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July 18 Transcript

Texas Department of Transportation Commission Meeting

Special Commission Meeting

Commission Room
Dewitt Greer Building
125 East 11th Street
Austin, Texas 78701-2483

Wednesday, July 18, 2007

COMMISSION MEMBERS:

Ric Williamson, Chairman
Hope Andrade
Ted Houghton, Jr.
Ned S. Holmes
Fred A. Underwood

STAFF:

Michael W. Behrens, P.E., Executive Director
Steve Simmons, Deputy Executive Director
Bob Jackson, General Counsel
Roger Polson, Executive Assistant to the
Deputy Executive Director
 

PROCEEDINGS

MR. WILLIAMSON: Good morning. It is 9:06 a.m., and I would like to call the special meeting of the Texas Transportation Commission to order. It is a pleasure to have each of you here this morning with us.

Please note for the record that public notice of this special meeting, containing all items on the agenda, was filed with the Office of Secretary of State at 10:16 a.m. on July 10, 2007.

Before we begin today's meeting, I would appreciate it if you would join with me in taking out of your pocket and removing from your pocket your telephone, your pager, your PDA, your Dewberry and all other electronic devices you might carry, and put them on the silent or vibrate or page mode so that we will not interrupt our guests while they're testifying. Thank you very much.

We called this special meeting to receive briefings related to five external audits that are near completion on several areas of the department's operations. It's the commission's intention to have an executive session, following hearing from our auditors, to further discuss the process of whether or not we will accept the retirement letter from Mr. Behrens, and if we do, how we will go about replacing him　-- which is a remote possibility.

Let me remind you that if you wish to address the commission's meeting today, we ask that you complete a yellow speaker's card, such as the one in my right hand, which you can find out in the lobby to your right, if you intend to speak on a matter that's on the commission's agenda.

Do we have general comments today?

MR. BEHRENS: No.

MR. WILLIAMSON: In a special meeting, we do not entertain general comments.

If you haven't signed up for the Texas Transportation Forum which starts in a few minutes, you will find in your chair a card, and I think we've got one or two spots left, if you'd fill out this card which you can find in the lobby to your right, we'd love to have you at our forum.

We'll also be taking up and considering today the awarding of 27 private sector concession　-- oh, no, that's next time. I forgot.

(General laughter.)

We will limit each speaker to three minutes, unless you're a sitting member of the legislature, in which case you may take all the time you wish.

Before we proceed with today's posted agenda, it's our custom to invite each commissioner to make opening comments. We will begin with Mr. Underwood, then Mr. Holmes, then Mr. Houghton, and then Ms. Andrade, and then we'll start our official meeting. Again, thank you for being here.

MR. UNDERWOOD: I want to thank everyone for being here. This is an important meeting. Also, on a sidebar, I want to thank the men and women of the Childress District for treating me like king for a day, except it lasted for three days, and I really appreciate the hospitality in Childress at the district there. Thank you.

MR. HOLMES: Welcome. This will be an interesting meeting and we appreciate all of your attention and attendance, and I look forward to seeing you at the Transportation Forum.

MR. HOUGHTON: I welcome you to Austin and to the commission meeting and the kick-off of the Transportation Forum.

MS. ANDRADE: Well, I echo my fellow commissioners, welcome to our special called meeting, and it's great to see so many of our district engineers in the audience also, so special welcome to you all. And I look forward to our forum that starts this afternoon. I think it's just absolutely wonderful when over a thousand people get together to discuss transportation for Texas. So thank you very much.

MR. WILLIAMSON: Thank you, members. I associate myself with the remarks. I also welcome you to Austin and to our special meeting. I look forward to an interesting morning as we talk about the external audits that are ongoing. And I guess with that, Michael, we'll call Steve Simmons, our deputy executive director, to the podium, who will set the stage for today's meeting. Steve.

MR. SIMMONS: Good morning, commissioners, Mr. Behrens. For the record, my name is Steve Simmons; I'm the deputy executive director of the Texas Department of Transportation.

And Commissioner Andrade, the district engineers are here because they were told to be here.

(General laughter.)

MR. SIMMONS: And a lot of our division directors are here also because this is something that's very important to the department as we move into our Sunset Review, that they need to hear what these independent auditors have said and be able to react, as the department always has, to changes that are necessary.

A little background. Transportation Code 201.109(b)(5) requires the department to contract for an independent audit　-- and I stress independent audit　-- of the agency's management and business operations in 2007. In order to comply with this requirement, at the commission's direction, the department was divided into five separate auditable units. They were: transportation funding, contracting/project delivery, consumer services, management and support operations, and field operations.

When we originally went out for these, we had several proposers for each one except for, I believe, the field operations which we did not get any the first go-round, but we went out for a second round and we selected Deloitte Consulting to do that.

The contracts were awarded to: Dye Management Group, they performed the transportation funding and consumer services audit; and then Deloitte performed the contracting and project delivery, the field operations, and the management and support operations.

The individual teams determined the objectives of each audit by conducting a risk analysis and developing an audit work plan. Mr. Behrens established an audit oversight committee to provide guidance through the audits and approve all audit deliverables. The committee members consisted of myself as the chairman of the audit oversight committee, Owen Whitworth from the Audit Office, Coby Chase from the Government and Public Affairs Office　-- and he's supposed to be sitting over there but we didn't tell him　-- Bill Hale, our Dallas District engineer, and Mario Jorge, our Pharr District engineer, to try to get a broad expertise to help review these audits.

And I'd be remiss if I did not recognize Donna Roberts from the Audit Office. Donna, where are you? Please stand up. Donna is the one that worked tirelessly to get these auditors onboard and also kept the audit oversight committee in line and worked with the districts and divisions to get responses to these audits. So thank you, Donna.

In carrying out their duties, the committee drew upon subject matter experts throughout the department as needed. Each of the five audits are now in draft reporting stage and have results ready to present to the commission.

Please note that the timing of the audits is such that recent legislative changes are still being analyzed by our staff and may not be incorporated into the final results or conclusions of these audits at this time.

If, after hearing the audit results, the commissioners would like the auditors to provide any additional information, that request can be made under the current contract terms, and currently the contracts expire the end of August.

So unless you have any other questions, I'm ready to bring forward the first team of auditors to make their presentation.

MR. WILLIAMSON: Members, do you have any questions of either Mr. Simmons or other staff? I'll have a few but I yield to you first.

Steve, when we first set out to define our expectations for our external auditors, I know we had a series of extensive　-- I guess the word would be frank and straightforward meetings with not only staff but with the auditors themselves, and part of that straightforwardness and frankness circled around the importance of the agency's staff totally cooperating with the effort, even when it was painful to do so. In your estimation, did agency staff totally cooperate with the auditors, and more to the point, do commissioners need to worry about whether or not whatever these people have to say to us is based upon frankness from the staff?

MR. SIMMONS: Mr. Chairman, that was a question I posed to each of the independent auditors when we went through a walk-through of these to make sure that they got full cooperation, not only from the department but also that they were able to interact with our transportation partners outside the department because there are several of these audits that did require going outside the department to get information and how we do things, and the response they gave me　-- and I hope that you'll ask each one individually to make sure that that is a true statement　-- they said unequivocally that they got 100 percent cooperation from the department.

MR. WILLIAMSON: Well, I am going to ask almost the same question of each of them, and I wanted to give you the opportunity to say first, in your view, that they received the total cooperation of the department.

MR. SIMMONS: Yes, sir.

MR. WILLIAMSON: Well, if that's the case, I'm ready to proceed, if you are.

MR. SIMMONS: Our first auditable unit to make a presentation is our transportation funding which I think all of you know is very important to the department. And Dye Management Group did that, and I'm going to ask Bill Dye and Peter Mills to make the presentation.

MR. DYE: Good morning, Chairman Williamson and members of the commission. My name is Bill Dye, for the record, and I'm president of Dye Management Group. With me this morning is Peter Mills, a senior associate with Dye Management Group. Together, we will provide you with an overview of the findings and recommendations from the transportation funding audit.

I'd like to preface my comments by thanking the members of the audit oversight committee, TxDOT staff, and business partners from MPOs, RMAs, and toll authorities across the state for responding to our requests for data and information, and for reviewing our work in progress in a timely manner. And with regard to Chairman Williamson's question, we had very good cooperation from everyone in the department and felt that we could do our job very professionally in that regard.

MR. WILLIAMSON: Well, let me stop you and ask you about that.

MR. DYE: You bet.

MR. WILLIAMSON: The reason I'm focused on this is because we just went through almost six months of I think the proper word would be skepticism about how we arrived at certain conclusions we've arrived at upon which to base some decisions we've made. It is extremely important that you can defend your work product with Chairman Carona, Chairman Krusee, Chairman Ogden, Chairman Chisum, the lieutenant governor and the speaker, and any other interested House or Senate member. You have to be able to say, Look, this is our view, our professional view, and we can defend it. Because one of the things we've learned in the last six months is no matter what story we tell, someone is going to try to find a way to describe it as an alternate reality, perhaps.

MR. DYE: Yes, sir.

MR. WILLIAMSON: You have to be able to go into that room by yourself without us around and say, This is the facts, Jack.

MR. DYE: Yes, sir. I know of no finding that we changed　-- other than findings of facts that changed any recommendation that we made in the report because of comments. Again, we were unfettered.

MR. WILLIAMSON: Okay, thank you.

MR. DYE: You bet.

You have in your packets the draft executive summary to our draft final report. As you see, it covers a lot of ground. Our presentation is organized by major audit area, and in each area our presentation focuses on the findings and recommendations that we believe address important policy questions for TxDOT as it goes into the Sunset process.

Please also note that the audit does not address implications of House Bill 792 or the legislation enacted by the 80th Texas Legislature.

This slide addresses the four audit areas that were covered: fiscal capacity; programming project selection, including the use of debt in project finance; management capacity for the new finance mechanisms; controls and oversight. For each area there was a series of general and specific audit questions. The audit report takes each question in turn, provides an answer, supporting findings, and where applicable, recommendations.

MR. WILLIAMSON: Hang on a second. The print is a little small, I'm having to focus on it. Old man eyes　-- you know how that is. Okay.

MR. DYE: Now I'm going to turn the floor over to Peter Mills, who is going to talk about our first audit area.

MR. MILLS: Commissioners, ladies and gentlemen, good morning. For the record, I am Peter Mills, an engineer and economist with the good fortune to be affiliated with Dye Management Group, and also to be assigned to this project.

I thank you for your attention to the table in front of you. We're going to use this to present our findings with respect to the first question, and that is: What revenues can Texas reasonably expect from the funding tools that are defined in House Bill 3588 and House Bill 2702?

In the left-hand column we present the estimates that were compiled by the MPOs and the department in 2004. The funds from existing sources, $102 billion, will be familiar to you. It was weighed against $188 billion of unmet needs to estimate a shortfall of some $86 billion over the period 2005 to 2025 to 2030. As old as these estimates are, they are still very much in the public eye, so we have compared our forecast to them.

And to keep that forecast and that comparison consistent, we　-- as the department did in 2004　-- have forecasted in constant 2005 dollars, and there is an important implication to that: it does not include inflation; it does not include any possibility or any expectation of increases in tax rates; and it does not, on the needs side, allow for any inflation in the costs of completing projects. So in terms of purchasing power, what we're showing here are only nominal dollars and not accounting for the erosion of purchasing power as the costs of constructing projects on the needs side increases over this period.

MR. WILLIAMSON: Stop a second, if you would.

MR. MILLS: Yes.

MR. WILLIAMSON: Now, I, for one, have not seen this until this morning. Do I assume that we're all in that position?

MR. MILLS: Uh-huh.

MR. WILLIAMSON: So this could either be real embarrassing or real uplifting, depending on what the next page says. But before we turn the next page, I need to be sure that I understand what you just said, and if Amadeo is not here, Steve, perhaps you can help me. Steve, where are you?

MR. SIMMONS: Right here.

MR. WILLIAMSON: When we projected what we called our revenue challenge, did we infer an increase in revenues over the next 25 years?

MR. SIMMONS: We used the MPOs projections for their plans. They based theirs on what they project they will get in from the revenue, whether it's from the state, from the federal, or whether it's local dollars. So that's the numbers that we used.

MR. WILLIAMSON: So his numbers are going to be not inflated.

MR. SIMMONS: That's correct.

MR. WILLIAMSON: And our projections were inflated on the revenue side.

MR. SIMMONS: Yes, sir, to some extent.

MR. WILLIAMSON: Now, on the cost side　-- which is more significant to us　-- your cost projections will not be inflated?

MR. MILLS: We have made no cost projections. We have dealt only with funding and with revenue, and our growth of revenues is the same as that as was projected by the MPOs. If you look at the table, you'll see that, in fact, the MPOs projected two sets of revenues. The first, the $102 billion, were the revenues to be expected from existing taxes, both federal and state, projected forward for growth in traffic, for economic growth, but not for price increases, so not for an assumption that the federal government would increase its federal excise tax rate or that the state would increase its motor fuel tax rate. So those sorts of price assumptions are not in there. The assumption is those tax rates will stay the same, both in the MPOs work at the $102 billion number which is the upper number, and also in the numbers we're going to show you.

MR. WILLIAMSON: Okay. So does that also mean that you didn't inflate the revenue for what we inflated the revenue, projecting our private sector investment activity and concession collections that we would use to bridge the gap?

MR. MILLS: We did not include price inflation or any progressive increase of toll prices over time in those either.

MR. WILLIAMSON: Can I stop you a second?

MR. MILLS: Yes.

MR. WILLIAMSON: Amadeo, can you come up, please? If you don't mind.

MR. MILLS: No, absolutely.

MR. WILLIAMSON: This is really important.

MR. MILLS: We want to make sure we're all on the same page.

MR. WILLIAMSON: Now, what I understand he's fixing to lay out for us is the external independent audit viewpoint of whatever the revenue facts may be. When we were projecting our shortfall and how we would bridge the gap, did we infer in our revenue what we thought we would collect from public-private partnerships, and specifically concession payments such as 121?

MR. SAENZ: The MPOs, when they put together their Metropolitan Mobility Plan, first took into account how much money they were going to get from traditional sources, and then they identified some potential toll projects, and in the first iteration they just identified the projects and they said we can build these projects, they did not take into account the concessions to carry it forward. That's being done as part of the second iteration of the Texas Metropolitan Mobility Plan.

MR. WILLIAMSON: So to the extent the revenues differ between what we stood on and got soundly kicked around about and what he's going to tell us is there shouldn't be any difference, the difference should be reality.

MR. SAENZ: Right now I think the numbers will be the same. In the next iteration when the MPOs update their Texas Metropolitan Mobility Plan, they'll be able to take into account and address how much more revenue could come from the concessions and concession payments.

MR. WILLIAMSON: Okay, thank you.

I'm sorry to interrupt you, but like I said, this is very important stuff for us.

MR. MILLS: So for the record, I'm Peter Mills, returning to the podium.

The estimates that the MPOs made that Amadeo just referred to of what new toll revenues might be available or what other reasonably expected new revenue sources might be available to them, those are included in the $12 billion which you see labeled as New Tools Business Plan 2005.

So Commissioner, to try to make sure I'm putting this in the right terms, what the MPOs estimated was $102 billion from state motor fuel taxes, federal aid, those traditional sources, plus approximately $12 billion　-- and this was just within the eight TMAs that did this work in the major urban areas　-- from what they believed they could do from tolls, from local option taxes, whatever, they made a few other small assumptions, but principally new toll projects. So their numbers in 2004 including traditional sources, new projects, but no assumptions about increases federal or state tax rates, that was $114 billion, and that's the number which is at the bottom left-hand column of this slide before you.

MR. WILLIAMSON: Well, the reason I took Amadeo through that discussion, we're playing the game right now on three levels: there is the MPO projection of revenues which came under some criticism from elected officials and primarily the State Auditor; then there is our projection of how we would fill in that gap with public-private partnerships, and that came into just a little bit of criticism from almost everyone; and then the third level at which we're playing is our projection of the cost that we think is necessary to be met if we're going to actually meet our goals as opposed to just continuing to operate as we do now.

In other words, the whole basis of our Strategic Plan is that we will reduce congestion in Austin, Texas, not that we will live with what we have. The whole basis of this Strategic Plan is that air quality will improve in Houston, Texas, not continue as it is now, and so forth. So if I have to stop you a lot to get you to elaborate, it's because this is pretty serious for us in terms of responding to certain elected officials, to the State Auditor.

MR. MILLS: Absolutely. I'm happy to stop, and also, as any technical forecaster is, happy to go into stultifyingly boring levels of detail for those who are interested in it -- in another forum, probably not today　-- but we're happy to show our forecasts and how we arrived to them and to defend them to all and sundry.

MR. WILLIAMSON: Of course, I'm afraid to turn the page, your forecasts might prove that we were out in left field.

MR. SIMMONS: Mr. Chairman, if I could. I was remiss in my opening comments. We did invite the State Auditor's Office here and they are here in the back of the room, so Dorothy, raise your hand. And we did also invite the Sunset staff to come and sit in on these meetings also, and I don't know if they are here yet or not. Apparently not.

MR. WILLIAMSON: They're no doubt watching us across the miracle of the internet.

MR. SIMMONS: Correct.

MR. HOUGHTON: A point of clarification. Did you say, Amadeo, that concessions are in this forecast?

MR. SAENZ: No.

MR. HOUGHTON: They're not in this forecast.

MR. WILLIAMSON: But as we advanced our Strategic Plan and argued our case, we argued that we would fill the gap with that.

MR. HOUGHTON: I understand.

MR. WILLIAMSON: And what I'm hearing them all saying is that that amount of money is not in here.

MR. HOUGHTON: Not in this forecast. When you talk about toll projects?

MR. MILLS: That's right, when we talk about toll projects, the $12 billion, we're talking about what the MPOs forecast as at the toll booth receipts from a toll facility.

MR. HOUGHTON: Above and beyond debt service and operation?

MR. MILLS: Just gross revenues.

MR. HOUGHTON: Just gross revenues.

MR. MILLS: That's correct. So this is point of sale at the toll booth.

MR. HOUGHTON: And you're going to get into expenses at the same time?

MR. MILLS: No. We are just forecasting revenue.

MR. HOUGHTON: Some of these toll projects do not make money for　--

MR. MILLS: We are going to address exactly that problem as we get into our remarks about the setting of toll prices relative to cost.

MR. HOUGHTON: Okay.

MR. MILLS: Shall I carry on?

MR. WILLIAMSON: Please.

MR. MILLS: Okay. So I'm going to lay out our forecast by starting from the same $102 billion and doing it comparatively, starting with our forecast of state revenues, principally from the state motor fuel tax. Now, we have made a forecast of that with, as I said, an assumption of no increase in the tax rate, despite the fact that it hasn't been increased in over 15 years, again to remain consistent with keeping inflation out of the forecast.

We have also made an assumption with respect to the increasing efficiency of engines in motor vehicles. We have used a forecast put out by the U.S. Energy Information Administration for nationwide improvements in fuel efficiency, and we have adjusted that for the different mix of vehicles in Texas, as in Texas there are a higher number of heavy vehicles and a higher number of pickups in the light vehicle fleet than one tends to find nationwide.

We have used the population forecast that was produced by the Texas State Data Center. We have also assumed that as the population of the state ages, as a higher proportion of the state reaches the Golden Years, that the existing patterns of driving amongst old people and new people do not change, so as we get older, we tend to drive less, and therefore, the Texas population　-- as the population will throughout the United States　-- tends to drive a little less as it ages.

So our forecast is about $8 billion lower than the departmental and MPO forecast that was done in 2004, and that seems like a fair bit from a financial perspective, but from a forecasting perspective, it's about a 15 percent variation, so our forecast is about 15 percent lower than that which was done in 2004, and when forecasting statistically over 25 years, 15 percent is actually not a significant variation.

Our next forecast is with respect to the funds that would be available for obligation through the Federal Aid Highway Program, and on this we've made a number of assumptions. We've made several assumptions, bold assumptions, as one has to do when one is predicting the behavior of the United States Congress. First we have forecasted what the fuel excise tax receipts would be nationwide into the Federal Trust Fund. We used the same sorts of assumptions on federal nationwide receipts as we did for the state receipts in Texas. We have also made some assumptions with respect to what the U.S. Congress may have to do over the next 25 years to deal with the current federal government deficit.

