scrutinize construction costs

Audits in the News: ODOT could do more to scrutinize construction costs

We here in the audits division are proud that the work we do makes a difference. Our work attracts the attention of the legislature, statewide news sources, and even local media outlets. Local media coverage of our audits is just another way we communicate with the people of Oregon about the work that we’re doing on their behalf to make government better. This is part of an ongoing series of posts rounding up recent instances in which the Oregon Audits Division makes a cameo in the local news.

This was the first performance audit released since Secretary Dennis Richardson assumed the office of Oregon’s Secretary of State. The audit team examined the Oregon Department of Transportation and the agency’s efforts to monitor bidding, costs and other changes in construction projects.

You can read the entire audit here.


The Oregonian/OregonLive – ODOT loses money on contractors gaming the system, auditors say, but agency questions accuracy

Read the story here.

“The Oregon Department of Transportation could save money if it cracked down on bidding practices contractors can use to rig low bids to produce higher payouts, according to an audit released Monday by the Secretary of State’s Office.”


The Statesman Journal – Contractors could be gaming ODOT contracts, state audit finds

Read the story here.

“The Oregon Department of Transportation could save a significant amount of money by monitoring construction project changes, a state audit released Monday found. ODOT doesn’t track so-called “unbalanced bid items” on about $400 million per year spent on highway, bridge and other construction projects, the Secretary of State Audits Division said.”


The Portland Tribune – New audit of ODOT contracting system finds same old flaws

Read the story here.

“A decade ago, state investigators found that Oregon Department of Transportation contracting had become a cynical sport for one highway construction company — the executives there submitting low bids, then wagering over ways they could subsequently increase project costs to boost profits. While that case is old history, a new state audit of ODOT suggests that its contracting system remains vulnerable despite a decade of warnings from the department’s own employees of contractor gamesmanship and fraud.”

Audits in the News Featured New Audit Release

City of Portland Audit Services: Financial Condition Report released

As part of our Regional Roundup beat, we are starting to feature the work of other audit shops. Check out the recent financial condition audit released yesterday by the City of Portland Auditor’s Audit Services Division. 


Portland Audit Services DivisionThe Financial Condition report, produced by the Portland City Auditor’s Office every other year, focuses on historical trends over five years and allows decision-makers to visualize the City’s course, consider options, and make adjustments to improve the City’s long-term financial health.

Portland Spending

Auditors found that although Portland’s financial condition is stable, the City must address long term challenges.

Some City assets are losing value faster than the City can make repairs.  While the City is making significant investments in water, sewer and stormwater assets, most transportation infrastructure is in fair to poor condition.

Portland Construction

The City has also seen a declining net position – partly due to increased liabilities, such as the City’s pension system for police and fire, as well as policy changes for the Oregon Public Employees Retirement System.

Report highlights

Read the full report


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Audit Release: ODOT should better scrutinize construction costs and project changes by tracking line-item bids with abnormally high or low prices

AUDIT PURPOSE

The Oregon Department of Transportation spends about $400 million a year on highway, bridge, and other construction projects. The purpose of this audit was to determine if ODOT is effectively monitoring project changes to prevent unwarranted costs. Because unbalanced bidding can lead to increased project costs, we examined the agency’s efforts to monitor project changes related to those bids.

FINDINGS IMPACT

These bids could impact ODOT project costs for state contracts. If agency leadership decides to implement enhanced tracking and scrutinize unbalanced bidding, the state could potentially realize significant savings by avoiding project cost increases. Inaction will continue the status quo of incomplete data that prevents ODOT from evaluating unbalanced bidding that can lead to project cost increases.

 

Read full report here.

