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.
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 train 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 restrictions 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 short-term 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 short-term “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.”