So we have assumed, for example, that the approximately $9 billion rescission that is called for in SAFETEA-LU in 2009, that that will happen. We have also assumed that the Congress will further reduce outlays from the Federal Highway Trust Fund to keep that fund from going into a negative cash balance in the year 2009, as it currently forecast to do. And we also assumed that starting in the year 2013 that Congress will, by reducing the fire walls through all the discretionary programs, take about $3 billion a year nationwide from the Federal Highway Trust Fund in order to make a contribution to reducing the federal deficit.

So bold assumptions and somewhat pessimistic ones.

MR. HOUGHTON: How did you come up with that assumption that they're going to do that?

MR. MILLS: We come up with that assumption by, first of all, predicting that the devaluation of your currency　-- which has happened by about 30 percent over the last five years　-- will not be tolerated, and therefore, they will have to take some action to reduce the federal deficit. So that's the first step.

The second step is we observe that the federal government's Budget Enforcement Act requires those reductions to be made in their discretionary programs, of which there are only five: Defense, FBI, Internal Revenue Service, Transportation　-- there's another one.

MR. HOUGHTON: They have sent a signal to that effect?

MR. MILLS: I'm sorry?

MR. HOUGHTON: They have sent that signal?

MR. MILLS: They are sending that signal, as I infer　--

MR. HOUGHTON: When you say $3 billion.

MR. MILLS: They have not signaled $3 billion, that is our assumption.

MR. WILLIAMSON: They're sending a signal by their actions and inactions; that's how they're ending a signal.

MR. HOUGHTON: Well, I understand that, but the $3 billion number.

MR. MILLS: The $3 billion is our assumption, and it is our assumption arrived at by what is required to reduce proportionately across all five of those discretionary areas in the federal budget to stop the federal deficit from getting worse.

MR. HOLMES: The $3 billion is an annual number?

MR. MILLS: Annual nationwide.

MR. HOLMES: And how does that relate to the rescissions that have taken place over the last couple of years?

MR. MILLS: It relates in that the rescissions are the means by which the federal government reduces its funds available when there's already an apportionment in place.

MR. HOUGHTON: And real dollars.

MR. HOLMES: Yes, my question was how does the $3 billion relate to the total dollars of rescissions on an annual basis.

MR. MILLS: Okay, $3 billion a year. You receive in Texas roughly 8-1/2 to 9 percent of national apportionments. So in other words, 8-1/2 to 9 percent of all the highway funds apportioned in the United States are apportioned in Texas. So we assume that you would have to absorb approximately 8-1/2 to 9 percent of that $3 billion reduction.

MR. HOLMES: There have been rescissions for the last couple of years.

MR. MILLS: That is correct.

MR. HOLMES: And what is the amount of that annual rescission over the last couple of years?

MR. MILLS: In Texas?

MR. HOLMES: No, in total, and how does that relate to the $3 billion. The rescissions have actually been a little more than $3 billion the last couple of years. Right?

MR. MILLS: The rescissions have been, I think, more in the order of $6- or $7- over the last couple of years, and we're assuming that they will not continue at that level. In other words, the federal government will not have to pull back $6- to $7- or more billion dollars a year out of the Federal Highway Program because we are assuming　-- and this is, again, where we get into bold assumptions about political responses　-- we're assuming that defense expenditures in Iran will go down after 2009.

MR. HOLMES: And so you're actually optimistic, the $3 billion is an optimistic number relative to the last couple of years.

MR. MILLS: I'm putting it in the context of the rescissions with which you have been hit, and of course, the rescissions are merely the most disruptive means by which the federal government calls back the money which they said they were going to apportion or said they were going to authorize. Yes, we're assuming that, in fact, it will be less than it has been, over the long run it will be less than it has been of late.

So in other words, this forecast is a combination of many assumptions about political behavior and economic conditions. Some of them can be viewed as optimistic, some of them can be viewed as pessimistic, absolutely.

MR. HOUGHTON: Does that statement apply to state revenue forecasts too?

MR. MILLS: Absolutely. We have assumptions there about how people in Texas will adapt to higher fuel prices and how they will change the types of cars they drive, as they do across the nation, as they start to substitute different vehicles in the vehicle fleet.

MR. HOUGHTON: In the equation is political forecast in that?

MR. MILLS: The only political assumption in the state revenue forecast is that the state government will not raise the state tax rate.

MR. HOUGHTON: Revenues.

MR. MILLS: Yes.

MR. SIMMONS: Peter, I know this just came out last week, but the federal budget forecast for the Highway Trust Fund, previously they were forecasting about a $700 million shortfall and now they came out with $3.6-, $3.8-?

MR. MILLS: Close to $4 billion, yes.

MR. SIMMONS: And then if you put the Raba into it, it's $4 billion short in 2009, and I think it's $16 billion short in 2010, but that's the next federal bill. How does that play into your forecast, does that number go up?

MR. MILLS: If I was doing this forecast again today, yes, it would probably go up as a result of that because I would have to make a stiffer assumption as to how much outlays will have to be reduced to keep the fund from going negative, the cash balance in the Highway Trust Fund from going negative.

Now, I might, if I may, at this moment just generalize about forecasts. We are presenting this forecast　-- and this is a relevant point to do it　-- we're not presenting this forecast as one being superior to one that's been done by TxDOT two years ago or last year or last week, nor are we trying to suggest that our assumptions or our methodologies are better. The recommendation we're making here to you, with respect to forecasts, is do it often. In our opinion, the best forecast is always the next one, and therefore, my advice or our advice is always absolutely question these assumptions if you don't like them　-- and no reason why people should　-- run another forecast with different assumptions.

MR. WILLIAMSON: Well, we appreciate you saying that, but we wouldn't want you to think that because we're on point that we have reason to doubt.

MR. MILLS: No, absolutely not.

MR. WILLIAMSON: We just enjoy being on this side of the table for once; we've spent the last six months being on the other side.

(General laughter.)

MR. MILLS: And commissioners, we would give you the same advice regardless of whether you liked our assumptions or disliked them. Our recommendation to you is that as an agency, as a commission and as TxDOT, you should be having these sorts of discussions all the time, and they should happen at a high level and they should happen inclusively of your partners so that when rescissions happen, they are not a surprise. They shouldn't be a surprise to anybody when they happen because yes, the means might be a surprise that yes, they've had to rescind existing, but the fact that the federal government is running out of money and the Federal Highway Program is one place where they can go and get it, that should not be a surprise.

MR. WILLIAMSON: In fact, that highlights probably a mistake that I made by letting the rescissions and our obnoxious focus on private sector partnerships become the focal point of the discussion. We haven't highlighted enough, from our perspective, I think, whether it's the war in Iraq or the war you won in Iran　-- which I support　-- or additional Social Security distributions, or whatever it is, the truth is the transportation pot in D.C. is a lot like the transportation pot in Texas: it is legal and easy to reach into and reapportion to some other function of government, and for us to make our 25-year plan based upon an increasing amount of federal government aid, as opposed to decreasing, would be irresponsible because it's not going to happen. It's going to decrease for some reason, whatever that reason is.

MR. MILLS: So let me move on, if I may, into our forecast of revenues that we believe the new tools will bring. We have forecasted revenues from toll operations, and because we are forecasting gross revenues from a toll operation, this forecast would be the same regardless of whether that toll operation was run by a public toll authority or whether it was operated under a concession agreement by the private sector. So what we're forecasting here is toll revenue point of sale at the toll booth and as the car drives under that TxTag reader.

Our forecast for that is about $25 billion over the period from new toll facilities, so this is above and beyond existing toll facilities in the state which collect roughly $500 million a year at the present moment. The forecast takes into account growth in traffic. It also makes an assumption with respect to pricing, and this takes us back, Commissioner Holmes, to a question you raised. We assume that the prices that are set on these tolls on these new tollways are not set just to cover their costs, that they are set based on the value of time they save for their customers.

So for example, if a facility costs an equivalent of 10 cents a mile to build over time, and the value of time saved to the people who drive on it is 16 cents a mile, our price assumption here is that the toll charged will be 16 cents a mile, of which 10 cents is going to go into maintaining that tollway and 6 cents is going to be available for other projects and other transportation priorities within the region　-- surplus revenue, if you will.

MR. WILLIAMSON: So let me ask you something. Would that logic apply to a gas tax rate. If tolls weren't an option and you were doing a capacity analysis and what was on the table was an increase in the motor fuels tax rate as opposed to generating tolls, would you be able to reach the same conclusion? I'm not leading you someplace, I really need to know. Would you instead be saying right now that assumes that if your gasoline tax rate needs to be 49 cents to recover your costs, you'll actually charge 88 cents to reflect the value of time per gallon, or is that analysis only relevant in a toll environment?

MR. MILLS: The value of time analysis is only relevant in a toll environment because people face a choice: they face a choice of traveling on another roadway or another system, and if they choose the tollway, they will save 20 minutes, 30 minutes, 40 minutes, and therefore, we can assign a very specific value of time and we can survey people and find out what that's worth to them and we can assign a time to that.

When people respond to higher fuel taxes, they respond in different ways. They don't just respond by making another choice as to where they travel, they may choose not to travel, they may choose to travel less, in the long run they may choose to buy another vehicle which gives them better fuel efficiency.

So when we forecast revenues from fuel taxes, yes, we can factor in adjustments for as you raise the tax, some people will drive less, some people will buy a hybrid, some people will just be mad and drive as much as they used to and pay more, but it's not a value of time argument, it's a cost of travel argument.

MR. HOLMES: Just a point of clarification, the $25 billion you have up here, if you use the 16 cents/10 cents analogy, is that the 16 cents?

MR. MILLS: That's the 16 cents, not the 10 cents.

MR. WILLIAMSON: And it's not inflated.

MR. MILLS: It is not inflated.

MR. WILLIAMSON: Just like the $102 billion in 2004 dollars which is going to get reduced perhaps to $87 billion because of other variables.

MR. MILLS: To use the analogy we're using, it starts with a toll of 16 cents a mile and stays with a toll of 16 cents a mile through the 25-year period.

MR. WILLIAMSON: I'm not trying to jump ahead of you, but it appears to me　-- oh, you've got one more revenue thing. I'm sorry. I want to ask that question when you're discussing all revenue.

MR. HOUGHTON: Where did the averages come from, 10 cents?

MR. WILLIAMSON: He just pulled that out.

MR. MILLS: Actually, I'm just pulling that out of the air as an example. It's not unrealistic.

MR. HOUGHTON: I mean, you had to come up with that $25 billion somewhere.

MR. MILLS: That's right. Well, the $25 billion, the way we came up with the 16 cents is we used the value of time estimates that underlay three of your most recent and most advanced traffic and revenue studies. So for SH 121 in Denton County, SH 121 in Johnson and Tarrant counties, and I think Copperas Cove and the Tyler Bypass, Wilbur Smith, who did all of those　traffic and revenue studies, they gave us the values of time which were implicit in all the survey work they did to support those T&R studies, and we used those values of time which are expressed in dollars an hour, basically what people think their time is worth when they're traveling. So that's how we came up with the 16 cents.

How we came up with the 10 to 12 cents was that is the established tolling policy of, in that same North Central Texas area, the NTTA. So their policy is to charge as low a toll as possible and still cover their system costs, and their target toll rate is a uniform 10 cents a mile. So while we pulled them out of the air, we pulled them from more or less the right places in the air.

MR. WILLIAMSON: So Michael can go back to Dallas and report to the consumers of North Texas that toll rates really need to go up to 16 cents a mile.

MR. HOUGHTON: They're being subsidized is what you're saying, toll rates are being subsidized.

MR. MILLS: No, I wouldn't say they're being subsidized.

MR. HOUGHTON: At 10 cents versus 16 cents?

MR. MILLS: I wouldn't say they're being subsidized because that implies that they're not covering the costs of the facilities, and they are covering the costs of the facilities. What they're doing is they are foregoing a revenue opportunity. Basically, they're taking the product which is worth 16 cents to a customer and they're selling it for 10 cents, 11 cents, when they could be charging 15, so they're giving the customer a pretty good deal.

MR. HOUGHTON: Yes, and they're being subsidized.

MR. WILLIAMSON: Well, not from his perspective, Ted. We don't want to put words in his mouth. But from our perspective, his 10 to 12 cents policy they set would not have been possible had the state not subsidized that toll system in the first place. The cost would have been more like 12 to 14 because they would have had an additional $500- to a billion dollars in debt cost.

MR. MILLS: A good example right now on the SH 121 Johnson-Tarrant county section which is just being looked at now, the costs are looking like they will drive the toll rate there up to about 15 cents. So TxDOT, City of Fort Worth, and NCTCOG are all working towards basically a special dispensation for NTTA to charge a 15 cent a mile toll because the costs of that project are going to be higher.

But the point I'm making here is that all of these tolls are based on recovering the cost of the toll system. Yes, you may subsidize it because you put toll equity in, you build connectors, you give them right of way, you do those things which artificially lower the cost of the tollway. I'm making a different point, I'm making whatever that cost is, the State of Texas and the toll authorities here have a tendency to charge a price that recovers the cost of the product, not what the product is worth to the customer.

MR. HOUGHTON: I agree.

MR. MILLS: And that $25 billion is based on charging a price of what toll facilities are worth to the customer.

MR. HOUGHTON: What would you say they are today?

MR. MILLS: What are the prices today?

MR. HOUGHTON: $25 billion is at 16 cents.

MR. MILLS: Roughly 16 to 18 cents a mile in peak periods.

MR. HOUGHTON: And what are we at?

MR. MILLS: About 10 to 12.

MR. HOUGHTON: In gross dollars, $25 billion based on 16.

MR. MILLS: $25 billion based on pricing around 16 cents a mile.

MR. HOUGHTON: What does that equate to today, that $25 billion based on 10 cents, given the Wal-Mart price.

MR. MILLS: Given the Wal-Mart price. At 10 cents a mile, what's going to happen is the revenues will come down roughly 60 percent, so you would go from $25- down to $15-, however, there is what we call a price elasticity effect, at a lower price, more people will drive, so at that price you'll attract more customers which rule of thumb says it will go back up another 20. So you would probably be $18-, you'd be south of $20 billion; I'd say you'd be probably north of $15-, south of $20 billion.

MR. WILLIAMSON: Uninflated.

MR. MILLS: Again, uninflated. All based on the presumption that the toll that is set in 2005 remains in effect through the 25 years.

The last set of bold assumptions we made are around the funds that would be available from comprehensive development agreements. I just want to stop here and take a very careful definitional thing. When you sign a comprehensive development agreement that results in a concessionaire giving you a payment, there's five different places a concessionaire can get that payment when they look at sort of their funding and their ability to do the project.

One would be　-- and this happens in other jurisdictions that because they're in the private sector, they can charge a higher toll. That doesn't apply in Texas because in Texas a private sector concessionaire can't apply a higher toll, they're going to charge the same toll as a public sector provide would on the same facility. So that amounts to zero.

The other source on the revenue side from which a private sector concessionaire will draw that payment is they are able to make a more optimistic assumption of what the traffic will be. The traffic and revenue studies which are prepared for bond rating agencies are very conservative, and when a public sector toll authority issues bonds on those, they have to stay with those conservative forecasts, whereas, a private sector firm can take a risk and share some of the benefit of that risk-sharing with you and they can give you some portion of what increased traffic they think they will get.

That portion, and the way we've done this forecast, that's included in the $25 billion because you'll recall the way we forecasted the $25 billion is we said no matter who runs that toll facility, public or private, they're going to charge the same toll and they're going to collect the same amount at the toll booth from whatever traffic shows, never mind what the traffic and revenue study initially projected.

So for example, when you get $1.8- or $2 billion from somebody for a road, they will include in that their expectation of some revenues or some traffic higher than you initially projected in your public sector analysis. In this forecast, that is part of the $25 billion which is already on the board. So when we forecast a further $5 billion of payments from concessionaires, we're forecasting those to come from their cost savings, not from what they think they can do on the revenue side. That's already included in the $25 billion.

So that $5 billion is a product of what they can save by doing design-build and life cycle design and construction through the entire project, and it's what they can save on the financing side by combining private equity and private activity bonds. So when you look at that $5 billion and you think hey, hang on a minute, we've already been given a check for something close to $2 billion on one project, recognize that that $2 billion was part of what's in the $25- and part of what's in the $5-.

Have I thoroughly muddied that one up?

MR. WILLIAMSON: Well, I think as long as we keep remembering it's uninflated, I'm about ready to ask a couple of questions that are either going to make me feel good or make me feel bad, but as long as we recognize they're uninflated, I think we do understand that.

Can I ask you to rest a moment?

MR. MILLS: Absolutely.

MR. WILLIAMSON: Amadeo, where are you? Now, they've made a real good point of saying the $102 billion revenue is not inflated. When we got to $188-, we were arbitrarily increasing the revenue need by looking at the expense side and backing into it. In other words, we got to an $86 billion gap because we said, Here's the revenue side, here's what we think the expense side is, the difference between the two inflated is $86 billion.

MR. SAENZ: No. The $86 billion was in 2004 dollars. The needs were identified in 2004 dollars; the revenues, we brought them back to 2004 dollars and we just subtracted them.

MR. WILLIAMSON: So　-- again, correct me if I'm wrong　-- where we decided that we could only fill the $86 billion gap with basically toll projects, is that $86- comparable to what he says is $30-?

MR. SAENZ: Yes.

MR. WILLIAMSON: Because we're saying we can fill $86 billion in gap with tolls, he's saying no, you can't, you can only fill $30 billion with tolls.

MR. SAENZ: Yes, sir, that's right.

MR. WILLIAMSON: So does that challenge the $86 billion, or does that simply say boys, you haven't gone far enough? Which is it?

MR. SAENZ: I think we haven't gone far enough.

MR. WILLIAMSON: What would you say it was?

MR. MILLS: Well, I can't speak to the other half of the $86 billion because part of it is need and we didn't look at need, but if I start from the premise that all of those need are bona fide and pared to the bone and absolutely needed, then yes, you haven't gone far enough, absolutely.

MR. WILLIAMSON: I'm not sure that's what I wanted to hear　-- it might have been. In other words, we haven't been aggressive enough?

MR. MILLS: That's correct.

MR. WILLIAMSON: Oh, that's exactly what I wanted to hear.

(General laughter.)

MR. WILLIAMSON: Okay, please continue. We've been conservative? I thought I was obnoxious and aggressive, you were rude and abusive. I just don't think we've done enough of what we've been doing, Ted.

MR. MILLS: Well, and the news gets a little worse, because not only are we saying that everything you can do will get you halfway there　-- if I can put it roughly　-- or a third of the way there, you have this other problem, and that is that the traditional base, the field you're trying to run on, the traditional base is slipping sand. Because what we're identifying is that maybe $15 billion of the traditional state and revenue sources that you thought would be there behind you as you tried to get across that $86 billion, that's starting to erode away.

MR. HOUGHTON: For my simple mind, I've got to put this in a snapshot in time. Amadeo or somebody, what was our revenue increase from this biennium to the last biennium　-- I mean in traditional revenue, federal receipts, state receipts. Is Bass here?

MR. SIMMONS: I think that what we saw, Commissioner Houghton, was about a 3 percent increase over the last biennium.

MR. HOUGHTON: Three percent in traditional revenue sources.

MR. SIMMONS: Total.

MR. HOUGHTON: Right, total revenue. Now, my next question is with the state growing the way we are growing, supposed to go to 50 million, 40 million, whatever the demographers are talking about, do you factor that in as to receipts?

MR. MILLS: Absolutely.

MR. HOUGHTON: Flattening out?

MR. MILLS: Yes. So we include in that population growth in which you are very close to 3 percent over the time period, whereas the United States generally is about 1.7, less than 2 percent over the same period of time, so yes, your population is growing faster. However, we have also factored into that as it grows, the population of Texas will also get a little older and older people drive a little less, but more significantly, they will drive more fuel-efficient cars.

MR. HOUGHTON: That's a big shift, though, when you're talking about the amount of growth this state is going to experience. I can't remember all these things swimming up here. My point is that who has said to me the ratio of people to cars in the state of Texas is what? Who knows that? Brett, what's the ratio of cars to people in the state of Texas, registered vehicles?

MR. WILLIAMSON: Historically it's eight to ten, for every ten persons, eight vehicles are registered.

MR. SIMMONS: I think we have about 19 million registered vehicles, and that includes trailers and stuff.