KEY FINDINGS

  • ODOT has processes in place to manage changes to its construction projects, but the agency does not track which bid items are unbalanced or project changes related to unbalanced bid items.
  • State and federal laws generally require ODOT to award construction contracts to the lowest bidder, so contractors sometimes submit abnormally high or low prices on certain line items, known as “unbalanced bidding.” Contractors may bid high on line items for which they think ODOT might have underestimated the quantity, with the goal of maximizing profits while keeping the overall bid low.
  • ODOT is unable to look across all projects for patterns of unbalanced bid items related to project changes. These bid items can lead to increased costs if projects are later changed, but not all project changes are problematic or avoidable.
  • We reviewed data for all 413 ODOT-run construction projects completed from 2011 to 2015 and found that over 90% of these projects had at least one unbalanced bid item, and 61% had one or more unbalanced bids that were at least double their estimated cost.
  • Total cost for the 413 projects was $1.8 billion, slightly below the total estimated costs of $1.9 billion, but 69% of projects exceeded their bid amounts. However, total project costs contain other expenditures not included in the contractor’s original bid amount, such as performance pay factors for meeting specific quality standards.

RECOMMENDATIONS

  • ODOT should track unbalanced bid items, either within existing systems or separately
  • Include bid item numbers in project changes and track them.
  • ODOT should conduct regular analyses of project changes related to unbalanced bid items and evaluate whether unbalanced bidding is negatively affecting project costs or bid competition.
  • ODOT should provide Project Managers with more guidance on how to manage unbalanced bid items.
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Audit Release: Business Oregon Can Improve the Evaluation and Transparency of Economic Development Incentives and Loan Programs

Executive Summary


Business Oregon, the state’s primary economic development agency, can strengthen its evaluation of incentives and loans given to private businesses, focusing on performance outcomes such as jobs created and retained, wages, and return on investment.

Business Oregon can also help improve the transparency of individual business awards by better reporting information about them to the public and policy makers. And it can improve its selection and modification of the Governor’s Strategic Reserve Fund awards to private businesses.

These improvements would help the agency, policy makers, and the public ensure that business incentives and loans are as strategic, cost effective and productive as possible, important given high statewide competition for Lottery and General Fund dollars.

Read the full report.

Business Oregon can Better Evaluate the Results of its Business Incentive and Loan Programs

Awards to businesses that Business Oregon has some role in are estimated to total $680 million in the 2015-17 biennium. This includes $145 million of state loans, loan guarantees, grants and tax incentives, and $535 million in locally controlled property tax exemptions initially authorized by the state.

Business Oregon conducts some evaluation of these incentives and loans. But it does not regularly evaluate and publicly report some key program-level outcomes, such as jobs created and retained, wages and return on investment.

We analyzed Oregon Employment Department data that Business Oregon already obtains to illustrate the potential benefits of more in-depth evaluation, and the value of reporting evaluation results to the public and policy makers.

We focused on the agency’s top discretionary programs for private business: the Strategic Reserve Fund (SRF) and Business Expansion Program (BEP), and Business Finance loans and loan guarantees. Unlike Business Finance loans, SRF and BEP loans are forgiven if a business meets job goals. The Governor approves SRF loans.

We analyzed 21 projects that received funding through the SRF or BEP, and an
additional 210 Business Finance projects from 2011-12. These are the most recent years with at least three years of job and wage data after Business Oregon issued the award.

The analysis indicated both positive results and issues that need more examination and public discussion. The programs helped add new jobs for Oregonians, the analysis suggested, and workers filling those jobs generated positive returns to the state through their income tax payments.

workers

Business Oregon’s mission includes supporting businesses that provide living wage jobs.

However, the majority of 2011-12 awards went to businesses with average wages below that of the county they operated in, an important result given Business Oregon’s mission to encourage living-wage jobs. Agency officials say they focused on saving all types of jobs in the down years of 2011-12.

Additional analysis of incentives and loans awarded from 2006-2015 indicated that most of them went to urban areas, which already have faster employment growth than rural areas.

Business Oregon’s strategic plan and key performance measures do not have targets for rural investment and living wages, making it difficult to evaluate these results. Setting targets could facilitate deeper agency evaluation of award cost-effectiveness, the agency’s investment in rural communities, and its ability to encourage projects that pay livable wages.