MR. HOUGHTON: And I'm probably getting too specific with my calculation, but I'm just having a hard time understanding the revenue sources dropping off that much over time with the population and the shift to these types of vehicles.

MR. MILLS: If I can put it in those percentage terms, what our forecast is saying is that historically you've had a growth of roughly 3 percent year over year, that's a little better than you've usually done　-- historically, it's closer to 2 percent over many years　-- we're forecasting by the time you get to the end of this period, that year over year growth rate will be below 2 percent in the revenues, it will be 1.8 percent. And that will be because even though the population is growing at close to 3, they're going to be driving those 19 million vehicles will become 30 million vehicles, but as those new vehicles are added to the fleet, they will be more fuel-efficient vehicles.

MR. WILLIAMSON: If you'll remember, one of the big arguments we had　-- not arguments　-- one of the sticking points, rough spots with Michael Stevens's reporting to the commission a year ago was that it was predicated upon TTI's assumption that the vehicle fleet wouldn't become more fuel efficient which we found to be appallingly in error.

MR. HOUGHTON: But that's why I wanted to focus on that. That is a significant shift; I don't think people realize how big of a shift that is to those types of vehicles.

MR. MILLS: And because what we're doing here is taking that sort of risk approach to audit, what we're seeing is that it is a significant risk. Like there is a significant risk to your traditional revenue streams that come in the form of increasing fuel efficiency　-- which from a public policy point of view is probably a good thing　-- and from a huge federal deficit. Those are significant risks.

MR. HOLMES: Did you actually use specific numbers on the fuel efficiency increase?

MR. MILLS: Yes. We used the forecasts that are put out by the U.S. Energy Information Administration. They do a forecast nationwide of how new engines will be developed and introduced into the vehicle fleet and the rate at which old vehicles will be scrapped, and we adjusted that then for the difference between the Texas vehicle fleet and the national vehicle fleet.

MR. HOLMES: Can you give me just guidelines as to what you assume it is now and what you assume it becomes over this time period?

MR. MILLS: I don't want to try to drag the numbers out of my head because I'll invariably get them wrong, but the story of the numbers basically is that all through the 1980s there, of course, was a significant improvement in the fuel efficiency of engines, then what happened is that the fuel efficiency in engines was then counteracted by a desire for more horsepower, so there was, in fact, over the last 15 years a tradeoff in the vehicle fleet between increased horsepower and decreased fuel consumption per horsepower.

The U.S. Energy Administration's prediction says that's going to come to an end, that people will no longer continue to demand more and more horsepower, that people have pretty much peaked out in terms of the horsepower they need in their vehicles or want in their vehicles, and therefore, any future technological developments to increase fuel efficiency will start to drive miles per gallon back down again.

So that's without recalling the numbers which I'm sorry I just can't do out of my head.

MR. HOUGHTON: But consumption is down on miles per gallon.

MR. HOLMES: It won't drive miles per gallon down, it will drive the consumption down.

MR. MILLS: Yes. I'm sorry, I'm thinking of liters per 100 kilometers. But yes, miles per gallon would go up.

MR. HOUGHTON: You mean we're not going to drive Hummers anymore?

MR. WILLIAMSON: No, we are going to drive Hummers, what he's saying is　--

MR. MILLS: What General Motors will do is they'll try to put more fuel-efficient engines in the Hummers to develop the same horsepower a Hummer has now.

MR. WILLIAMSON: But he also is saying that right now their projections are the need for the Hummer times two, the market is not going to develop a demand for Hummer times two, that the demand for increased horsepower is peaking, and we actually already see that, I think.

MR. MILLS: Yes, so that basically the Hummer is as much horsepower as anyone is ever going to want.

MR. WILLIAMSON: The grade of the hill hasn't changed, and as congestion gets worse, the need for 500 horses under the hood becomes less and less because you can't go any faster, the guys in front of you won't get out of your way.

Other members may have other questions, but what strikes me in looking at this last slide is that I can conclude from your projection that we're going to have to look to toll regimes of some kind for approximately 35 percent of our revenue in the future.

MR. MILLS: Certainly more than the 25 percent that's indicated here.

MR. WILLIAMSON: And $86 billion in our gap is going to be filled by our toll program. We projected $188 billion toll revenue of which $86 billion would be filled by our toll program. Who's got a calculator? What's 86 over 188? I want to see how close we were. All of you engineers ought to have one of those slide rules hanging around your neck.

(General laughter.)

MR. WILLIAMSON: So we projected 46, our auditors are saying 35. I don't feel too bad about that. I feel real bad about people who spoke out of ignorance over the last six months.

Members, anything else for this man's presentation? Continue, please.

MR. MILLS: So faced with that sort of forecast, these are the recommendations which we put in front of you with respect to how the basic funding model　-- which we believe to be fundamentally sound　-- how that could be altered and somewhat improved. We think in the long run that you should be trying to replace, as many states are looking at now, the motor fuel tax with a vehicle miles traveled charge. Because the technology for that has to be installed onboard on vehicles, it's probably 20 years to get that done. Texas is part of the development effort and should continue to be so.

We've also recommended some measures you should be taking while that 20 years is going by. One thing we observe, of course, is that tolling is not an effective tool for raising revenues in rural areas, it's predicated on high volumes, it's predicated on congestion, it's also predicated on the economic benefit of the highway being captured by the many thousands of people that drive on it every day. In rural settings the principal economic beneficiary of a highway is not the people that are driving on it　-- which is a low number　-- but usually the owners of land that is developed around. So we're suggesting that TxDOT should be looking at tools which are able to raise revenues from rural facilities which are capturing the economic benefit which is accrued to landowners.

The other thing　-- which we've already discussed at some length　-- is toll authorities currently in the state tend to price on a cost recovery basis. The political incentives under which they're governed are such that basically their customers are happier and their voters are happier when those tolls are as low as possible, and their incentives are, of course, to cover their costs and keep their tolls down. So our recommendation is that they be encouraged to price on the basis of demand, and we've made some recommendations about tools with which you might be able to help encourage them.

And at this point, being very mindful of the time, I think I'd better turn things back to Bill, who will talk about the programming process.

MR. WILLIAMSON: Well, wait a second. Any more questions of this presenter at this time?

(No response.)

MR. WILLIAMSON: Thank you very much.

MR. DYE: Peter will be back so you can grill him more in a few minutes.

This audit area involved an assessment of the processes, methods and procedures used to program funds. We evaluated TxDOT against four broad industry standards for best practices for programming project selection:

First, is there an outcome or performance-based approach, that is, are resources allocated and projects programmed in alignment with TxDOT goals and objectives. And in this case we looked at the five Strategic Plan goals that you've established.

Secondly, do the methods and procedures used to select and prioritize a project reflect industry practices and technically sound approaches.

Third, is the process transparent and replicable and is it understandable.

And fourth, does the process provide metrics for the effective communication with the public and stakeholders regarding the outcomes, and does it chart Texas's progress in managing for results.

This slide highlights our findings. First of all, TxDOT has made changes in your UTP structure, your Unified Transportation Program structure, to better align your categories with goals. Funds are allocated to categories through a goal-based approach, so that's very positive.

Secondly, the procedures and methods for allocation are transparent. For example, they're published on the website and they're quite institutionalized. For example, statute makes reference to these mechanisms and distribution formula when specifying that districts and regions are to be held harmless in their UTP allocation for implementing toll projects. So it is a very understandable process.

Then thirdly, TxDOT is currently continuing to strengthen metrics so the project selection can better align with Strategic Plan goals. For example, work is underway so that if two projects have equally beneficial outcomes in terms of mobility and air quality improvements, then the project with the biggest safety benefits would be the one selected.

And then fourth, for many UTP categories, decision-making is decentralized now with new projects entering the UTP from the regional level. MPOs, as you know, have been empowered to select projects and work with TxDOT districts and local toll authorities in putting forth these projects.

So in brief, in this area the findings are very positive with respect to at least the first three criteria that I mentioned. Where we do see opportunity for improvement is that there is no reporting of the actual outcomes in terms of the proposed improved level of performance of the system and what we would expect to see from the implementation of the UTP or MPO plans, and we'd like to see greater measurement of that.

To that end, recommendations are for TxDOT to improve accountability and communicate the level of performance, that is, the outcome expected from the UTP which is, in essence, your capital plan for the next ten years.

Similarly, we recommend that the largest MPOs, that is, the Texas transportation management areas, TMAs, be required to report the level of performance from the implementation of their system plans against the TxDOT Strategic Plan goals. This could be similar to the accountability report that the North Central Texas COG now has posted on its website.

And then finally, as TxDOT updates the Strategic Plan, further work can be done to better align the UTP and the goals in the plan into an outcome-based framework.

Questions about that?

MR. UNDERWOOD: Quick question. If I understand correctly, to report the level of performance　-- I hope I'm saying this right　-- bottom line is do they have the computers to be able to do that? Are you talking about doing that through computers, are you talking about doing that through reports? How are you going to coordinate all of that?

MR. DYE: Well, the main issue is to define measurable goals and to quantify where they're trying to go. You've established some very clear goals in your Strategic Plan and we'd like to see some estimates of what measurable impact those goals will have.

MR. UNDERWOOD: How are you going to receive those estimates is the question I guess I'm trying to say.

MR. DYE: Well, there are a variety of ways of doing the estimates. Some of them require transportation modeling to come up with the estimates, in the case of your mobility estimates, your congestion estimates and so forth, so there are various tools available to do those. In the end, though, it does require defining what those measures are which is really where you're headed with the UTP itself for your own program, but we'd like to see the MPOs report in a likewise manner.

MR. HOUGHTON: So a political decision versus a business decision.

MR. DYE: Yes. In the end, no one will take the politics out, but we'd like for you to have better data on what you might accomplish.

MR. HOUGHTON: To build or not to build, to build a toll road, or to put rubber tire or commuter rail, that kind of analysis is what you're talking about.

MR. DYE: Exactly.

MR. WILLIAMSON: Whoa. I'm trying to form my questions correctly. So the Strategic Plan that we put in place at the top has very clear goals that it should be easy for the department and then the regions and then local government to report against, and your recommendation is we need to strengthen how that happens.

MR. DYE: Yes. In some cases it's not easy to report the measures, though. That does take work and where those measures have not been developed, Commissioner Williamson, they're going to have to be developed.

MR. WILLIAMSON: So if I could give an example, when we do our apportionment to the metro and urban areas of projected state aid　-- as opposed to toll aid, state tax aid, without telling CAMPO how to do something, we should say whatever decisions you make, we need some sort of measure. You've either got to reduce congestion or improve safety or improve air quality or attract jobs to the area or preserve the value of our state system, be sure and tell us how that happens with your decisions.

MR. DYE: That's correct.

MR. WILLIAMSON: And by inference, your decisions, if you have a dollar that you can spend on reducing congestion on 1 percent or 3 percent and you choose to do it on the 1 percent deal, why did you do that, why did you not choose the 3 percent deal.

MR. DYE: That's correct.

MR. HOUGHTON: That also ties into, Ric, the financing mechanism with it. I mean, it's just not a separate decision.

MR. DYE: Correct.

MR. WILLIAMSON: And by that do you mean there may be a toll project that will only reduce congestion 1 percent but the project that would reduce congestion 3 percent might not be tollable. Is that what you're getting at?

MR. HOUGHTON: And vice versa.

MR. WILLIAMSON: Maybe I shouldn't ask you this question, maybe I should ask it of Steve. Isn't that, in effect, what we did with the Mobility Plan, Steve, when we told the areas: Here's your mobility money but tell us how you'll use it, tell us how you'll leverage it?

MR. SIMMONS: Yes, and also if you'll remember, we also brought in the TCI, the Texas Congestion Index, as one measure that we would make sure that they're using the money since we've given them the authority to.

MR. HOUGHTON: That's the political decision versus the business decision. If I've got a project over here that's toll viable to 10 or 15 percent and I've got one over here that's 50 percent, where does the oversight come to wring out at this level the political decision? Those things do happen. I mean, we see the path of least resistance: Okay, I built this 10 or 15 percent viable project, I get access to the mobility funds, when in fact it did not hit the TCI, did not hit my measures, but because we say local control, you got it. That's the oversight as to the UTP plan. Where is the oversight when it comes to that, or do we have that kind of oversight?

MR. DYE: Well, this is to give you better tools to do oversight with, to tell you what you're actually accomplishing.

MR. HOUGHTON: Bang for the buck.

MR. DYE: In business it's the return on investment.

MR. HOUGHTON: Bang for the buck.

MR. DYE: Exactly.

MR. WILLIAMSON: But as our auditor　-- and maybe I don't understand the bullet points; like I said, I haven't read this until this morning　-- in slide 10 the first bullet point: UTP resource allocation dollars to categories is goal-based. The UTP is actually　-- I'm going to have about 29 engineers, that I know of, throw something at me when I say this　-- the UTP is really not a planning document, it is a project-scheduling document. Isn't that correct, Steve?

MR. SIMMONS: Yes, sir.

MR. WILLIAMSON: The planning document is the Strategic Plan and how it relates to the region's decisions to advance something to the UTP. The UTP itself is nothing more than a project process. Or is it not?

MR. SIMMONS: It is the project-scheduling based upon the MPOs planning.

MR. HOUGHTON: Where's the backup on that UTP? Where's the oversight to the UTP?

MR. SIMMONS: It's the MPO.

MR. HOUGHTON: Business versus political, where is the analysis piece of it that he's talking about?

MR. WILLIAMSON: I think maybe he's saying that's what we've got to strengthen.

MR. DYE: That's correct. And I think if you want to see a good example, it's the North Central Texas Council of Governments. They do a really kind of results report and talk about what they've accomplished, they try to put this in measurable terms, and that's really what we're talking about. And we're not trying to take away authorities of the regions, we're just trying to provide you better information.

MR. HOUGHTON: There has to be some oversight.

MR. DYE: That's correct, and you have to have good data to tell you what you're accomplishing, and that's really what we're talking about.

MR. WILLIAMSON: I didn't ask the previous presenter; I need to ask you and I'll ask him when he comes back up. Are you comfortable with the cooperation of the agency in doing your work? Did the employees of the agency work with you as they should have?

MR. DYE: Yes, absolutely. We've had excellent cooperation.

MR. WILLIAMSON: Anything else at this point, members?

(No response.)

MR. WILLIAMSON: Thank you.

MR. MILLS: For the record, I'm Peter Mills, returning to the podium, and I'm going to take you on to the next slide which discusses the application of debt to funding projects in Texas, highway projects in Texas.

In the first bullet there, debt is no substitute for revenue. We put that there for any of those of you who do not have teenage children and do not then know the futility of trying to meet demands with debt. And starting from that skeptical position that using debt as a substitute for revenue in meeting needs in the long run is ill-conceived, we have found that in Texas the application of debt is rather good, specifically even more so at the state level perhaps than the local level.

Again, these numbers are a little bit dated, but if you look at the red and pink bars at the top which represent the debt incurred by the state government and state toll authorities　-- that includes the NTTA for funny reporting reasons　-- a large proportion of state-level debt in Texas is applied to toll-generating projects which, by definition, generate a benefit in the form of tolls and revenues which exceeds the cost of the debt. So Texas, we find is well placed and relatively well placed to other states in their use of debt.

Our observations with respect to debt is that TxDOT is doing the right thing in pursuing private sector financing through comprehensive development agreements as an alternative to toll revenue debt issued by municipal or state level public toll authorities. It is less expensive when public activity bonds can be brought to bear, and our belief is TxDOT should continue to do that.

The third point we'd like to make with respect to debt is around the issuance of debt, toll-backed debt by RMAs. What we've said here　-- and I should be a little more careful than I've been in the slide in differentiating this　-- whenever a toll project is financed with a high degree of debt, with a high proportion of debt and a low proportion of equity　-- in other words, it's highly levered or highly geared　-- there is, of course, a higher level of risk to the bondholders that the project will fail and they will not be able to clip their coupons. As a result, projects that carry a relatively high proportion of debt carry a higher debt cost, both in terms of the rating that the bonds receive and in terms of the insurance that the agency issuing the bond may have to issue.

So our observation that a highly geared or highly levered toll project has relatively expensive debt would apply not just to an RMA but to any another state or local level of toll authority that's issuing such debt, but our concern here is that the RMAs, coming out of the gate as they are, have very little equity, they don't have the equity available to them to put alongside bond debt when they kick off their first toll project, and therefore, that makes their debt very expensive, and therefore, if they were able to attract an equity shareholder to invest along with them in that toll facility, they would lower the cost of debt and therefore the cost of that toll facility.

MR. HOUGHTON: Are you saying an equity shareholder like in the private sector, private equity?

MR. MILLS: Or could be public equity.

MR. HOUGHTON: Here's that decision again, political versus business.

MR. MILLS: No. In this particular instance it would be government making a business decision.

MR. HOUGHTON: A political decision not to bring in the private sector, run away from it, or a business decision to say how do we narrow that debt with equity.

MR. MILLS: What the RMAs are missing is the third way or the third option. Right now they're caught between we either have to do a CDA and bring in private sector financing, or we have to issue a bond that's going to cover 80 percent of this project's cost and scrabble together the other 20 percent, if that.

MR. HOUGHTON: Or cut the project back.

MR. MILLS: Or cut the project back. And what we're seeing is that if there was a state entity　-- and I use that term loosely　-- a public corporation or an investment authority that the state had　--

MR. HOUGHTON: Have you been talking to this guy, Ric?

MR. WILLIAMSON: No, I haven't, I swear I haven't, not at all.

MR. HOUGHTON: I know.

MR. MILLS: I've actually probably been speaking more to people in jurisdictions outside the United States which do this quite frequently and where they form basically call it a public corporation　-- that's probably the best way to describe it.

MR. HOUGHTON: Like equity from the Teachers Retirement System and Employee Retirement System?

MR. MILLS: Well, I don't know if you'd even have to tread into that. TxDOT itself, in the Texas Mobility Fund, has the ability to raise debt to capitalize these sorts of things. But the important issue here　-- and I don't want to get prescriptive as to where the money comes from or how such an entity is structured　-- it's public equity in the sense that the state is investing money into that project without a guaranteed return as a bondholder would have.

But what they are getting, of course, is they're getting, first of all, a vehicle by which if there are surplus revenues on that project, as a shareholder they will be earned and they will be earned according to well-defined rules that come out of the private sector. They will also, as a shareholder, have some voice in setting what the tolls will be on that facility which takes us back to our previous point about having the means to encourage local toll authorities to do some demand management and peak pricing.

This next slide, we covered some of this in our first discussion so I'll do this very briefly.

MR. WILLIAMSON: I don't want to leave that too fast because that sort of strikes to the heart of another of the donnybrooks we find ourselves in. It is assumptive in the world that a 100 percent financed government-owned asset surely can generate more cash flow than a 50 percent private sector financed asset for the citizens of the state.

We took the position, Ned and Fred, before you got here, and when Mr. Nichols was on this side of the table, that the latter was preferable to the former because ultimately the cost of debt to the public monopoly would be more than the public monopoly wishes to discuss because the debt source is still going to be, in the end, my 401(k) and I'm not going to invest my 401(k) and take a risk without being paid a premium for that risk. We have so far been unsuccessful, the five of us, in persuading a lot of the state that that's the case, but your observation is that is precisely the case.

MR. MILLS: Our observation is　-- and I'll just make sure that I'm getting this in terms that work for you　-- is that the two choices faced now of a private sector financing where you combine private sector equity with a private activity bond, that is a lesser cost, and therefore, a better cash flow than a publicly financed facility. So that's where we start.

We then turn to the publicly financed facility and say even though it would still cost more than the private sector alternative, it would cost a little less if you were able to combine in it public debt and public equity.

MR. WILLIAMSON: And public equity could occur as an apportionment of our gas tax revenue if we had excess gas tax revenue　-- which we don't.

MR. MILLS: We haven't addressed what the source of funds would be.

MR. HOUGHTON: It's just public equity.

MR. WILLIAMSON: Or it could be the Teacher Retirement System.

MR. HOUGHTON: Or the General Land Office.

MR. WILLIAMSON: As you have so aggressively advocated for.

MR. MILLS: It could be those funds, and I guess I point to the example of private pension funds which historically were the source of funds for private sector investments in highways. They find that kind of long-term investment in people like Cintra and McCreary very attractive. So it would make sense that a public pension fund would find those sorts of long-term equity investments in a public asset equally attractive. But again, we do not want to be too prescriptive.

MR. WILLIAMSON: And if I could look for an appropriate example of the third category you touched on which is the public monopoly with some public equity in it, it would be fair then to observe that NTTA, in its negotiation with the regional MPO, is sort of doing that when it says we will match and exceed the private sector proposal and the way we'll finance that is we'll use the equity we have built up in our existing system.

MR. MILLS: Exactly. They, in fact, are doing exactly that, they are using public equity to lower the proportion of debt applied to the project and lower its cost.

MR. WILLIAMSON: In order to make that particular project's costs fall into line.

MR. MILLS: That's right. And because they can't effectively do what the private sector can do with the private activity bond　-- which is capture tax credits for depreciation　-- they won't get all the way there but they'll get closer.

MR. WILLIAMSON: Because in the end, NTTA, unlike HCTRA, is an extension of the state, is it fair to say then that the probable risk to the state is that if the project　-- in this case, State Highway 121　-- doesn't meet its projected revenue goals as its own project, that equity will be fully realized by raising the tolls on the entire system to pay for the difference between the project's revenue projections and reality?

MR. MILLS: That would, I guess, depend on the shareholder interest that that public entity has in the rest of the system.

MR. WILLIAMSON: Well, I'm sorry, they would do one of two things: they would either markedly raise the project's tolls or less markedly raise the tolls on their entire system.

MR. MILLS: That's correct. Certainly, as a shareholder, you now have a voice in determining what those tolls will be.

And one thing before we leave that, you've used the term, Commissioner, public monopoly. It wouldn't have to be a monopoly, there's no reason why there couldn't be more than one or why they couldn't compete with each other. So no, it merely needs to be a public entity, basically, which is owned by the people of Texas and it has capital available to make equity investments in toll projects in Texas.

MR. WILLIAMSON: Well, I think most of this commission is four-square in the corner competition but we haven't convinced some of our regional monopolies that that's the best way, but we'll keep working on it.

MR. MILLS: This next slide which I'm putting in front of you speaks to the question of toll rates　-- and Commissioners Houghton and Holmes, this takes us back to our example of 10 cents, 16 cents, 18 cents　-- and what this slide shows you is some data which we collected out of toll systems in the North Central Texas area. And I will just stop here because I think we pretty much already described this and where this information came from, and in the interest of time, I'll just make it part of the record.

I'll move on to our recommendations with respect to debt and project funding. We see this sort of equity investment as the solution to a couple of different problems. One, of course, is providing some effective means by which the state can encourage local authorities to price on what their product is worth rather than what it costs, and practice some demand management as well. We also see it as a means by which projects can still be done as public projects rather than CDAs, and albeit more expensive than a CDA, the gap would be narrowed by being able to invest public equity into the project. So that's really the basis for these recommendations that we're putting before you in this area.

The other one I would mention　is -- and it's something of a paradox　-- as we make potential toll facilities more and more valuable, we create a bit of a problem for our cousins in transit. Transit authorities are funded very differently in terms of their capital. They receive big bond issues to undertake specific projects and then they receive grants to fund their operating expenses, so when they're invited to the table to become part of the deal-making process for funding　-- and I'll just pull an example out of the air　-- the Katy Freeway and the inclusion of transit facilities in the Katy Freeway, they're not very well equipped and their heads aren't quite in the game as yet, but they're not well equipped from their funding standpoint to fund contributions to those projects to own a piece of them, to integrate their projects into them and become sort of one of the players in the funding of one of those projects.

And it's just something we've asked, we've made a recommendation here that if that ever does become a problem, that's perhaps a direction in which some equity can be invested to make sure that they are properly integrated into those things.

MR. WILLIAMSON: Ned.

MR. HOLMES: I need you to expand on that thought a little bit and explain that a little bit.

MR. MILLS: Well, here's an example. At the planning stage　-- and this works well at the planning stage　-- a toll corridor will be planned and the MPO will determine that there should be a transit element in it, and that might be some right of way reserved for light rail or it might be a dedicated busway or it might be a HOT lane, a high occupancy toll lane.

So now as let's say an RMA, a local toll authority, TxDOT start trying to put together the funding for the project and now we're at the point where the city owns the right of way so how much are they going to get for the right of way, and who's going to build those connectors and who's going to build those enhancements, and where are they going to get funded. Now the question comes up: Well, how are we going to fund the transit components. So in other words, here's a lane which if we just made it tollway, if that was a lane in a tollway, it could raise a million dollars a year　-- that's a number I'm pulling out of the air.

So now I turn to the transit authority and say, Well, that lane which you want me to turn into a dedicated bus lane, it has a toll value of a million dollars a year, and therefore, you should pay me a million dollars a year to make that a dedicated bus lane. And the transit authority looks back at you blankly because they just aren't accustomed to dealing with that sort of pricing of access to right of way. So it puts transportation planning and funding in a bit of a conundrum because on the one hand good planning might dictate that the best use of that lane is as a transit facility, and yet, in terms of your revenue goals and toll generation, you're giving up a million dollars a year.

So the logical argument is to say, Transit Authority, you should pay us a million dollars a year to get access to that authority. And that kind of pressure on deal-making is happening out there in the field, it's happening in Houston, starting to happen a bit in Fort Worth and Dallas, and the transit agencies aren't well equipped to deal with that. Their funding structure makes it a little hard for them to come up with well, okay, we'll pay you a million dollars a year for access rights to that lane of highway.

MR. WILLIAMSON: So are you suggesting　-- and maybe you're not　-- can I infer from your observation that the transit authorities should have an economic interest in the toll collections?

MR. MILLS: I'm inferring one of two things: I'm inferring either that we be open to the possibility that transit will come along and say, Okay, we'll give you the million dollars a year but we want that treated as an equity investment and we want to be a shareholder in this thing; or that if the transit authority is simply unable to do that, that you may have to come along, that TxDOT may have to come along and say, Okay, we will own that lane and we will decide to forego the tolls and put transit on it.

MS. ANDRADE: So are you encouraging it or discouraging it?

MR. MILLS: We are putting it forward as a last resort.

MS. ANDRADE: That sounds kind of sad for public transit.

MR. MILLS: It would be sad if public transit was excluded from a toll facility simply because they couldn't meet that offset price, and this is putting a means in place that as TxDOT if you find that the funding structure of a particular toll facility is going that way where transit simply is getting forced out of the game by the high revenue potential that that tollway has, then yes, this provides you with the means to step in and say, All right, we will own that lane, we will be the equity investor, we will own that lane, and we will decide to forego the revenue and put transit in it.

MR. WILLIAMSON: I don't think what he's saying is bad, I think what he's saying is current practice is transit is being pushed to the side.

MR. MILLS: There's a risk that transit might get pushed to the side.

MS. ANDRADE: So we just need to do a better job in encouraging them to be a partner but helping them understand what it's going to take to be a partner.

MR. MILLS: Yes. Certainly our discussions with transit people suggested that they haven't fully got their heads around all of this yet, and so for example, when TxDOT officials talk to them about well, okay, we think we're going to make some surplus revenue here and you have to be prepared to make some contribution towards that surplus revenue on a toll project, to transit people that's a whole new language.

MS. ANDRADE: I also think we haven't done as well of a job in bringing them as one of our partners.

MR. MILLS: And all we're proposing here is that there is a risk in the development of a toll project　-- I don't think we've seen it happen yet, but there is a risk in the mechanisms, the way they're set up right now, that a transit element which was identified at the planning level as a good thing might get forced out just because they can't participate in the funding of it. So we're just saying as a last resort, you may have to step in and solve that problem.

MS. ANDRADE: All right. Thank you.

MR. HOLMES: Doesn't the tension come from the fundamental economic differences between transit and toll roads?

MR. MILLS: Actually the economics are not far different in that the transit authority will collect a toll, if they run a light rail or a dedicated busway, they'll collect a toll, they will generate revenues, they will capture a benefit, so the economics of it works. What doesn't work quite so well is the financing because the way transit authorities are financed is they get an operating grant from the federal government to cover ongoing operating costs, so basically a subsidy of their fuel and labor which is a big bill. And then when they have to acquire capital, they go out and do a single big bond issue or a single big raising of capital, they don't have the sort of pools of capital funds available to participate in projects like this that say a highway agency does.

MR. HOLMES: I'm not sure I agree that the economics are the same. You know, there are obviously toll roads that are not fully toll-viable that require some toll equity, but there are also some toll roads that are very toll-viable and will produce additional value which is where the CDA process comes in. I have not yet seen a transit project that recovery through the fare box even covers its operating costs, much less capital costs, much less provides additional funding. So I don't agree that the economics are fundamentally the same.

MR. WILLIAMSON: But Ned, you're comparing transit to　-- this is great, we've been having this discussion for seven years now　-- you're comparing transit to a toll road, compare it to a tax road instead which is still 90 percent of the roads we operate in the state.

MR. HOLMES: And the tax road is paid by the users through the gas tax.

MR. WILLIAMSON: Well, right now it's not.

MR. HOLMES: And the transit is paid by sales tax on general sales, not on a specific use.

MR. WILLIAMSON: I agree that the source of revenue for transit is not good, there's not a direct relationship between the use of the funds and the source of the funds, but forgetting the source for a moment and just looking at dollars in and dollars out, the same subsidy is occurring on tax roads. You and I are being subsidized by our children's taxes on the tax roads we drive on today, and taxes we pay don't near cover the cost of original construction and maintenance and rehabilitation of those roads. We're just shoving it onto the next generation, and in actuality　-- I started to ask you about this and decided that I was being too aggressive or obnoxious, whichever applies　--

MR. MILLS: No such thing.

MR. WILLIAMSON: 　-- isn't it the fact that the subsidy that my father paid for me, that bill is now coming due from me? That is, in reality, the problem that transportation faces.

MR. MILLS: That's the fundamental tenet of a pay-as-you-go system.

MR. WILLIAMSON: It started in about 1976 when the age of the Federal Highway System started to matter, and my father paid one-third of the gas tax he should have been paying, and I am now beginning to subsidize his consumption of that road, and I am consuming the roads that I expect my children to pay for in just a few more years.

Now, the same thing that happens between tax highways happens between transit users, exact same thing happens: we're all being subsidized.

MR. HOLMES: Well, I think the general rule is correct, but I think it's across all levels of government that we are passing on the cost of all levels of government to our children and grandchildren, it's not just transit and highways. I think it's a more dramatic difference between transit and highways than it is in other areas.

MR. MILLS: And transit is deliberately subsidized for a specific public policy reason. The public policy objective is that we will underprice transit from the perspective of the user in the hopes that more people will use it, and that's the demand management thing. Right? We'll try to alter people's behavior. Which takes us back on the toll side we'd say, Well, we will charge more than it cost to build this toll road in the hopes that less people will use it　-- as a conundrum as that sounds, but basically that's demand management.

MR. WILLIAMSON: Well, it's not conundrum-sounding to us because we buy into that. I think all of us on this panel　-- forget for a moment that we're trying to make transit work from just a business perspective　-- all five of us are self-employed, we understand the notion that you ought to charge what something is worth, people ought to pay what it's worth to them. But it seems to me that we can never include transit into this discussion as long as they're getting the subsidy, as long as their source of revenue is not directly related to transportation to begin with, a sales tax as opposed to a gasoline tax or as opposed to a share of the toll collections or a share of the concession fees.

Because what's always struck me about urban transit in particular　-- and I assume your observations take this into account　-- no one ever asks the question: How much cleaner is the air because a thousand people take a subsidized electric train? It's got to be cleaner and there's got to be a value associated with it but no one ever seems to want to calculate that.

MR. MILLS: And to link this back to the outcome measures that my colleague, Bill, just spoke of, that takes us to the decision-making at the UTP or the project level where yes, you weigh different projects and you look and see what each alternative will provide you in terms of contributions towards your five goals: safety, mobility　--

MR. WILLIAMSON: How many accidents do you have as a result of 800 fewer cars being on the road?

MR. MILLS: Yes, exactly. And the politics of it works out such that in a small urban community or small rural community, they would logically put a lower relative weight on air quality, perhaps, than they would on safety. So yes, we'd expect them to be less likely to pursue a project, a transit project which had a big air quality component.

So with that, we should perhaps move on with our section with respect to management capacity, Section C, and I will turn it over once again to my colleague, Bill Dye.

MR. DYE: For the record, I'm Bill Dye again, Dye Management Group.

MR. WILLIAMSON: One other question about slide 14, Bill. I'm sorry.

MR. DYE: That's okay.

MR. WILLIAMSON: This is, again, my first time to look at it so I'm having to kind of think through. No, I want to wait for a moment, I want to form that question better. Thanks.

MR. DYE: I'm still Bill Dye.

This audit area addresses the organizational development required for TxDOT to manage and execute the work required to exercise its responsibilities for the new finance mechanisms. As you know, this represents a major new business line for TxDOT and requires development of the organization and tools to address it. The work required and the competencies are quite different to those required for the traditional funding mechanisms.

The audit finds that TxDOT has a workforce plan which has identified and correctly defined the challenges that TxDOT faces as an agency in recruiting, retaining employees and in succession planning, however, there is no department-wide action plan to address these issues. For the competencies required for these new finance mechanisms, the issues are even more acute, as TxDOT does not have established procedures and tools for recruiting and retaining the required particular competencies in this area.

To date, TxDOT has been able to cover the volume of work through reassignment of resources, however, they are stressed. The audit finds that the current organizational capacity is not scalable as you continue to add more work in this area. More staff with the required competencies will be needed. Corrective work also is needed to address compensation, recruiting, career development and retention issues for the competencies needed for the financing mechanisms. Again, if we're talking about at least 25 percent of your revenues being from these new sources, again, you can see the corresponding workload will be growing substantially.

Regarding the tools, we find that TxDOT's cash management tools address the use of debt and new revenue sources, and those are working quite well.

In terms of our recommendations, they really have to do with the management capacity side. We recommend that TxDOT, as a matter of priority, establish an action plan to address the changed management required from the new procedures for recruiting, retaining and career-pathing. The recommendations include requirements for increased staffing and compensation for the required competencies.

Any questions?

MR. WILLIAMSON: Members?

MR. HOUGHTON: Did you look at like industry as to when you talk about competencies and recruitment, a like industry in the private sector versus us versus compensation scale on the differential in that compensation scale?

MR. DYE: I know that we looked at like businesses, the compensation scales in other authorities that perform the same sort of functions.

MR. HOUGHTON: I think our competition is the private sector on retention and recruitment of those new competencies you're talking about.

MR. DYE: It is, and I know there were comparisons, I don't know whether they were strictly industry. I know that we did look at, for example, with engineering firms and other firms that have competencies like this, I know we did look at their scales.

MR. HOUGHTON: We have compensation-benefits are totally loaded, what is the differential between the public sector/private sector attracting those competencies?

MR. DYE: Well, again, I know we did some comparisons and I'd have to get back with you on more details about that.

MR. HOUGHTON: Because that, in my opinion, is where the issue lies.

MR. DYE: It's a tough market out there, as you probably know, for professionals at all levels, and this is a more specialized area. Obviously it's challenging even in the engineering areas where you're having a tough time just meeting the private sector competency levels, but these require the combination between engineering and finance and more what a master's in business administration candidate would have, so it's even a more specialized area.

But I'll get back to you specifically, Commissioner Houghton, with some more detail on that.

Other questions on that?

MR. WILLIAMSON: We may come back to it.

MR. MILLS: For the record, I'm Peter Mills, returned to the podium to deal with the last of our audit questions, and that is the controls and accountability around the regional mobility authorities, and I'll spend very little time on this for two reasons. First of all, so as not to exhaust you, but secondly, because in the order of magnitude of the problems and challenges we've been facing today, there really isn't much here. The RMAs are well conceived, they've been well founded, they're well run.

We have put some recommendations in front of you with respect to not so much trying to control them but to merely know what they're up to. So I would characterize the recommendations we've given here as more of you keeping a light touch and a finger on the pulse of what the RMAs are doing rather than trying to exert a heavy-handed control over telling them what to do.

And we make that recommendation from the very simple premise that they are local authorities, they are locally governed and locally controlled, however, the commission has a legitimate and significant in their success. You want them to succeed and therefore, it's just prudent for you to have a finger on the pulse of what they're doing and how they're doing.

MR. WILLIAMSON: And perhaps more so in the early years and less so as time goes on.

MR. MILLS: Yes, as comfort levels build and such. We're just starting from the place that given that these are early days and this is a bold institutional change in Texas, yes, we want to discourage a failure, that's all. Our recommendations here are more on you just keeping a finger on the pulse of what they're doing.

MR. WILLIAMSON: I want to ask you a significant question because how you find on this may influence how the legislature reacts to changes that we're making internally. To what extent should the geographic boundary lines　-- and if you're not prepared to comment on this now, this is an add-on that I'm requesting　-- what extent should the geographic boundary lines of a multi-county toll authority, whether it's an NTTA type thing or an RMA, to what extent should those mirror the MPO boundaries, the planning boundaries?

MR. MILLS: We have not looked at that at all, we have not looked at geographic coincidence at all. We just simply took the law as it currently stands.

MR. WILLIAMSON: I think that might be one add I would like, I would like to see the relationship. Actually, it seems to me there's three relationships that need to be looked at in the audit process: the relationship between TxDOT's decision-making boundaries, a multi-county toll authorities decision-making boundaries, and the planners' decision-making boundaries, and to what extent that overlaps or gaps contribute to inefficiencies or efficiencies, and to what extent would matching up and there would be no gaps contribute to effectiveness or ineffectiveness.

MR. MILLS: It's a very valid question, yes, absolutely. And no, I couldn't give you a good answer on that today.

MR. WILLIAMSON: We'll follow that up with the formal process that you've established to look into that for us.

MR. MILLS: So with that, we conclude our presentation with this summary of our findings, and with our thanks to you, the commission and the department, for the cooperation we've had.

I may just add my own words with respect to the cooperation of the department, having spent considerable time out traveling around to field offices and district offices. I was pleasantly surprised, and I was pleasantly surprised not because they were very cooperative and helpful　-- I expected that　-- I was pleasantly surprised because in the midst of all of the other challenges they've been dealing with over the last six months, the legislative sitting not being the least of them, they still gave this audit a very high priority, higher than I expected.

So I watched them basically fight their way through other priorities so that they were able to meet with us, they were able to respond to our data requests, and as I say, they gave it not only their full cooperation but a higher priority than I had feared they would be able to, given the competing demands on their time. And we are very grateful for that. Thank you.

MR. WILLIAMSON: This would be your opportunity, members, to ask general questions, do as I just did. If there are things that popped into your head, since we started this a few months ago, that you want to add to the audit that we think might be either important to us or that we think the legislature Sunset Commission specifically might be interested in, this is the opportunity to voice that.

I have several I'm going to ask them about, so please have at it.

MR. HOLMES: Mr. Chairman, in their second bullet point when they talk about regional toll roads and CDAs being effective in urban areas, but the issues for outside the major metro areas, I think we need significant focus on that because it seems to me you've summarized it as one of the points that needs to be expanded, and I'd like further thought to be given to that. How do we develop revenue sources for the areas outside the major metropolitan areas, what are all the alternatives?

MR. WILLIAMSON: That would be very valid to add on.

MR. HOUGHTON: One of the add-ons we had talked about is the Texas corporation, Ric, that you worked on, but is now again raising it through your recommendations, I think has got to be a focus. There are public pension funds and there are public funds that could invest equity. As you demonstrated, debt financing and maximum debt financing has a tremendous amount of risk to those public agencies, like the RMAs, NTTAs, HCTRAs of the world, when, in fact, there ought to be a corporation there attracting these Teacher Retirement, Employee Retirement, as Ned and I were talking about at the state level, and there's loads of dollars there that we need to work on those people, the policy people to talk about infrastructure funds, dedicating those to infrastructure in the state of Texas, a percentage of their current assets under management.

But I think, Ric, that should be a huge initiative over the next 18 months during the next session.

MR. WILLIAMSON: Well, again, if we believe the Sunset Commission is going to look into that or if we believe we're going to advocate for that in '09 legislative session, then certainly that needs to be a part of their investigation.

MR. HOUGHTON: Well, with the lack of raising revenue through either gas tax, those means, and not wanting　-- as demonstrated in this last session　-- private sector investment, here's a way to mitigate some of that or a lot of it.