The audit also focused on enterprise zone property tax exemptions, Oregon’s broadest program of local incentives. Evaluation of enterprise zone performance is sporadic, and several issues need more attention.

Our analysis of 2015 enterprise zone data showed a high amount of zone job growth in the Portland metro area, which is relatively strong economically, and in non-distressed areas. Urban areas have economic development needs too, but the concentration of benefits in relatively well-off urban and non-distressed areas is at odds with the enterprise zone programs’ original focus on lagging areas that have more economic need.

The analysis also found high tax exemptions per job in the long-term rural enterprise zone program — $54,500 in 2015 versus $4,200 in standard zones. And it found high exemptions per job for data centers built by Apple, Facebook, Google, Amazon and others. These projects could be costing counties more than typical projects, though fees and other taxes paid by the businesses involved may help offset the property taxes foregone.

In general, state income tax incentives receive more scrutiny, including “sunset” reviews when tax credits are scheduled to expire. But they also need more frequent objective evaluation.

Oregon Can Improve the Transparency of Individual Economic Development Incentives and Loans

In recent years, Oregon has substantially improved its reporting of economic development awards to individual businesses, putting it near the top in various state rankings and improving public accountability.

But policy makers and the public still do not have enough information on many economic development incentive and loan programs to assess their value, determine which businesses are receiving awards, and review the jobs and wages generated by subsidized businesses.

The transparency reporting generally meets state statutes and guidelines. But ten of the 15 programs we reviewed did not disclose outcome information, such as jobs and wages, for individual businesses receiving incentives and loans. For 11 of the programs, determining whether a particular business met program requirements given the information publicly reported was difficult or impossible.

Business Oregon does not identify which businesses receive SRF, BEP, and Business Finance loans, or how many jobs those businesses retain and create.

Agencies did not report the amount of the tax incentives given to individual businesses for four of the eight economic development tax credits and subtractions we evaluated, in part because of tax return confidentiality. And county tax assessor reports for enterprise zone tax exemptions often contain incomplete information on jobs and wages.

Business Oregon Can Further Improve its Selection Process for Strategic Reserve Fund Awards

Business Oregon has developed a new, more thorough selection process for SRF awards, typically forgivable loans. We reviewed a sample of business projects that received SRF awards, and found several areas for further improvement.

The agency should make sure it completes risk reviews before businesses begin their projects. It should also more directly incorporate risk reviews into decision-making, and evaluate the state’s full investment in projects before sending proposed awards to the Governor for approval.

We reviewed seven large projects that included SRF awards from 2008 to 2015. Business Oregon calculated projected returns for those projects based solely on the SRF forgivable loan, and did not include other state investments in the return calculation.

For five of the seven projects, adding estimated state tax credits alone to the return analysis would have significantly reduced the estimated return. For the five projects, estimated worker income taxes were projected to pay back the SRF award amount in three years on average. Adding state tax credits would have increased the estimated payback period to 24 years on average, a substantially increased risk.

Recommendations

Our complete recommendations are included on pages 26 to 27 of the full report. We recommend that Business Oregon develop additional metrics and targets for incentive and loan performance, using them to evaluate the awards and report performance to policymakers and the public.

We also recommend transparency improvements. They include reporting individual SRF, BEP and Business Finance loans, and working with the Legislature, other state agencies and counties to improve the quality of information reported.

And we recommend that the agency improve its selection and modification of the Governor’s Strategic Reserve Fund awards to private businesses.

Agency Response

The agency generally agrees with our findings and recommendations. The full agency response can be found at the end of the report.

Featured New Audit Release Performance Audit

Oregon Water Resources Department: Enhancing Sustainability Efforts and Agency Planning Needed to Better Address Oregon’s Water Supply Needs

Executive Summary


Oregon is facing growing pressures and concerns related to its water supply. The Water Resources Department (WRD), charged with managing the state’s water resources, could better balance water rights issuance and management with actions to sustain current and future water needs. The agency can also enhance its focus on groundwater protection, data collection and analysis, and workload and staffing. A long-term agency plan would help WRD strategically focus and prioritize the agency’s efforts and align them with available resources.