MR. WILLIAMSON: But I've been thinking about our last six months vacation, I don't think they said they didn't want private sector investment, I think what we've heard the legislature saying is we don't want private sector equity that permits an unusual amount of upside to preside in the private sector's hands.

MR. HOUGHTON: Well, I think we've demonstrated that on the analysis on 121 that that's a myth, the upside residing in the private sector's hands, through the analysis by an independent accounting agency that showed that it's fiction. So I think we have to demonstrate that more.

MR. WILLIAMSON: But you have to admit though, Ted, that since we announced 86 projects totaling $50 billion, that we intend to finance all of it through the private sector, have you heard a peep? I haven't had one House or Senate member call me with a concern, and doing my telephone calls as we all did in the last two weeks, did anyone? I mean, Senator Carona was very pointed with me: How are you going to finance this stuff? Here's how it works, make good business decisions, offer the locals the deal first. I mean, it wasn't like oh, don't go do that.

Although I understand clearly what the audit report is saying, it's saying you guys need more private equity in your deals, I just don't think that the legislature were saying no private money, they were saying no private equity that controls too much of the unanticipated profits. That's our challenge is to convince them that that's not going to happen. We know it won't happen, we've got to convince them of that.

I'm sorry, Ned.

MR. HOLMES: Well, I was going to associate myself with Ted's comments earlier in this part of the discussion about some of the public pension funds, whether it's the Teacher's Retirement Fund or the Texas Employees Retirement Fund, it seems to me that there is enormous pools of capital that are seeking returns and they should at least have the opportunity to invest in some of these toll road projects.

MR. WILLIAMSON: Without a doubt.

While you form some more questions, let me touch on a few that I scribbled down. Tell me a little bit about how far the audit went in terms of being able to give us some advice at some point on the impact of federal rescissions at a project level, not globally as we've talked about it today. But for example, we try to do a three-, five- and seven-year cash flow projection based upon certain assumptions.

MR. MILLS: Yes.

MR. WILLIAMSON: Where do we need to be in terms of planning? One of the questions that I'm frequently asked by House and Senate members is how are you going to deal with the rescission. Now, traditionally we just stand up and say, Well, we're going to plan to spend less on enhancements, we're going to plan to spend less on bridges, on safety. I'm thinking that we've got to get to a little bit greater level of detail in the very near future, if it's going to be the amounts of money you suggested.

MR. MILLS: The planning process, as I understand it, is based on what the apportionments will be, so when TxDOT programs, programs in the UTP, it is programming on the basis of what apportionments it expects. So because every rescission is a reduction in apportionments, it is, of course, a disruption of that plan.

MR. WILLIAMSON: So while it's not cash flow instant, it's cash flow in the future.

MR. MILLS: That is correct.

MR. WILLIAMSON: So we almost have to just actually reduce our if not three-year project plan, we're going to have to reduce what the project plan is going to look like seven years from now as a result of what happens today.

MR. MILLS: Well, seven years from now you're into a new piece of authorizing legislation, in which case the federal government will perhaps use other means to reduce the apportionments, they'll just be lower in the new authorizing legislation.

But yes, if you plan on the basis of being able to spend all of your apportionments, in other words, your obligation limits will, by the end of the legislation, equal your apportionments, that is unlikely to occur, and if you plan on the basis of the apportionments in succeeding pieces of authorizing legislation over the next 20 years will continue to grow at what they've grown historically, you will also find your program is under-funded, absolutely.

MR. WILLIAMSON: One of the things that the legislature asks us about on a regular basis　-- and I'm sure the Sunset Commission is going to bring up　-- is the extent to which the department looks for opportunities to outsource for its business. Right now two principal areas of outsourcing are our construction program　-- we don't build roads anymore, we contract that out　-- and increasingly, our engineering program, we don't design our roads like we used to, we contract a lot of that out.

But the Sunset Commission is no doubt going to say, Well, what about your IT services, what about your accounting services, what about your whatever, roadside park maintenance. To what extent would the audit have looked at that so far?

MR. MILLS: The funding audit did not look at that question at all. We were concerned solely with where the money is coming from, not with how programs are delivered. So no, I would not make any comment on that based on the work we've done in this audit. We've done lots of work on the question of outsourcing services. I worked on the outsourcing of our highway maintenance in British Columbia 15 years ago, so we have experience in that area, but it was outside the scope of this work.

MR. WILLIAMSON: So perhaps any of the questions that I might have concerning the ultimate use of that funds, maybe I'll wait and reserve that for the other presenter.

MR. MILLS: Yes.

MR. WILLIAMSON: I think I've asked all of my questions. Anything else of this group?

And you did confirm that the staff has fully cooperated with you?

MR. MILLS: Absolutely. No reservation in making that comment at all.

MR. WILLIAMSON: We thank both of you.

MR. MILLS: Thank you very much.

MR. DYE: Thank you.

MR. SIMMONS: Bill, Peter, thank you.

Commissioners, for the record, I forgot to tell you we set aside 30 minutes per presentation, so we're right on schedule after spending two hours on this one, but I think it was a good dialogue and I think it's something that's very needed.

Our next auditable area is consumer services, and I'm going to ask Rob Cooney to come up. This is probably the broadest area of the department because we have so many different areas of the department that are dealing with consumer services. And I'll let Rob make his presentation.

MR. COONEY: Thank you, Steve. For the record, my name is Robert Cooney. I'm a vice president with Dye Management Group and I am the project director on the consumer services audit.

First, I want to begin by just again thanking the commission, the management of the department and the staff of the department for their help and cooperating throughout the audit process. We also, in this area particularly, involved a number of stakeholders of the department. I'll highlight some of those as we go through here, but this represented both essentially all those folks who are consumers from the department's perspective. Those are other state agencies, as well as a number of industry groups that are in some way regulated or interact with the department, and we had representation from all of those industries on various work groups that we had throughout the audit. And again, I'll highlight some of that as we go through here.

So just to refresh your memory on what constitutes the consumer services auditable unit, it's motor carrier operations, motor vehicle dealer/distributor operations, the various grant programs that the department administers, that's public transportation, traffic safety, the automobile theft prevention program, as well as the enhancement program, vehicle title and registration operations, what we call the revenue-neutral operations which really has a focus on the outdoor advertising control program, and then the department's travel and tourism programs. And as Steve noted, these cover a quite broad area and so we'll go through a number of really detailed recommendations in each of these areas that, to some degree, stand on their own within the perspective of each of those as we go forward.

As Steve mentioned earlier this morning, there was a process where we went through a risk analysis process initially and really looked at a high level at all of these program areas and attempted to define what we thought were those areas of highest risk to the department based on the likelihood of a risk or opportunity occurring, and the impact to the department of that process. During that, we interviewed approximately 50 individuals across all these areas, including approximately 20 stakeholders, non-department personnel, and from that defined 36 risk areas of which 16 of these were defined to be high risks, and that formed the basis for many of the detailed areas that we actually took a look at.

And these areas that were considered to be high risk, one of those is in the motor carrier area and relates to the turnaround time for processing oversize/overweight permits and some related staffing issues associated with that.

In the area of motor vehicles, it dealt with limited control over dealer-issued temporary tags which was sometimes addressed during the last legislative session, the fact that there is extremely long durations for complaint resolutions in the motor vehicle dealer area.

In the area of grants, it really had to do with skills and competencies of the individuals within the department that are performing grants management functions and whether those skills are sufficient.

In the area of medical transportation, it had to do with interactions between TxDOT and HHSC related to governance issues, and again, to some degree that's been addressed by actions that were taken the last legislative session, as well as the extent to which operational changes that TxDOT has made have impacted medical transportation.

In the vehicle titles and registration area, there's several risks that, in a nutshell, are related to the ability of VTR to continue to meet the increased demand. As was touched on a little bit during the last presentation, there's approximately a million new vehicles that are registered in Texas each year. The technologies that the department has to address that, and to some degree, as we'll talk about statutory limitations that the department faces, impact its ability to most effectively address that increasing demand.

And in the area of travel, the questions really had to do with the strategic alignment of the travel and tourism programs with the department's overall mission. A number of policy makers have raised that issue over the years as to whether it's an appropriate role or purpose for some of the department's money to be allocated to, so we wanted to take a look at that.

And then there were several multi-program risks that had to do with coordination of call centers across the divisions. As we'll find there are approximately 17 different call centers within the department, all more or less operate independently within their program areas. And then we also identified a lack of integration or limited integration among the various what we would call motor vehicle services functions within the department. And all of these areas have an extreme dependency on technology to implement critical business change, and of course, that puts a premise on solid management and oversight of those technology projects to ensure our on-time and on-budget delivery of those projects.

So with those risks having been identified, we worked with the audit oversight committee to define nine more detailed study areas that we will take you through now the findings and recommendations of each of those areas one at a time.

Before I do that, I do want to highlight that in each of these areas we established a stakeholder team. This consisted of TxDOT management, staff and outside stakeholders that were appropriate to the area. We had 72 TxDOT staff that participated in these groups and we had 26 representatives from outside the department. And the goal here was to have these individuals help us identify the facts and get the facts out on the table, so the goal was to ensure that the findings were accurate, that we had a correct factual basis from which we were then going forward and making recommendations.

And again, most of the industries or consumers that are somehow affected by this process were represented. Some of the examples on the slide: we had representatives from the Texas Division of the Federal Highway Administration; we had representatives from Department of Public Safety; we had two county tax assessor-collectors who participated on the teams related to vehicle title and registration; we had representatives from the outdoor advertising industry, the environmental advocacy groups that work with and have an interest in outdoor advertising; as well as motor carriers and both independent and franchise dealers.

So the first area that I want to talk to you about is oversize/overweight permits. The salient issue in this area has been the turnaround times. There's been increasing deterioration on the turnaround times that the industry is receiving for oversize/overweight permits, and it really comes from two issues: one, again, an increase in the volume of the permit applications that are coming in, and then an increase in the complexity of the permits. There's an increasing percentage of what we would call super loads, permits that require an extensive amount of time on the part of the department to do research and analysis prior to issuing has increased tremendously. So the mix of permits is getting more complicated, the volume of permits is getting more complicated.

The Motor Carrier Division has taken a number of steps to address this within the confines of the resources that they have available to them, and as you may be aware, in the last legislative session they were actually authorized to have additional positions that they can put towards this area. And they have begun planning for and are in the process of actually procuring a system that they're calling TxPROS which is an intelligent routing system, so the goal is to have the computer do a lot of the work that is currently being done by TxDOT staff and would allow the industry in most cases to self-issue all of the routine permits and this would allow the department staff to focus their work on those things that involve the super loads, again, the more complicated permits.

So our central question was: Is that the best approach to dealing with this issue? And we looked at TxPROS and other technologies, we also looked at the opportunities to potentially privatize all or some of this function, and we looked at ways to have an increased use of partnerships.

It is our recommendation, after having done this analysis, that the department should proceed with development and implementation of the TxPROS initiative. That having been said, this is an immediate problem that's facing the industry. The industry estimates that the cost in delaying a permit is approximately $100 per hour to the industry. So given that there is an 18- to 24-month time frame to bring the TxPROS implementation live and them some reasonable period of that can be assumed for institutionalization of that process, we would recommend some things be done in the short term.

One of these is to get towards a single application processing queue or essentially a first-in, first-out concept. Right now the Motor Carrier Division takes applications by telephone, by fax or by the internet. If you send them by fax or the internet, they will process them as they get them; if you go by telephone, you may be on hold for three to four hours at different times, but once they get on the phone with you, they actually issue the application while they have you on the phone. So this actually incents the industry, in some cases, to invest the time of having the person sit the three or four hours on the phone because they know once they get on actually speaking to a representative, they'll get their permit issued.

So what we would propose is to use those additional FTEs that the legislature allocated to actually implement a single application processing queue so that essentially when you would call in they would take basic information from you but your permit would then go in the queue along with those that are issued from other sources. And we'd also encourage some additional use of what is called remote permitting service which is a feature where the industry can either self-issue the permits or some third parties are issuing on behalf of a number of different motor carriers.

And finally, again, as we've said, technology here is critical to driving business change so it's important that there be a detailed risk management plan for the implementation of TxPROS and some contingency plans in place should it take longer than we would expect to actually get those online.

The second area that we looked at is what we call motor vehicle synergy, and the subject area here was to establish or look at opportunities for better communication and coordination and collaboration between the motor vehicle divisions within TxDOT　-- so that's the Motor Vehicle Division, Motor Carrier, Vehicle Titling and Registration, and to some degree, the TxTag, the electronic tolling operations within the Turnpike Authority.

The second objective was to look at how those motor vehicle services functions can better communicate and collaborate with other state agencies that have motor vehicle services, and specifically in the Department of Public Safety we're speaking of the Driver Licensing function and the Vehicle Inspection and Enforcement function, and then within the Comptroller's Office, the International Fuel Tax Agreement function that's administered out of the Comptroller's Office.

In terms of context and findings here, we find that the motor vehicle divisions within TxDOT operate within great autonomy, essentially they operate as siloed organizations. The department's published Strategic Plan really focuses on infrastructure and provides little direction for the motor vehicle services divisions.

In addition, these divisions work in a very complex environment where they have very detailed statutes and sometimes conflicting statutes that were placed into law at various different times, so the real nuts and bolts of what they do are actually placed in the details of statutes, and that's also true in terms of the fees that are set. And these statutes and fees have rarely been the subject of a comprehensive and sort of singular review to try to bring these into alignment and also to see if there were opportunities to simplify those.

In terms of the synergy points with other agencies, we believe that there are a number of synergy opportunities between TxDOT, and most specifically the Vehicle Titling and Registration Division, and the Department of Public Safety's Driver Licensing function. Timing would suggest, though, that some of these may have to be deferred until Driver Licensing is able to complete the implementation of the federally mandated Real ID initiative.

A number of the things that we had looked at or had envisioned as being possible here, for example, if you look at it from a technology perspective, the idea of a common customer portal so if I move from one part of the state to another and I need to change my address, I could go one place and I could change the address on my driver's license and my vehicle registration and as a customer not have to go to two or three different state agencies to effect that transaction.

Some of that is something I know that DPS is very interested in working with TxDOT on but some of that is also going to be kind of sorted out in the mechanics of what do you have to do from a federal perspective in terms of Real ID and does someone have to physically appear in the driver's license office and those kinds of issues.

We do think in the immediate term, though, there are opportunities for closer working relationships between DPS's vehicle inspection programs, VTR and the toll tag operations. As you're, I'm sure, all aware, on a given vehicle today we can have an inspection sticker and a registration sticker with differing inspection dates, we can have a TxTag on that vehicle, we can have a license plate on that vehicle, so all of these are vehicle identifying tools that are being issued by various different parts of both TxDOT and DPS.

And we also believe there's opportunities for further coordination between the IRP, or International Registration Plan program, which is within Vehicle Titling and Registration, and the fuel tax program that is within the Comptroller of Public Accounts.

So in terms of our recommendations in this area, we are recommending the creation of a position of assistant executive director for motor vehicle services that would have responsibility for all of these areas and we would include in that TxTag from the perspective of electronic toll tags, all of those things that are motor vehicle functions. And we arrived at this recommendation after looking at a number of different options that included: maintaining the status quo, combining the motor vehicle divisions into essentially a single division. We also looked at the idea of having an actual State Department of Motor Vehicles which, I would add as an aside, when you look at your peer states, other large states　-- California, Florida and New York being good examples　-- those functions are typically in a separate department from the transportation function itself.

So after looking at all of those areas, we believe that one way of recognizing the uniqueness of each of these divisions and their different sets of customers but yet achieving some commonalities in terms of business planning, strategic planning, and shared synergy, would be the idea of having those under an assistant executive director, who would also then essentially be a player at the table representing the needs of motor vehicle services as things like the department's Strategic Plan is developed.

We would also recommend that the department conduct a comprehensive review of statutes, fees and vehicle classifications to try to streamline these, simplify them and update them, to simplify the environment in which these divisions do business. And we would encourage you to work with the Texas Legislature to seek a change in philosophy from what we would consider some very detailed legislation that is sometimes cumbersome to operate in because things change in the business environment, and move towards broader enabling legislation where you then would be able to hash out the details within administrative rule.

Some specific issues that were asked about by the audit oversight committee. One of those was to take a look at the issue of whether motor vehicle divisions should remain within TxDOT, or would it be appropriate to move to the Department of Licensing and Regulation. We would recommend that that stay within TxDOT and the primary reason for this is that we believe there are a number of areas where the department can benefit from working closely with the motor vehicle dealers as a partner in the process. One of those is the new temporary tag program or web-based temporary tag application that's going to be developed, another of those is online dealer titling and registration　-- which I'll talk about in one of our other study areas　-- which we believe represent good opportunities for the department to work with the dealer community, and I think having the Motor Vehicle Division licensing those dealers and being part of the department has some good synergy opportunities for us.

We would recommend that the department initiate discussions with DPS in regards to two functions, though. One of those is the disabled driver parking placard program which is currently administered in VTR. We see this as being really a function of the driver's condition or the driver's medical condition, it's really tied to the driver, not tied to the vehicle, and would be more appropriate to be administered through the Driver Licensing function which is focused on the driver as opposed to the vehicle.

And we would also recommend discussions with DPS in terms of moving salvage dealer licensing from VTR to DPS. We also looked at whether it would be appropriate to move that internally within TxDOT from Vehicle Titles and Registration to the Motor Vehicle Division since they are essentially both licensing functions, and some dealers may also be salvage dealers, but we believe that it is most appropriate to be in DPS given that DPS at this point actually has the law enforcement authority for salvage dealer licensing. So from a state perspective, we would be combining the licensing and enforcement functions for salvage dealers all within one agency.

We believe there's opportunities and would recommend that VTR and the TxTag operations collaborate with DPS on a future common vehicle identifier so we don't need to have as many different tools from the state's perspectives in a vehicle in terms of providing vehicle identification. And we would recommend that you all initiate dialogue with the Comptroller of Public Accounts about merging the administration of the IFTA and IRP programs. Our vision would be that TxDOT would have responsibility for managing both of those programs and the Comptroller's Office would have responsibility for essentially the auditing process underneath both of those programs.

Any questions on this study area before I proceed?

MR. WILLIAMSON: Only one. Any questions, members? You said you looked at moving a function to the Department of Licensing and Regulation. Did that preclude you from making a recommendation to us that it move someplace else? For example, what if we wanted to move that to the Comptroller?

MR. COONEY: We specifically really looked at one of two options which was maintaining it in the department or moving it to Licensing and Regulation, and that was based on Licensing and Regulation being generally the home in the state for most other licensing functions.

MR. HOUGHTON: Do they have the capacity to do that kind of stuff, staff-wise, Licensing and Regulation?

MR. COONEY: Today they would not, but the assumption would be that people would move with them, yes, or positions would move with them.

MR. HOUGHTON: And you're not advocating creating a new department like other states have with motor vehicle registration?

MR. COONEY: We are not at this time, and one of the reasons for that, we think that may be an issue that the state would benefit from taking a look at in I'm going to say the five- to ten-year window. One of the reasons for that is given the really massive change program that Driver Licensing is now taking on in terms of meeting this Real ID impacts, that really managing a change of consolidating those functions into a single department and also executing the change that's required from a Real ID perspective probably injects an additional risk to which there isn't an offsetting benefit.

MR. HOUGHTON: Did you look at the opportunity of bringing Driver Licensing and Motor Vehicle Registration to one department like TxDOT?

MR. COONEY: We did, in fact, and we believe, based if you look nationally, there's multiple different answers to that question and how those functions are organized in most states.

MR. HOUGHTON: Where are you from originally?

MR. COONEY: I'm originally from the Northeast but I live in North Carolina now.

MR. HOUGHTON: This is Texas, it's a little different down here. I don't think we're interested　-- I'm not　-- in creating another department. Maybe the legislature is but I can't imagine creating more government and larger government.

MR. COONEY: Right, and that's why the approach that we took was an attempt to try to get some more coordination between the functions that are under TxDOT's umbrella without necessarily adding anything to TxDOT's umbrella.

There was some discussion at the time that the audit began, Commissioner, about that there was some interest on the part of others in the state in terms of looking moving driver's license into TxDOT.

MR. HOUGHTON: I think it's a great idea. I mean, we deal with security issues on license plates and registration of vehicles with our friends in law enforcement.

MR. COONEY: Exactly. And there is some good synergy opportunities. I guess one of the things　-- and I'd like to defer to Mr. Simmons on this　-- one of the things we tried to do within the context of this being an audit of TxDOT was seek voluntary input from the Department of Public Safety on those types of issues, and they did have a representative from Driver Licensing that participated in the stakeholder groups, but to some degree, we confined our recommendations to things under you all's control.

MR. SIMMONS: I think that they were in the same predicament where they're in a legislative session and didn't really want to look at some things at that time.

MR. HOUGHTON: Would they be willing to give up Drivers License?

MR. SIMMONS: I doubt it.

MR. WILLIAMSON: They're just poking you, Steve, don't take the bait.

Instead of us taking from them, why don't we suggest to our auditors that we give them something? We'd like to give them General Revenue.

MR. HOUGHTON: Don't they get that, Ric?

(General laughter.)

MR. COONEY: Commissioner, if I could, just to finish on your original question, we did look at how other states are doing this. I would say in terms of large states, that whether they're in a separate department or consolidated within a given agency, whatever that agency is, you all are unique among the large states in the fact that those two programs operate in different agencies. And if you look at this from the perspective of this being an audit of consumer services and put ourselves in the customer's perspective, there is confusion on the part of customer, the citizen, in terms of which department provides which functions.

So some of the things that we did look at, without merging the organizations, would be taking a look at　-- and that was one of the things I mentioned with this idea of a common customer portal, or other ways we could do things so I could go on the internet and change my address and could get to both departments. As a customer, I don't necessarily care what goes on behind the scenes to make that happen but just that I don't need to talk to two or three different folks to do that. So we did look at that which we thought was much more implementable in the short term.

MR. HOUGHTON: Than merging?

MR. COONEY: Than merging, yes, sir.

Study area three addressed using technology to enhance Vehicle Titling and Registration.

MR. HOUGHTON: You're not advocating the acquisition of DPS by TxDOT, are you?

MR. COONEY: No.

In terms of the use of technology, as I mentioned earlier, VTR registers almost one million more new vehicles per year over the last several years, so there's an annual increase of about a million vehicles a year in terms of vehicle registrations. In order to meet this demand at the same level of customer service, the high quality customer service that VTR wants to provide, it's important that they fundamentally change how they deliver this business, and they've been working over the past couple of years on something called Vision 21 which is intended to rethink and re-engineer fundamentally how that division does business.

MR. HOUGHTON: Wait a minute. You said a million new vehicles a year. What's the net number of vehicles per year? You've got some going out, some coming in.

MR. COONEY: The net would be about a million new vehicles a year, and it's approximately 20 million right now, total. Yes, that's correct.

MR. HOUGHTON: How does that work with a thousand people a day　--

MR. WILLIAMSON: You have a certain number not being re-registered.

MR. HOUGHTON: But the net is a million a year, the net.

MR. COONEY: The net.

MR. HOUGHTON: Net gain. Somebody is buying a lot of cars.

MR. WILLIAMSON: Well, let me just say, the historic ratio of eight cars to ten people is based on a going-forward average. We've never used it in any of our projections. I say this primarily for Mr. Carona's staff and the Sunset staff.

MR. HOUGHTON: I think they left.

MR. WILLIAMSON: Maybe they're watching us on the ozone. There is a lot of thought by demographers that operate in this state that we actually have a much higher population than the number that we use reflects, and that's based upon things such as this vehicle registration number.

MR. HOUGHTON: You're saying 20 million vehicles are registered in the state of Texas.

MR. WILLIAMSON: In round numbers it's approximately 20 million; it's 19-something right now.

MR. SIMMONS: I think you have to recognize it's not necessarily just cars and trucks, there's trailers, there's farm equipment and things of that nature that come along with that.

MR. HOUGHTON: But what I'm focused on, Steve, though, is his number: a million net new.

MR. WILLIAMSON: Like I said, there's some thought that our population is actually larger than it is and it's actually growing faster than we give it credit for, based upon things such as vehicle registrations, water well permits, utility hookups, things that seem to suggest there may be more people in Texas than we think.

MR. UNDERWOOD: Well, especially when they said earlier that 80 percent of the people that are coming in are bringing　-- the vehicles are eight to ten, ten people, eight vehicles.

MR. WILLIAMSON: Historically that's been the average, yes, sir.

MR. UNDERWOOD: So we've been preaching about a thousand people a day, and that doesn't hold true with a million vehicles.

MR. WILLIAMSON: Like I said, there's some suggestion our population is growing much faster than the official statistics indicate. You know, we're all in different businesses and we all get to see the public a lot. Our observation privately has been that we think we're growing faster than that, and I suspect these numbers bear that out. And this guy is going to move from North Carolina any minute now.

(General laughter.)

MR. COONEY: Given that increase in volume, it's important that we kind of fundamentally rethink how we do that business, and VTR has been working on that through this initiative called Vision 21, however, they are limited to some degree in some of the things that they can do and the way that they can use technology by some current statutes, and we'll talk about that in a little bit more detail as we go through here.

So an example of this is that TxDOT lags other states in utilizing the internet for Vehicle Titling and Registration functions. Virginia and Arizona, for example, have 20 different internet applications that citizens can use to interact with their motor vehicle departments or motor vehicle agencies to perform title and registration transactions. Texas has three, one of which is not even able to be used on a statewide basis, it's kind of used on a county-by-county basis based at the discretion of the county tax assessor-collector.

And here's some of the reasons for that. The counties are statutorily required to process the registration and title transactions, so effectively the registration kind of has to at least pass through in some way the county tax assessor-collector. The participation in these internet services right now are at the option of those county tax assessor-collectors.

The portal fees that the Department of Information Resources charges are extremely high compared to those that we found in other states, and so that creates a situation where adding some of these applications doesn't necessarily have the cost benefit to the department that you would like to see.

And customers are forced to pay a convenience fee, and so unlike other industries　-- let's use airlines, as an example, where the airline now charges me more if I call them up and talk to them on the phone to do my ticket as opposed to doing it myself through the internet　-- you all actually charge your citizens more money for them to try to self-service and do that transaction on their own, so that's just the opposite of what's typically seen in industry.

MR. CHASE: May I add there, when you say you all, it's the Department of Information Resources, not the Texas Department of Transportation.

MR. COONEY: That's correct, the state.

MR. CHASE: We've argued for years that the way DIR's TxOnline is set up actually discourages people from using the internet to do things. I just want to make sure we choose our pronouns correctly on this.

MR. COONEY: That's correct, Coby. I'll correct myself. That policy is a policy that's set by the Department of Information Resources, absolutely correct.

So while VTR is planning to implement more internet-based transactions, they are limited by some of these statutory constraints, and we did some analysis in the details of our report where we took a look at what we saw as the return on investment to the state of eliminating the county offices to the extent possible from these internet-based transactions, and there is a substantial cost benefit to the state of doing that. It's smaller initially, but again, given the million new transactions per year, it becomes a very large return on investment very quickly if you assume that that growth rate is going to continue.

Now, we realize that the county tax assessor-collectors are a critical partner. As I mentioned, two of them graciously chose to participate with us on our stakeholder team.

MR. WILLIAMSON: Yes, they won't jump to that suggestion at all, we can assure you of that.

MR. COONEY: So there are issues to be worked out here. We've actually attempted to work with the two individuals that were part of our stakeholder team to help understand sort of their cost dynamics and understand what the impact of some of these recommendations might on their particular business, but we understand, as we move forward on this, the department would have to work with their partners to find something that provides a win-win situation, and we'll have some comments about that as we move on through our recommendations.

So in terms of recommendations in this area, one of those would be to seek statutory changes to allow increased use of the internet and other technologies. We would recommend that internet-based registration programs be allowed to bypass the county tax assessor-collectors. We would further recommend that VTR be allowed to establish a direct relationship with the dealer community to implement an optional online dealer titling and registration program. A number of states do this where the dealer, in the course of their transaction with the customer, captures much of the information that is needed to actually do the title transaction and so forth, and they are essentially then submitting it usually as a direct interface from their dealer management system to your system and moving that transaction forward without someone actually needing to touch the transaction from the county perspective.

And then we would recommend that you seek a reduction in the fees that DIR is requiring or ask the legislature to waive your participation in that program. And we think that if you come to the table with the kinds of volumes of transactions that we're proposing would occur here, that there's really room for negotiation with DIR in terms of being able to set a lower fee based on the volume of transactions that we believe can be driven through the system.

MR. WILLIAMSON: How would they get their money to operate then?

MR. COONEY: This is, again, sort of the volume price tradeoff here. They're actually missing out on some of the volume here because the transaction fees are so high, so the idea would be to be able to put together a compelling business that's showing by lowering those fees, we could actually drive more demand to the internet, therefore, essentially getting them the cost recovery, the same fee revenue that they need, Mr. Williamson.

And then that would lead to an elimination of the convenience charge to customers so we actually encourage the customer to use the internet, as is the case we're seeing in other states. A number of states that we looked at are getting 25 percent or so of their renewal transactions processed through the internet.

And then with this statutory framework in place, we would recommend that VTR move aggressively to implement a number of internet-based applications.

And we would also recommend that VTR or TxDOT work to redefine the relationship between the department and its tax assessor-collectors and really we see three areas for discussion. One is to develop a new revenue-sharing formula. We would recommend　-- and we have some detailed analysis behind this that's in the report　-- we would actually recommend that you pay them more for actually processing those transactions that they would touch but you wouldn't compensate them for transactions that are going through the internet.

So today you're paying them a fixed fee for each transaction regardless of the level of effort on their part required to process that transaction. We'd look to change that structure where we're compensating more for actual work that they're having to perform, and by doing that, we believe that we can, for the most part, or at least certainly minimize the impact to the counties from some of these recommendations.

We would also recommend that a service level agreement be developed between the department and the county tax assessor-collectors. Much of the relationship is codified in statute, we need something that's a little bit more on the operational level. And then we would also suggest that you work together to find other potential revenue opportunities. There are some transactions today that counties don't do but are only done in VTR's regional offices, and those might be additional revenue sources that you could offer the counties to again help offset the impact of the internet transactions.

Any questions on this area before I march forward?

(No response.)

MR. COONEY: The next area is call centers. Fundamentally, there are 17 unique call centers in the department. These all operate independently, there's little collaboration between divisions on best practices and process improvements. They operate multiple technology platforms and there's a multitude of agency phone numbers which is fine if I know who I want to talk to. If I'm new to the state or not sure who I need to talk to at TxDOT, it's often unclear who do I actually have to call.

And then our team also found, from doing some usability testing on the websites, that they're difficult to navigate and access, there's a lot of jargon on the websites and in some cases there's a lot of broken links and things, so again, that typically means I can't get the answer I want on the websites and now I've got to pick up the phone and call somebody.

In addition, there are a lack of formal customer feedback processes, there's no consistent agency-wide performance measures on how we're doing with our call centers. TxDOT has done an excellent job of figuring out how to integrate these call centers into the overall state emergency operations approach and strategy, but there is still a need, one thing that there is a gap is that there are no agency-wide disaster recovery plans. If a call center goes down, there's not a plan in place as to how the department would actually deal with that.

So in terms of recommendations in this area, we looked at several different options. We looked at the idea of physically consolidating some of these call centers, we looked at the use of technology to establish what we would call a virtual call center, and we also looked at the idea of privatizing some or all of these call centers. At the end of the day, we are recommending more of an approach of establishing a multi-division planning group to ensure that these call centers are using the same standards and processes and that they move over time towards using the same technology architecture which we think will save money for the department.

The reason that we did not recommend a consolidation of these functions is that at the end of the day there's a real premise on the programmatic knowledge that the individuals have, so once the customer gets to the right place where they want to talk to, it's most important that they're talking to somebody who's really a program expert in dealer licensing or in vehicle registration transactions or whatever the business might be.

That having been said, though, we are recommending the implementation of a virtual call center to handle level one calls, to deal with that issue of I don't know who to call, I think I need to call TxDOT but who do I need to call, so that there's a point of contact for those initial inquiries to the department that would then be funneled as quickly and most appropriately as possible to those program areas that would essentially function as the department's level two call center.

MR. HOUGHTON: Let me ask a question. How many incoming calls do we have in our call centers on an annual basis?

MR. COONEY: I know that's in our report; I don't know the answer off the top of my head; we can get back to you with the exact answer to that.

And the other recommendations here would be to implement customer advisory groups and feedback processes, implement performance measures so we can see how the call centers are doing, continue the work the department is trying to do to strengthen its websites and web presence, and establish disaster recovery plans for each program call center.

Any other questions in that area?

(No response.)

MR. COONEY: Our fifth study area was travel and tourism, and the central question here was does travel and tourism align strategically with TxDOT's mission, and then the second question was are there some additional potential revenue opportunities that the department needs to take advantage of in these areas.

So with that in mind, some of our findings in this area are that the travel and tourism programs are generally efficiently and effectively managed, and this is really based on two parameters. One is in surveys that have been done, they receive a high customer satisfaction; there's also a strong return on investment case that can be made here. While these numbers are a little bit out of date, the last analysis being done in around 2002, for the department's approximately annual $7.6 million net investment in travel and tourism programs, there's a return of somewhere between $24- and $25 million of fuel tax revenue, and in addition, this analysis was done in 2002.

It also doesn't take into consideration the fact that there may be additional sales tax if someone stays a couple of extra days in the state, based on information that they got in the travel information center; it doesn't take into account the safety rest areas that fall within the scope of this unit, it doesn't take into consideration the safety benefits because a person was able to get off the road because they found the safety rest area attractive and so they stayed instead of driving on when maybe they shouldn't have.

So there's a number of intangible benefits here that aren't intended to be quantified, but if you just sort of look at the hard numbers in terms of dollars back to you in terms of fuel tax revenue, there is a return on investment from these programs. However, this is not something that's really well known and we did find in our audit that there are a number of policy makers, legislators and others, who do ask questions about whether the money that is spent by the department from Fund 6 on travel and tourism programs is appropriate, and so this is an area where we think there is a need to sell that story and to tell that story a little bit better and a little bit more aggressively in terms of the return on investment from these programs.

We do believe, at the end of the day, that there is a clear synergy with your mission and with your strategic objectives and it's something that the department should talk a little bit more about.

Just some other thoughts here. There are a number of programs that do generate revenue and there are also a number of programs that the department has been working on and are continuing to look at that are new revenue opportunities, and we would encourage the department to continue to pursue these.

One question that was asked of us was to take a look at a new federal program called the Interstate Oasis Program and look at whether that in some way presents a revenue opportunity to TxDOT. We don't believe that it presents a meaningful revenue opportunity. There may be an opportunity to charge essentially for signage for the oasis, similar to your existing logos program, but it is not, in and of itself, a new revenue source or an opportunity for the department to be in some way an owner operator of those oases.

In addition, an area that we looked at in terms of the travel and tourism programs that may be on planned toll facilities. This is an area where we find that the department is limited by statute in its ability to provide travel centers and other traveler services as part of new toll roads. We see this on two levels. Again, looking at this from the perspective of a consumer, this is a potential customer service issue because if you look at toll facilities, essentially legacy toll facilities, existing toll facilities in other states in the Northeast and Midwest, it is very typical for customers to expect to see travel facilities, travel centers and so forth within those toll roads, and also those represent revenue opportunities for those agencies and so we see this as a potential lost revenue opportunity for TxDOT that could potentially be used to fund the travel and tourism programs within the department, thus kind of effectively reducing the amount of Fund 6 money that's used to fund these programs.

There are some opportunities for greater synergies between the Maintenance Division and the Travel Division. There are some things that they both do that they could work together on and probably gain some efficiencies for the department. And we also took a look at an opportunity to outsource management of the brochure racks. This is essentially fulfilling the materials that go in the travel information centers, and we thought that if we outsourced this, this would also be a way to get them into the newer safety rest areas that are positioned to have that type of information without requiring TxDOT staff to necessarily be involved in doing that.

I will add, just an example, where we mixed stakeholder reviews, so to your question, Mr. Williamson, earlier, this is an area where we didn't change a recommendation based on feedback that we got from staff, but it is an area where we have noted in our report that staff have a number of concerns about the recommendation.

MR. WILLIAMSON: Is the recommendation that we outsource more and different varieties of our tasks?

MR. COONEY: Yes.

So in terms of our recommendations here, we would recommend that you maintain tourism programs within TxDOT. We believe you should analyze the return on investment from this program on an annual basis　-- again, the last real detailed analysis was in about 2002　-- and communicate these results to policy makers, so you'd be better prepared to answer the question: Why are we in these programs, why do we do this?

We would recommend that you continue to pursue additional revenue opportunities, assess the feasibility of outsourcing the rack management, the fulfillment of brochures. That would include anything that goes into the racks.

MR. HOUGHTON: How many maps do we produce a year, do you know?

MR. COONEY: Doris could answer that question, I don't have the answer to that question.

MR. HOUGHTON: How many?

MR. COONEY: 1.2 million.

MR. HOUGHTON: Maps a year.

MR. WILLIAMSON: That's a ratio of ten maps for every new registration; there's got to be some logic in that ratio. That would be six to five. I didn't do too good in math in college.

MR. COONEY: And then we'd also recommend that you develop a departmental strategy related to traveler services that should be provided on toll road facilities, and based on the outcome of that study, where it's appropriate to seek statutory changes to do so.

Then we would encourage you to involve the travel industry and also consumers in that process by actually doing focus groups and surveys to see what consumer expectations are.

And then finally, we would recommend consolidating the contracting process for facilities management between Travel and Maintenance. Those are actually now done as separate processes. And we believe similarly there's an opportunity to leverage the existing ad sales capability within the Travel Division to handle some ad sales work that is needed by the Maintenance Division for their TexTreks website. This is the internet access that you would have in each of the safety rest areas.

The next area that we have is grants management functions, and here we were looking at opportunities for, again, coordination, collaboration and synergies among various grants programs that the department has: Public Transportation, Traffic Safety, the Automobile Theft Prevention Authority, and the Enhancement Program which while not a true grants program, has some characteristics of a grants program, so for purposes of this study analysis, we treated it as a grants program.

And as in call centers, we would find that each program kind of does what each program wants to do, they don't communicate and coordinate and collaborate in terms of shared processes and opportunities to work together and to take advantage of best practices. They work within their program areas and for those programs, Public Transportation and Traffic Safety, that are essentially managed in the districts with policies set by headquarters, again, there's variability among the districts on how things are actually done.

One of the things that really stood out here was the fact that there's an inconsistency in their position descriptions, the skills of the people that are performing this work, so we have a wide variety of individuals across districts in terms of their skills and capabilities as grants managers or contract managers. And in a lot of cases it tends to be sort of other duties as assigned that the district engineer will determine a particular person should be the program person for traffic safety and please work on traffic safety when you aren't doing the other ten things that we need you to do this week, so that there isn't quite the focus on a level of skill base and professionalism in terms of being a grants manager out in a number of district operations. So we believe that is a primary area of concern and focus.

There's also a fairly limited use right now of technology in these programs, however, Traffic Safety is in the process of implementing an electronic grants program which will have the goal of doing a lot of self-service functions, so as an applicant for a grant or someone that is a grantee, I'll be able to do what will be expected to do, a lot of the work for myself and provide that to you in an electronic format. And that will have an opportunity to really kind of re-engineer and revitalize a number of the business processes in the grants management area.

In the area of Enhancement projects, one thing that was noted by our study team is that these projects tend to seemingly have an undefined start and end date so there are awards made several years ago for projects that have actually not started, and so it complicates the administration of the program where there isn't sort of a defined period to actually get the work done.

And again, what we did here is we looked at several different ways that we could do some of this grants management function. We looked at the idea of regionalizing this on a program level so that you would have Traffic Safety managed out of headquarters and some folks deployed regionally managing the program. We looked at within a district whether there would be opportunities to consolidate, within especially some of the smaller districts, could we have a person who is a grants manager and he would be handling both Traffic Safety and Public Transit, for example.

At the end of the day, we recommended that we maintain the existing status quo structure but that we establish what we're calling a grants management coordination team across the department to develop some standardized procedures and processes and then deploy their standardized procedures and processes so that an individual who is a grants manager on any one of these programs across TxDOT is operating with essentially, as much as possible within the uniqueness of their program area, they're operating with the same standard processes and procedures.