Read full report here.

Better balance needed to ensure water sustainability

owrd_logo_color_smwebParts of the state are experiencing regular and large scale water supply availability issues. There are indications that this trend will continue, intensify, and spread. Many water sources in the state have been fully allocated, and groundwater levels are decreasing in several areas. By 2050, Oregon could be faced with a need for an additional 424 billion gallons of water per year to meet irrigation needs and municipal and industrial demand. Though Oregon is known as a rainy place, there is a limited amount of consumable water available for meeting all existing needs and new uses.

While issuing water rights has always been a key responsibility for WRD, actions to restore and protect stream flows and watersheds for long-term sustainability have received less attention. Related programs are limited in number and in participation. The demands that are putting pressure on Oregon’s water supply are likely to continue to grow, which raises the need for action to ensure the ongoing sustainability of our water.

Groundwater protection needs more focus

Groundwater usage is increasing, and a large and growing number of wells go uninspected. Poor well construction may result in higher levels of groundwater contamination or wasted water. Contaminated groundwater would harm the overall groundwater supply. WRD has few well inspectors to inspect all wells in the state. For those wells that are inspected, WRD staff have noted an increase in well drilling deficiencies at a time when well construction has also increased. This could be due in part to minimal requirements to become licensed as a well driller in Oregon. Also, WRD could better coordinate with other agencies to address well risks, such as water contamination and public safety concerns, for the overall health of groundwater resources.

Data challenges hinder efforts to manage and conserve water

WRD collects a lot of information on surface water and some on groundwater. However, given the size of Oregon and its complex geology and aquifer systems, many areas of the state have not had detailed groundwater and surface water investigations. Not all water users are required to report their use, and as such, the amount of water being used in the state can only be estimated. Also, some of the data collected has not been entered into databases and analyzed, so the agency is not able to use it for water management decisions.

Increasing demands and other limitations impede monitoring and regulating water

Dry creek bed in Central Oregon

Dry creek bed in Central Oregon

Growing and changing demands coupled with a limited number of field staff impact WRD’s capacity to effectively monitor and regulate Oregon’s water supply. Field staff coverage overall has steadily declined and there have been some extended gaps in time where positions were vacant. Field staff have to cover a vast geographic region and associated workload. This, along with limited external support, impedes the agency’s ability to protect water and the rights of users, and to curb illegal water use. WRD should regularly assess field staff workload to ensure it aligns to resources and that staff time is dedicated to critical responsibilities.

Long-term agency plan needed to help focus efforts on future water sustainability

While the Integrated Water Resources Strategy provides a long-term multi-agency plan for managing water resources in Oregon, WRD needs an agency plan to strategically focus and prioritize its efforts, and align them with available resources, to better meet its mission. This would help WRD balance its efforts to ensure both consumptive and environmental water demands can be met now and into the future, and address areas needing increased focus, such as groundwater protection, data collection and analysis, and workload and staffing issues. Priority-based planning can help clarify and direct agency efforts that are vital to protecting Oregon’s water supply.

Recommendations

This audit recommends ways WRD can build on its efforts to help address the current and future sustainability of the state’s water supply. Our detailed recommendations for agency management are included on Page 26. They include recommendations for further integrating sustainability considerations into water management decisions, helping to ensure water laws and rules meet current and future needs, enhancing well regulation and groundwater protection efforts, strategically collecting and analyzing information, aligning staff workload with mission critical priorities and resources, and developing an agency long-term plan.

Agency Response

The agency generally agrees with our findings and recommendations. The full agency response can be found at the end of the report.

Featured New Audit Release Performance Audit

Oregon Department of Education: Computer Systems Ensure Integrity of Data, But Other Processes Need Improvement

Executive Summary


The Oregon Department of Education (department) oversees the education of over 560,000 students in Oregon’s public K-12 education system. The annual distribution of the State School Fund of $3 billion and federal funding of about $750 million help fund Oregon’s public education.
The department’s computer systems reasonably ensure the integrity of data used to distribute the State School Fund and appropriately process school district claims for federal funding. However, improvements are needed to provide better security for computer systems and student data, manage changes to computer systems, and ensure systems can be restored in the event of a disaster.