We would also recommend that we have focus on developing those grants management skills. Nationally there is a grants management certification program that's being developed and we would encourage the department to have all of their staff that are doing grants management functions meet and achieve that certification. And this E-Grants program that Traffic Safety is doing, we would encourage that this be carried on to the other grants programs.

We also looked at some opportunities for self-certification. Essentially, this is asking the grantee or the applicant to do more work, and we believe that there are opportunities to do that and there are some opportunities to privatize more of those functions.

In the area of Medical Transportation, this is an area that, as you're aware, the legislature moved the program from TxDOT by September 1, 2008, so this study area was in process in the course of that decision. We believe that transferring the program back to HHSC should address a number of governance and coordination issues.

We do, however, believe and want to communicate that the MTP, as it has been in TxDOT, there's been a number of operational efficiencies that have been achieved, a number of major changes that have been made in the program that we believe are very meaningful on a go-forward basis. And in discussions, again, we had transportation providers and client representatives participate with us on stakeholder teams and they are very positive about the work that this department has done in terms of its management of that program, and that should be noted.

The other area that we were asked to look at here related to how big this program is going to grow, and for a number of reasons, we believe that this program will continue to grow in size which will put driving management efficiencies and containment costs to be paramount, and a lot of this could be accomplished through the implementation of technology. And just as is the case in VTR, there are some statutory limitations and policy limitations in terms of the ability to use technology. As an example, providers today could swipe a card when a person takes a ride, and MTP wanted to implement that but they've told by legal staff here that no, you've got to get a signature in a log book. So again, there's need for statute and policy changes to better align with the technology opportunities.

So in terms of our recommendations in this area, we would recommend that the state revisit some of the provisions of Senate Bill 10 that moved the program. We believe that there are advantages to coordination between TxDOT and HHSC. We think the department, TxDOT, has a lot to offer in terms of providing program management to this program and also in terms of ensuring that there's collaboration between medical transportation and the public transportation programs that the department works with. So for example, doing more to try to make sure that if a valid way to get somebody to a medical appointment is to have them take a bus or a train because they are capable of doing that, that we encourage them to do that so that the last thing that we do is have somebody come to their door and pick them up.

So there was a lot of good thinking and alignment in terms of that. There were some governance and operational issues around Medicaid and the concept of the single state provider, but we believe that overall there are synergies between this program and what TxDOT does and that should be revisited as we go forward in the next legislative session.

We also think from an HHSC perspective there's a number of findings within the details of our audit report that would be beneficial to them as they manage the transition, and given that the Frew lawsuit is now beginning to settle a little bit and they'll have a better sense of the operational environment that they will be working in, that they may be able to apply some of these recommendations.

MR. WILLIAMSON: Is the Frew lawsuit settled?

MR. COONEY: It's moving towards that. There is a consent decree that both parties are working through, so it's in final or near final format as of a few weeks ago. So it's beginning to get to the point where hopefully we'll have an understanding of what that operational environment will be.

And then in terms of the technology, we believe it would be appropriate to seek statutory revisions and policy changes where needed in order to be able to implement enabling technologies, and we'd also recommend looking at a capitated broker model, at least on a pilot basis. This is essentially moving towards a per-member, per-fee type structure for medical transportation.

In the area of outdoor advertising, a critical point here is this is supposed to be a revenue-neutral program and it is currently not a revenue-neutral program. Our analysis would suggest that there's approximately a $500,000 annual deficit and this is growing. There's a number of reasons for this. The program is distributed across headquarters and districts; there's lack of consistency in how these programs are operated across the districts; there's limited use of automation; there is no up-to-date statewide inventory of signs, we don't exactly know how many signs are really out there; and renewal cycles are monthly and distributed and managed by districts. So if I'm a large outdoor advertising vendor, I actually could get 18 different bills every month from each of the districts that I operate under for the signs that come due in that month, as opposed to getting a consolidated bill once a year for all those signs that I might have across the state.

There are some issues with the license fee structure in terms of equity: I pay the same license fee whether I have a sign advertising my business on my property or I'm in the business of doing outdoor advertising and I have hundreds of signs. And the current permit fee structure is not consistent with national best practices and basically it's on a per-structure basis as opposed to taking into consideration the size of the sign or the number of faces that there are.

MR. WILLIAMSON: Back up. I hate confessing when I don't know something about my department. Would you repeat what you just said about the fee structure?

MR. COONEY: Yes, sir. By statute, you are required to license everyone who has outdoor advertising in the state, and essentially you have to have a license whether you have one sign or you have a thousand signs, and the license fee right now is the same if I'm a small business or a church or something that has a sign advertising my organization that sits on my property, I would pay the same license fee as if I'm Clear Channel or anyone else that is in the outdoor advertising business.

MR. WILLIAMSON: But nonetheless, Clear Channel has to pay per sign.

MR. COONEY: They then pay an additional per-sign permit fee, correct.

MR. WILLIAMSON: Thank you.

MR. COONEY: So the recommendations here would be to develop an updated statewide inventory of signs so we actually know how many signs we have and where they are. Again, that was last updated in, I would say, the neighborhood of 2000. Some districts have updated it since then but there's been no comprehensive attempt at a statewide update over the last seven years. And this represents a key building block for the other recommendations. The department is currently working on a five-district pilot, they are in the process of trying to get that under contract, and our recommendation to the department has been to move forward on a statewide basis very quickly because this is really a building block recommendation across this entire program area.

We would recommend that you centralize the permitting billing process and automate that to the extent possible, so again, if I am Clear Channel, I'll now get one bill from the department once a year for my thousand signs as opposed to getting 18 bills every month from 18 different districts for the two or three signs that come due that month.

We would recommend that you shift responsibility from the districts to headquarters for a centralized field review function, so when I apply for a sign, someone has to go out and look at the location and those kinds of things, there's some work that has to be done. Today that's being done in the districts and there's approximately 19 FTEs that play either a full or part-time role in that process, and we've identified that we think if you were to essentially regionally deploy but centrally manage this field force, you could do it with approximately eight folks, so there's an opportunity to do this with less FTEs.

We would also recommend that you eliminate the license fee and surety bond which is really, to your benefit, a simplification of administration. The cost to administer the program doesn't come near to what you're charging them for a license. But the offset of that is that we'd recommend that you increase permit fees and base it on the number of signs and faces, so essentially someone is paying for the complexity and the size of their sign.

And then we would recommend that you also adopt and implement some self-service capabilities so to some degree a lot of this could now be done electronically so you could send a bill to the outdoor advertising firm and they could go online and pay you without there necessarily needing to be paper exchanged in that transaction.

MR. WILLIAMSON: Do you think we ought to charge more for a digitally electronic sign that changes messages every 72 seconds?

MR. COONEY: That's considered to be the best practice in this area, yes. That would be an example of a sign that would be charged a higher fee than essentially your traditional, conventional sign.

MR. UNDERWOOD: And you base that off of what?

MR. COONEY: In this scenario where we benchmarked what the department is doing against what other states are doing across the country and what is considered, this is also an area where FHWA provides some national guidance in outdoor advertising, so we used FHWA policy as one guidance, we also looked at what other states are doing as a guidance. And this is one where TxDOT really has a fairly straightforward and simple structure, a sign is a sign, as opposed to, as Mr. Williamson was saying, are we looking at the number of faces of it, are we looking at it as an electronic sign, those types of things.

MR. UNDERWOOD: You're basing it then off of how much revenue it's going to generate, because the electronic sign would generate more revenue because you'll have more multiple signs.

MR. COONEY: That's correct, yes, sir.

And that leads us to where if you implemented all of these recommendations, we'd be able to move the program from where it is now where it's running about a half million dollar deficit and a deficit that is growing towards one that would have a small surplus over a five-year period. It would require about $2-1/2 million in investment, so it's still running a net deficit over that five-year period because of the need to do the $2-1/2 million of investment, but that's giving you the framework for being able to, on an ongoing basis, have what would be a revenue-neutral program.

Other questions on this area?

MR. WILLIAMSON: Probably a happier customer all the way around, citizen.

MR. COONEY: Yes.

The districts did not seem to mind that that function would be centrally managed. I did note that in our conversation with various members of the audit oversight committee.

The last area is Motor Vehicle enforcement investigations. Right now the MVD enforcement cannot effectively manage their current caseloads, and we tried to measure this in three ways: we looked at the ratio of investigators to licensees and benchmarked that against other large states across the country, New York, Florida, California; we looked at caseloads per investigator, and again benchmarked that against other large states; and we looked at case aging and we benchmarked that against other states. And essentially, from a consumer perspective here, what's happening here is it's taking a long time to get a resolution to a complaint.

In addition, this is a function that is centralized, all of the investigators are based here in Austin. Obviously all the dealers are not in Austin, all the complaints that come up are not in Austin, so therefore, sometimes it's hard to get out to the field and go to where the issues might be.

In addition, MVD lacks authority to regulate non-licensees. So the statute is very clear on their authority if I'm a dealer and if I am a dealer and I'm not following a policy or a statute that I'm supposed to be following, their authority is very clear. If I am Joe Smith and I decide to put ten cars out in my front lot and want to essentially be a dealer without being a dealer, MVD does not at this point have authority to regulate those licensees, they have to seek help from local law enforcement to deal with that issue, and sometimes this type of issue won't have the mind share that you'd want to have in law enforcement agencies.

In addition to this, MVD lacks the resources to perform what we call pre-license inspections, and again looking at practices in other states, this is considered to be a best practice where you would actually look at a dealer's site and his operational plan and those types of things, you'd physically go there as part of the licensing process because it tends to vet out some individuals who may not be good candidates to receive a dealer license.

So our recommendations in this area, this is an area where we do recommend that you would increase FTEs allocated to this function but we'd also recommend that you would regionalize the staff, again, probably put them in four or five locations across the state based on where the dealers are and where your volume of complaints and issues have come over the last five years.

We would also recommend that you develop formal partnerships with law enforcement agencies, and we would recommend that, as the Transportation Commission, you seek the authority statutorily to commission some investigators as peace officers. It is an issue that's arisen that these individuals don't have the authority that they need to have as they're dealing with these issues. And I would point out on this particular point that this is one that several members of the audit oversight committee have expressed some concerns about because it would involve a change in department philosophy, some concerns about the department becoming, quote, a law enforcement agency, but also involved the need to change some HR policies in terms of commissioned peace officers carrying weapons and various issues.

So this is one that there has been some concerns, so in that regard, we see the two recommendations of developing partnerships with law enforcement agencies and the peace officers as working together because certainly you could do both, or if you only worked out getting formal partnerships with other law enforcement agencies who were giving you better mind share for this problem, then at least you'd be moving forward. But we would encourage you to explore based on what we see other states' motor vehicle enforcement agencies doing, and also other Texas state agencies. There's a variety of Texas state agencies that have commissioned peace officers on their staff. We'd encourage you to look at that recommendation to commission some members of the enforcement staff.

And then finally, we would recommend that you seek two statutory changes. One is to establish a statewide anti-curbstoning legislation. Curbstoning is when an individual is selling more than a certain number of cars from their front yard or from the street. There are a number of cities and municipalities within the state that have ordinances to this regard but there is no statewide legislation that specifically makes this specifically illegal.

And then we would also recommend removing the advertising cure letter provision. This is something that was put in now three sessions ago that impacts MVD's ability to enforce advertising regulations so when there's unfair advertising on the part of a dealer, it really restricts the ability of the department to address that issue.

We're almost done. Just some comments on multi-program findings that we wanted to share. Dependence on technology is really across all these areas and it really puts a premise on the department's carefully managing and monitoring all of the technology implementation projects because, given that you live in a world where you have FTE caps and constraints, technology is one of the tools that you have to effectively drive business change, and so therefore, it's extremely important that these projects are managed carefully so that they come in on time and on budget.

We think there's a need for a more structured business planning methodology in terms of trying to figure out how to allocate those scarce FTEs and we'd like to see that tied to outcomes, and the idea from a consumer services perspective, what does my customer expect, what level of service is my customer expecting, what kind of resources or investment do I need to deliver that level of service, and then be able to put that in a framework so that different divisions can have discussions with you in terms of saying right now I'm delivering a B level of service, my customers expecting an A, here's the kind of resource and kind of investment that I would need to be able to actually do the outcome or to deliver the level of service that my customer is expecting and try to make that a little bit more structured than the current business planning process within the department.

And finally, we believe　-- and we did this in the areas of grants management and call centers but we believe there's probably other opportunities to have some user groups, some planning groups across the divisions so that the fact that each district is operating somewhat autonomously and each division is operating somewhat autonomously, where there are opportunities to share best practices, to share knowledge, to share technology, so that we don't reinvent the wheel, that we find ways to gain some of the benefits of those synergies.

And that concludes our presentation.

MR. WILLIAMSON: Members, questions, comments, dialogue with this presenter?

(No response.)

MR. WILLIAMSON: So now I ask the same question I asked earlier on the funds guy and more appropriately ask here. You touched on outsourcing all through your presentation. It is my view that the Sunset Commission is going to be looking very carefully at that matter up and down our division and district lines. Were there any areas of outsourcing that you didn't touch upon that you would touch upon if the commission said go back and look at it again?

MR. COONEY: I think in each area we looked at outsourcing as an option, Commissioner, so I would say we evaluated the potential for outsourcing in each area, and within the detailed analysis, where we didn't see privatization as being the approach to take, we typically have given. So as someone, for example, from the Sunset Commission who is looking at the details of the study, I think they would see where we made an analysis and would say privatization was or was not appropriate. And I'll give a couple of examples of that quickly.

In the area of oversize/overweight permits, we looked at what Florida has gone through a privatization initiative where you all have chosen to take a technology initiative with TxPROS, and we actually evaluated or benchmarked those two initiatives against each other and determined that it would cost approximately 25 percent more to actually privatize the function in Texas that it's going to cost to implement TxPROS as a technology solution. So I think we have a basis for the recommendation that we have there.

In the area of outdoor advertising where we've suggested that you have a centrally managed, regionally deployed internal organization, we also costed out what we believed it would be to privatize that, and it would cost, in round numbers, approximately a million dollars more a year to actually privatize that function.

So I would say generally where we thought there was a privatization opportunity, we attempted to do some analysis to see if that was a better option than maintaining the function with the department or maybe somehow changing the way it's being done within the department.

MR. WILLIAMSON: Okay. Members?

Thank you, and I'm assuming you're going to be around for a little while?

MR. COONEY: Yes, sir. Thank you very much.

MR. WILLIAMSON: Thank you very much for your hard work. This will disappoint some and make some happy, but I can't help that. That's generally the way it is around here. We're going to take a lunch break, but we're actually going to take a lunch break to permit the commission to have an executive session. So for those of you who aren't involved in that, please be knowing that we will not take up the next presenter and resume our deliberations any sooner than 1:30, if you want to take a break and go eat some lunch or make calls back home or whatever.

And what I will say into the record, Mr. Jackson, if you're listening to me, is at this time we will take a break from our regular items on today's agenda and we will　-- do I want to use the word recess or open the executive meeting, Mr. Jackson, how do you want me to do this?

MR. JACKSON: Recess.

MR. WILLIAMSON: We will now recess our open meeting to go into executive session under Section 551.074 of the Government Code to discuss the appointment of a new executive director for the Texas Department of Transportation. It is now 12:24 p.m. and we'll meet in Mike's conference room.

(Whereupon, at 12:24 p.m., the meeting was recessed, to reconvene this same day, Wednesday, July 18, 2007, following a lunch break and executive session.)

A F T E R N O O N S E S S I O N

MR. WILLIAMSON: We're returning from executive session at 1:42 p.m., having made no decisions.

In the early years when I first got here, Ned, the UTP was made up of every project that had gotten to a certain point at the dollar value assigned in the year in which it had first been conceived. So Robert Nichols, one of the greatest things he did for the commission was he asked the question one day in a meeting: What's the current year cost of all these projects? And no one knew the answer. And so we all kind of looked at each other, and John Johnson turned to then Wes Heald　-- I think Wes was still at the helm　-- and he said, Wes, why don't we currently cost all these projects?

Well, if my memory serves me correctly, we had so much revenue we knew was coming in, and the cost of all those projects we had already approved that were in the UTP exceeded that revenue by?

MR. SIMMONS: I couldn't tell you.

MR. WILLIAMSON: I think it was $6 billion.

MR. SIMMONS: I think it was more than that.

MR. WILLIAMSON: I mean, it was some number that was beyond comprehension.

MR. SIMMONS: I hate to step over the chair, it wasn't quite as bad as that, but I can tell you that the estimates on the projects, some of the districts did play games and keep the numbers artificially low, knowing it was going to get let, but there were others that periodically updated the estimates.

MR. WILLIAMSON: But it was a large dollar difference.

MR. SIMMONS: It was a very large dollar difference between what we had coming in and what was on the books.

MR. WILLIAMSON: So the next logical step was, okay, let's remove from the UTP and let's get back to reality. Well, the biggest hit was obviously the biggest district, Houston, and that's when your close friend, Michael Stevens, decided I was Satan in disguise. He's been mad at me ever since.

MR. HOLMES: [Inaudible].

MR. SIMMONS: The UTP currently has a built-in 4 percent inflation every year that it's not let. And we're refining those estimates as a project nears. But every district knows how much money they're going to get, so if the project is over, that's just that much less money they have to spend.

MR. HOLMES: [Inaudible].

MR. SIMMONS: That's current dollars.

MR. WILLIAMSON: Okay, Steve, I turn it back over to you.

MR. SIMMONS: Commissioners, our next auditable area is contracting and project delivery, and this is by Deloitte and I'm going to ask Peter Wallace to come on up and make the presentation. Good afternoon, Peter.

MR. WALLACE: Good afternoon, Mr. Simmons, good afternoon to everyone. Appreciate the opportunity to meet with you this afternoon and discuss the contracting and project delivery audit unit.

With me today are two of my colleagues, John Cullian and Brett Bisaga. Both of these gentlemen worked on this project and John is going to address a couple of the slides a little bit further along in the discussion.

If we go to the second slide, just sort of the agenda, give you a sense of what we're going to talk about. First, overview. I want to talk a little bit about the methodology we used in particular with the contracting and project delivery portion of the work, talk about the summary of findings, some of the key issues that came out of our review. Then we've got a few sections we want to do in more detail, there's four areas we want to walk you through a little more detail on the findings and our recommendations, and then finally questions. But I encourage you to ask questions as we go through it as well, feel free. It might be easier if you hit us with a slide that's up on the board if there's a particular question or clarification needed.

Let me start with the methodology and the approach we used. I think as Mr. Simmons described the first thing this morning, there are really three phases to this audit. We did a phase one risk assessment to really identify areas where we thought there was a need for further study. After phase one, after our meetings with the AOC, we developed a work plan in phase two, and then phase three is the detailed assessment.

This graphic shows the typical project life cycle of the project from inception through completion, and we've listed on there the divisions that we examined as part of both phase one and phase two. And if you look at the far left beginning with the Transportation Planning group, Environmental, Design, Right of Way, Construction, Bridges　-- really could be folded in with Construction　-- through to Traffic Operations, and if you notice the color coding, all of these divisions were looked at in some level of detail through interviews and looking at documents. The ones in red were the ones where we identified an issue or an opportunity, a risk that we felt should be examined during phase three, so the red ones are the ones that we really did a more intensive review of.

And in going through the process, at the end of the day, we focused on four areas that we felt were the key risk and opportunity areas for meeting the objectives of the agency to relieve congestion and to efficiently deliver programs to the public, and that is adequacy of project controls, effectiveness of project delivery systems, management of consultant contracts, and utilization and structure of the CDA program.

And in looking at these, we were also looking at some board issues that we see in any organization, the issues around people, processes and policy, technology, and then other external issues such as Federal Highway regulations changes and the state regulations.

Turning to the next slide and you'll see that in the four areas of primary focus we really identified twelve individual items so I'd like to walk through that a little bit more to give you a better flavor for the issues we were trying to examine.

Under adequacy of project controls, we were looking at the scheduled monitoring and control procedures, obviously a key element to any capital program and delivery of capital programs is to have a way to manage the schedule and be able to meet milestones and meet the deliverable dates. We also looked at the bid assessment procedures, in particular the process for selecting contractors. We examined the cost monitoring control procedures, that's the other side so the other bookend of the project control system is schedule and cost, how are we doing on budgets. And finally, we looked at the IT tools and processes that are in place for project delivery.