Read full report here.

Computer systems ensure integrity of student and school data

Department staff use the Consolidated Collection System to analyze and aggregate school and student data. They use information from this system to allocate monies to Oregon’s schools and education service districts. Computer systems reasonably ensured the integrity of student and school information through automated processes that accurately identify students and detect potential data errors. In addition, department analysts use system information to validate student and school data.

Computer systems appropriately receive and process School district claims for federal funding

The department uses the Electronic Grant Management System and the Federal Cash Ordering System to receive and process requests for federal program expenditure reimbursements. We found that computer controls reasonably ensure that these systems could appropriately receive and process school district claims for federal funding. These systems ensure grant claims do not exceed available balances and reject claims that otherwise would be ineligible for reimbursement.

Security measures for computer systems were insufficient

Although the department provides important protection measures for security, improvements are needed to better secure their computer systems and data. Weaknesses we identified relate to the department’s processes for planning, configuring, managing, and monitoring information technology security components. As such, the department does not provide an appropriate layered defense to protect agency computer applications. Thus, confidential student level information is at increased risk of disclosure or compromise.

Management of changes to computer systems needs improvement

The department has formal processes and tools for managing changes to their systems, but staff do not always fully utilize them. Independent and technical reviews of computer code changes did not always occur and processes were not in place to ensure only approved code could be placed in production. These weaknesses increase the risk that developers could introduce unauthorized or untested changes to the systems.

System files and data are appropriately backed up but procedures for timely restoration after a disaster are absent

The department has processes in place to back up critical data and can restore individual files as needed. However, department management and staff have not fully developed and tested a comprehensive disaster recovery plan capable of restoring critical systems and data in the event of a disaster or major disruption. Without a disaster recovery plan, the department cannot ensure it can timely restore operations in the event of a disaster.

Recommendations

We recommend that Department of Education management ensure resolution of identified security weaknesses, improve processes for changing computer code, and fully develop and test processes for restoring computer systems after a disaster.

Agency Response

The full agency response can be found at the end of the report.

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Oregon Housing and Community Services: Critical Improvements Needed to Help Ensure Preservation of Affordable Housing for Low-Income Oregonians

Executive Summary


Oregon is in a housing crisis—housing costs are high, vacancy rates are low, and low-income Oregonians struggle to find affordable housing. Oregon Housing and Community Services (OHCS) is charged with being the state’s leader in housing, but challenges are hindering its progress in helping to address the affordable housing crisis.

We found OHCS should improve its affordable housing preservation efforts, strategic planning, and data management. In addition, OHCS should address organizational challenges, which include poor communication, inconsistent staffing levels, and inadequate policies and procedures. By improving in these areas, OHCS will be better able to help ensure affordable housing for low-income Oregonians.

Read full report here

Affordable Housing is Essential to Meet Oregon’s Low-Income Housing Needs

housing1Increasing costs, combined with relatively stagnant incomes since the 2008 recession, have resulted in housing costs taking a bigger chunk of Oregonians’ paychecks.

Because the housing market generally does not produce new housing affordable to households making less than 60% of median income, federal, state and local governments work with nonprofit organizations and for-profit developers to create affordable housing for this segment of the population.

Housing subsidies that keep rents affordable for low-income Oregonians are important. A substantial amount of affordable housing could be lost in the next twenty years by way of expiring federal rent subsidies, use restrictions, maturing mortgages and/or deterioration.

Loss of affordable housing damages progress on meeting overall housing needs for the state. The loss of even a single rental unit could mean one more Oregon family may not be able to find a home.

Agency Efforts to Preserve Affordable Housing Fall Short

Affordable rental housing created with government subsidies is the main focus of our report. We found the agency could improve its housing planning and preservation of this existing low-income affordable housing.

Since 1991, OHCS has been required to complete an annual comprehensive plan for the state, detailing the housing needs of Oregonians. Thus far, statewide housing planning has come up short. Agency leadership is working to build on existing needs assessments and planning to create a comprehensive plan for the state. A major hurdle to achieving this goal is the lack of an accurate and reliable inventory of affordable housing, another task the agency is currently working to complete.

housing2Preserving federal rent subsidies is critical to helping preserve low-income affordable housing. It cannot be achieved without a variety of public and private partners working together collaboratively. Poor external communication aggravated strained relationships with housing developers and partners in the housing community. Although improved, OHCS could do more to strengthen relationships with partners.

OHCS could also work with funders in the state to better align funding cycles and application processes so preservation projects go more smoothly. Many housing developers rely on OHCS funding each year to build or preserve affordable housing, making OHCS a key partner. For developers investing millions of dollars and several years into projects, predictability and transparency are important. Clear funding priorities will help developers understand and plan for the affordable housing that OHCS is targeting.

Oregon also falls behind other states in providing funding developers need to make projects viable. Increased gap funding could expand the use of a tax credit program OHCS administers, resulting in preserving more low-income affordable housing.

Strategic Planning is Not Sufficient

The Oregon Legislature tasked OHCS with leading the state in housing policy and serving as the central source of affordable housing data, training and technical information. We found that OHCS is not achieving these expectations.

The agency needs to improve its strategic planning to better provide for affordable housing in the state. Without adequate strategic planning, OHCS’ vision for the future and priorities are unclear, potentially resulting in the loss of affordable housing. Improved planning, including setting measurable goals, will help OHCS identify priorities, recognize success, detect problems and respond with corrective action.

Better Data Management Needed for Informed Decision-Making

housing3The lack of complete and accurate data on the multifamily affordable housing portfolio kept us from completing planned work related to affordable housing. This included evaluating the effects of OHCS policies as well as overall trends of properties in need of preservation.

The agency could do much better at using data to inform decision-making. Due to inadequate resources dedicated to data systems and data management over a number of years, the systems are outdated, not integrated, and require workarounds. OHCS could benefit from an integrated data system that tracks projects from beginning to end. This would eliminate the workarounds that contribute to errors, incomplete data, and other problems we identified.

OHCS could also improve its collection and use of financial data from its affordable housing projects in order to help identify best practices. Such a system was in place, but was discontinued by agency leadership in 2012 and to date, has not been replaced.

Organizational Challenges Impede Agency from Addressing Affordable Housing

We identified organizational issues affecting all sections of the agency that impede OHCS efforts to adequately address affordable housing, including preserving low-income affordable housing. These challenges include poor communication inconsistent staffing levels, and inadequate policies and procedures.

housing4We found significant issues with both OHCS’ tone at the top and internal communication. Both are influenced by leadership’s operating style and management philosophy, among other things. More importantly, both are critical to enabling the agency to be successful at managing its priorities. To gain a better understanding of the agency work environment, we conducted a survey of agency staff. Overall, survey results indicate that significant communication issues exist between agency leadership and staff.

OHCS has also experienced capacity issues, such as loss of institutional knowledge due to turnover and agency restructuring. At the same time, the workload in the agency’s Multifamily Section has increased. The current workload and capacity leaves little time to analyze decision-making and data to improve administrative systems and bolster better policy. Having a better understanding of workflow and resources will help identify capacity for additional work and target areas in need of additional staff or resources.

In addition, we found that some agency policies and procedures were absent, outdated, or weak. For example, OHCS does not have standardized or written contracting and procurement policies, resulting in inconsistent practices.

Recommendations

To help ensure affordable housing for low-income Oregonians, we recommend OHCS management improve housing preservation efforts, strategic planning, and data management. We also recommend OHCS management address organizational challenges including organizational culture, communication with staff and stakeholders, workflow and capacity issues, and inadequate policies and procedures.

Agency Response

Oregon Housing and Community Services management generally agrees with the findings and recommendations in this report.  The full agency response can be found at the end of the report.

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