Under project delivery systems, we were looking at the alternative contract delivery approaches such as design-build which is used in the CDA program, not traditionally used in the Texas DOT projects. We looked at the process of development, projects being developed from the standpoint of even the stage prior to letting when plans and specifications are being prepared at a district and how that process works with the divisions in order to meet the requirements of the letting schedule. We looked at inspection and some people issues around the inspection process and resources. Environmental affairs processes and organizational structure is another key element where we saw some issues around, in particular, lack of sufficient resources.

The third area, management of consultant contracts, really how are we managing these contracts, how do we select consultants, and then how do we monitor the deliverables, do we have a good process such that we know that the deliverables we're getting from consultants, either plans or specifications, are meeting the requirements of the project and are meeting the specifications that TxDOT uses on their projects.

And finally, we'll talk about the utilization and structure of the CDA program, in particular how the program is structured and the resource issue around getting sufficient talent internally to maybe get to a point where you can rely less on maybe specialty consultants in doing the CDA program on a go-forward basis.

This next slide just kind of summarizes on the top the various groups that we spoke to, and you can see that all the major divisions we spoke as well as even Office of General Counsel, the Audit Office, and we also spoke to three districts: Houston District, Austin, and the Bryan District, and we tried, where it was appropriate, to overlap with the field ops audit as well, and you'll be hearing from some of my colleagues on that in a little bit because there were common issues and we wanted to make sure we understood the process at the district level as well as division. You really can't look at a life cycle of a project without understanding how the whole process works from districts through divisions.

And then the bottom box is some of the external agencies that we spoke to or got research from, and this really was a process to see what are the other practices that are out there for all the issues we're looking at, where are the best practices, what are other agencies doing that you may be able to benefit from.

And let me just add at the top, the process of those divisions within TxDOT, I think we had almost a hundred interviews and they're referenced in our report, I think we have a list of everyone we spoke to. So I think we got a good sense of everyone's views on issues and risks and how can we do business better.

If we go to the next slide, it's just sort of a summary and I mentioned it in one of the earlier slides about whenever you look at an organization there's generally a couple of common denominators to success, as I like to say: people is one, process and policies is another, and then technology is the third, and those are really the business processes and the elements that allows any organization, either private or public, to be successful in their endeavor. So I wanted to take some of the key findings and put them into these categories so we can just make a few comments about them.

First the people issue. Staffing issues is a primary area of concern across the board for the divisions and even some of the districts we spoke to. Not having enough people, people being overworked, maybe not even having the right skill sets in some arenas. And obviously you've got a very significant capital program going forward and we've got a cap on FTEs, so that's a struggle for people in general.

There's an issue around retention of existing employees and knowledge transfer. What we're seeing　-- and I've worked with a lot of public agencies and we see it time and again　-- you're losing people to the private sector, to consulting firms, and what happens many times is you've got young engineers coming to the organization, work a few years, and then they go off with a private consultant.

So what happens is you've got an organization now where you've got a top layer of very senior people who really have all the knowledge, they've gone through the process of building these projects and understand the issues and how to deal with all aspects of a project, be it environmental or construction or some other aspect, and then you've got some young people. So there's an issue around knowledge transfer, getting that knowledge to your staff. So I think that's something you've got to think about from an HR perspective.

Having adequate staff to meet the current demand for projects, and in particular, probably the largest thing that jumped out of this is the Environmental Division, there's just not enough people to handle the volume of projects that are coming through the pipeline for environmental review. In some cases we met folks that have a portfolio of a hundred projects. That's just too much, I think, for one person to handle. So that's an issue we think you ought to be addressing from HR, either using more consulting or going back to the legislature and trying to deal with the FTE issue to try to get more resources into that department because, frankly, the environmental stage gate for a project is critical, you're not going forward with the environmental reviews done properly and being able to address the impact issues.

Level of experience in staff in certain roles. There are some issues around field personnel, in particular inspectors that we don't see a lot of structure around what's the requirements for an inspector, how do we make sure that we've got adequately trained people in the field for these projects.

And finally, in the people issue is the resources from the CDA program. It's a different business case, different risks, much different than traditional projects. We think you ought to be looking, even with the situation now where you've got a moratorium on new projects, this is probably a good time to start thinking about how do we bring people into this organization and it's going to require some thoughts about compensation, benefits, and there's a lot of issues because you're competing with many, many other states and consultants that are out there developing　-- more broadly they call it PPP programs but it's the same thing as a CDA program.

MR. HOUGHTON: How far did you drill down in the environmental process?

MR. WALLACE: We actually looked at 14 projects which I'll get into in another slide, but basically we took a look at projects that were just cleared environmentally and ones that had been let for construction to see.

MR. HOUGHTON: When you look at an organizational chart of one project and you said one person to a hundred projects, is that person managing consultants?

MR. WALLACE: In some case he may be. And that was sort of a couple of people we spoke to, I can't recall, I'd have to go back to see specifically who it was, but it was a very large caseload, and we heard that from many people in the Environmental Division.

The second area around processes and policies, TxDOT has some very good comprehensive policy procedures in place. I think there are some minor modifications that could be made to reduce risk, and one in particular is change order approval authority. We see, when we look at change orders, that because of the level of autonomy at the district level, very few change orders get to the division for independent review, and I think that's something you may want to think about, either lowering that amount from $300,000, and maybe re-characterizing some of the change orders so you can have a little bit more oversight and governance. The only issue would be time. That can be dealt with by streamlining the process and making sure that things get done when they need to be done.

And I've seen this many times with other agencies, the people on the project that deal with the contractors, they may not necessarily　-- they have a different viewpoint sometimes and maybe you need some fresh eyes to look at a big change order and decide well, really has this guy met the requirements of the contract, has it been priced appropriately.

Finally, technology. We looked at the technology that relates to project delivery in particular. In our third audit unit today we'll talk about more broadly technology issues, and one of the things we saw was I think we counted up about 200 different software systems used in project delivery, and the question is is that appropriate, are there redundancies, what tools are the best. Maybe there should be a study done, I think, to kind of understand what we have in place right now and maybe there's some things we don't need and maybe we can consolidate some functions.

The other thing in technology is the movement towards this total project cost initiative which I think is an excellent idea, it's a leading practice, trying to take in all costs of a project, internal costs of design, right of way, but the only issue we have is that there's no tool yet to accomplish there. There's a screen with some kind of module in DCIS for it, but I think you should be looking at that, a better tool to accomplish that on a go-forward basis.

Now I'd like to get into a few of the detailed findings, and these are the four areas I introduced in the second slide. First, adequacy of project controls, and we've identified, as I said before, there are some very good control procedures in place for managing projects. We even tried to identify where are some of the real strong practices and where are some of the areas where we think there needs to be some attention paid to.

This first one, consistency and effectiveness of schedule planning controls. We found in our interviews that there's really varying levels of experience and proficiency, in particular with project scheduling systems for managing projects, and in particular, things like being able to monitor schedules, being able to deal with change orders, and being able to deal with extension requests. This is a training issue, it's not a big deal, it's something that should be done, should be looked at, and I think that's something that you could do internally or through some outside vendor to get better P-3 training.

One of the problems is the contracts require the contractor to submit an initial schedule, it's a computerized document. If you don't have the people that understand electronically to get into that schedule and understand the logic ties and all the issues around scheduling, you really don't know what you have, is that really an appropriate schedule. If you're not challenging the contractor　-- and I'll get into this a little bit more when we talk about incentive contracting　-- you need to have the people that have the talent to do that. And when an issue comes up about critical path delay, I'm sure there are some people in the organization, not as many as we would like to see or we would have expected to see.

Second issue is the effectiveness of the project budgeting and cost controls. The unit price tracking system we think is very effective, good operational strength, it gives you a good cross-section of bidding prices across the state, it also will help you with your engineers' estimates on a go-forward basis, so we think that's very good.

The second issue is around change order authority, discussed that a little bit, the authority level of change order approval at the district level, and maybe you want to do a study to see what kinds of change orders are out there, where would you want a second level review. If it's just a change order that's unit prices, it's just a quantity issue, very straightforward; if it's something else that requires redesign or if it's a differing site condition and there's pricing issues, that might be something you ought to be thinking about having a division level person in Construction look at.

Third issue is consistency and accuracy of cost estimates. This total project cost system I think is a good decision to move forward and I think it's the only way you can really understand what's the true cost of a project in which you can capture your internal design time, the time for right of way, it's just basically creating a contracting system and a work breakdown structure to support it.

MR. HOUGHTON: Well, how have we done regarding those estimates?

MR. WALLACE: Well, I think we can only look at the construction estimates, there's not a lot of data. We have not seen any data where we can see where you've captured for a project what the internal design costs were, development of right of way issues.

MR. HOUGHTON: I'm just talking about the estimates versus what we let that contract for.

MR. WALLACE: Well, I think your construction estimate only, you're facing what everyone else is facing, a lot of inflation, so consistently the bids are coming in over your estimates.

MR. HOUGHTON: Well, I understand, but how have we done, 10 percent over the estimate, 5 percent?

MR. WALLACE: It's part of the study but we didn't try to do a metric on what average it is, but it's certainly, I would guess, is over 10.

MR. HOUGHTON: Over 10?

MR. WALLACE: Yes. And one of the problems is it's not a simple issue because it could be the quality of the estimate but the other issue is what kind of competition are you getting in the marketplace. That really drives those bids just as much as the estimate does.

MR. HOUGHTON: So if we flood the marketplace, we potentially eliminate that competitiveness because everyone is busy.

MR. WALLACE: That's a problem.

MR. HOUGHTON: We pat ourselves on the back one day for letting a record $5.5 billion, but the next day we don't have the competition necessary to drive that competitiveness that we were looking for. Accurate or inaccurate?

MR. WALLACE: That's accurate, yes. It's a problem across the country in terms of getting good qualified contractors, and depending on where the project is will drive it a lot too. I mean, if it's in a major metro market, you've got more contractors, but how much is going on in that marketplace.

MR. WILLIAMSON: But is it not the case that if policy drives people out of business, policy also drives people in business? In other words, we've said if the legislature has given us the directive to use private sector debt to build toll roads and if we, as a commission, have made a decision to send 86 projects out for proposal with the firm statement that we intend to borrow the money to build these projects, aren't we, in effect, driving people back into business by saying that?

MR. WALLACE: Well, you are. You're encouraging the marketplace because there's now an amount of work flow, but the problem is that you've got to look at, first of all, some of the bigger projects you have these bigger contractors, more sophisticated contractors, and what's their book of business look like, what kind of bonding capacity do they have, what kind of financial resource do they have to build the project.

A good example is I've been involved with the bay bridge program when they first bid the new Oakland Bay bridge, they got one bidder, they thought they had two, they had one bidder and it was $700 million over the engineer's estimate, and there was a problem with the engineer's estimate on that one, but they finally went back and they got two bidders. But a project like that, there's not many people that are willing to take it on, and then you add to that the fact that in northern California and southern California there's a tremendous amount of highway construction and heavy civil construction going on.

So I don't think it's an easy answer but I think that you want to encourage the contracting community to bid projects and have an outreach and getting a dialogue going with contractors I think is very positive.

MR. HOUGHTON: So should we slow down on letting contracts?

MR. WALLACE: No. I think you've got to balance that against the public need. You need roadways, so you've got to go through the process and just try to improve your engineers' estimates as best you can, try to peg them more realistically to the prices in the marketplace.

MR. WILLIAMSON: Maybe we need to create a Construction Division.

(General talking and laughter.)

MR. WILLIAMSON: I haven't heard a good reason not to do it, I'm still waiting.

MR. HOUGHTON: Do you want us to give you that reason or them?

MR. WILLIAMSON: Well, if you can't find contractors to build your projects, if your public tells you they want the roads built, what did the federal government and state governments do 40 years ago, 50 years ago? Maybe that's the answer, maybe we need to be in the construction business.

MR. WALLACE: Well, you'd be a first for a public agency.

MR. WILLIAMSON: We don't worry a lot about that here. Maybe Mike Behrens won't retire if he knows he's going to have a Construction Division.

MR. WALLACE: Well, I know, I think it's a problem. If you've been following the bond initiatives in California, they passed an initiative for $20 billion to spend in the next five years. It's going to be a real challenge for CalTrans to develop and build those projects.

The last item on this slide is the bid assessment procedures, and it's really testing the financial capability of a bidder to bid works very well, it's a strength, you're not getting people that are bidding projects that ultimately would not be able to perform. But on the other side, we did see very little policy, procedures around deterrents of collusion in bidding, and we think that's an area that requires some training and probably some procedures in place. Collusion, essentially bid-rigging. It's unfortunate, it's something that does happen.

And I think when you've got issues with few bidders, you've got ones that are above the engineers' estimates, we've got to have a process in place to look at that issue, and it's really to deter things, there's no way you're going to prevent that sort of activity necessarily, but to have something to try to deter fraud.

And I worked with the Virginia DOT on this very issue, on a major issue around their concern about collusion of bidding, and we did a study and we helped them develop some policy and procedures around the bid review process.

So it's just a good governance process that I think the agency should think about.

MR. HOLMES: Before you go on, you didn't uncover evidence of collusion, you're simply saying that we need to refine our procedures and policies that would help prevent it. Is that correct?

MR. WALLACE: That's right, we didn't see any. There should be a step process to address that issue.

The next slide is dealing with the project delivery systems and we looked at three things: alternative project delivery, effectiveness of the development process, and incentive/disincentive contracting.

In the alternative project delivery, what we see is that, like most agencies, you typically do design-bid-build on your projects, but there are a lot of things happening in the marketplace, including changes in federal regulations, that are making design-build a more viable alternative. You're obviously doing it in the CDA program. We think that should be added and maybe be sort of a legislative issue. I've seen you folks have talked to the legislature previously about this, but maybe that's something you ought to be thinking about as an alternative again to build projects and there are some time-saving and potentially cost-saving advantages to going to that route, for you to use design-build as a contract delivery process.

Effectiveness of development process, we saw some issues around communication between divisions and districts and one of you gentleman asked about the environmental process. We did look at 14 projects, some that have been just environmentally cleared, some that were let for construction, to see how we were doing, and there are several examples in our report. In one in particular, we saw an issue with a project where the design was being revised at the district level for a 16-month period of redesign, yet the environmental group was still proceeding along with their environmental approval process. So it was a real disconnect as to why was that happening, why wasn't it communicated, and obviously given the pressure you have on environmental staffing to begin with, it's something you'd obviously like to avoid.

One of the things we suggest is sort of a project development schedule for maybe your larger projects where you can bring in all the division functions and the district functions, have a schedule where everyone can see it and we know where we stand, you can think about allocation of resources. So if one project is being redesigned, the environmental group can focus on something else.

Next item on effectiveness is this time line estimator tool which is an environmental tracking system which we think works really well. That gives you kind of a realistic view of what's the environmental development process for a project, so we think that works very well.

Further item on project development is the process whereby plans and specs come from the district to the division for approval, there's a 90-day period before you go to letting, and we saw some issues around the manual for the PS&E development, checklists being used, and we know the manual says the checklists are not mandatory. We got some feedback from folks that we ought to make those mandatory requirements. That way the district, as they're developing plans and specs and the deliverable, they know what they have to meet at the division level to get it approved in order for it to move on to the letting process. So it's basically a policy issue or a process issue to adjust.

I talked about the Environmental Affairs Division and the backlog and under-staffing for the volume of projects.

The final item, some issues around inexperienced field personnel and under-staffing of construction projects. We didn't see a lot of process around what are the requirements for the inspector, how do you vet people for projects, how do they get assigned. There could be some policy around that, and I think also doing sort of an inventory of all the skill sets across the board: what do our inspectors and our field people have for qualifications, years of experience, so you get a better system for assigning people to projects.

Finally, incentive/disincentive contracting practices, we've looked at this program and obviously you want to encourage people to finish projects on time and give them a benefit. One of the issues we have is we tried to look at what's the percentage when you make the incentive or you apply the disincentive, and there's really no data out there. I'm sure it exists but there's no tracking of that. And what it comes down to is that with an incentive contracting program there's a potential for abuse, and one of the issues is how aggressive is the schedule that you're imposing on that contractor to meet an early milestone, has anyone done any analysis about that, because frankly, if he's not putting out the extra effort, expending the dollars to make the incentive, if it's an easy incentive to make, not a good situation.

So that's something we think you ought to look at in more detail, you probably should track it and maybe have some more procedures around it, depending how much it is, there's a process that says someone has made a judgment that that incentive requires them to go add three more equipment spreads, add more people, he's expending economic activity to earn it.

MR. HOUGHTON: If you could prioritize under your project delivery system, effectiveness of the development process, which is the most critical out of all those?

MR. WALLACE: Well, some of them are strengths, but the most critical, I think, is this comprehensive development schedule for projects. So you've got a master schedule so you know what the district's activities need to be and what the divisional responsibilities need to be and how they interact to bring a project in on time, to get the project to the letting stage quicker, and avoid issues like it's being redesigned, environmental doesn't know, or other issues like that. I think in my mind that's the number one issue, and the second one is probably the Environmental Affairs Division, getting more staff.

MR. HOUGHTON: In the Environmental?

MR. WALLACE: Yes.

MR. HOUGHTON: Okay.

MR. WALLACE: At this point I'd like to turn it over to John Cullian, who is going to talk about the other two detailed areas of findings.

MR. CULLIAN: For the record, I'm John Cullian, senior manager with Deloitte Financial Advisory Service, and I was involved in much of the day-to-day analysis and evaluation over the last several months of the department.

As Peter said, the third area that we want to cover is the area of the management of consultant contracts, and obviously, with the volume of projects that have been let in the past few years and with the restriction on FTEs, there has been a tremendous amount of reliance on consultant services by virtually all districts and divisions to help execute and deliver projects.

So our objective in this evaluation was to look at the process for selecting and managing those consultant contracts, but also at the same time, to look at and assess the oversight of the services to ensure that there was a quality of service being provided or that there were procedures in place to ensure that services being provided were what is expected by the Texas Department of Transportation.

In this area we had some key findings. I think what we saw is that there are a number of policies and procedures in place that help guide the process for selecting consultants. There is a very good flow chart that takes both the district and division personnel through the process for selecting consultants, particularly in the area of architects, engineering and surveying, contracts that identifies the steps necessary, the parties responsible, as well as the required documentation along that process. And along with that, there is also documentation around the roles of the various individuals throughout that selection process, but also once consultants are selected, giving guidance around the oversight and management role as well. So there is good policy and procedure that we believe is in place.

MR. HOUGHTON: You didn't review political consultants, lobbyists, others?

MR. CULLIAN: No, we did not. Our focus was on architects, engineering and surveying.

MR. HOUGHTON: They're the honest ones. What about the other ones?

MR. CULLIAN: We found the individuals that we dealt with to be very open and honest.

MR. WILLIAMSON: You were kind of struggling to answer that question, weren't you?

MR. CULLIAN: I wasn't certain if it was rhetorical or I was looking for an answer.

MR. WILLIAMSON: Sometimes it's best just to stay silent and just kind of see if something else develops.

MR. CULLIAN: Duly noted. Thank you.

MR. WILLIAMSON: Well, I don't know if lobbyists and political consultants, do they have a trade monopoly protection in statute that prohibits us from looking at their money?

MR. HOUGHTON: Yes, they do, I think. It's called Republican or Democrat.

(General laughter.)

MR. CHASE: No, it doesn't. We have much more flexibility in whom we hire in that respect. For the record, Coby Chase.

MR. WILLIAMSON: Continue.

MR. CULLIAN: Thank you.

One of the findings that we found in this area deals with the evergreen contracts. Most of the consultant work is authorized through evergreen contracts, on-call contracts that are issued to the consultants, and presently those contracts are authorized in a $2 million two-year increment, and we recognize that in certain instance the department has the flexibility to authorize those contracts in $5 million increments, but presently there's an executive order in place limiting it to $2 million.

We understand that that order is in order to help create competition and grow the number of consultants available to provide services to the department, so we certainly recognize the value of that order, but in certain instances, we recognize that there is a need for various divisions or districts to have the flexibility to go to that $5 million cap.

A significant amount of time is spent in the selection process getting consultants through the overall selection process, and so we think this would help make that process a little bit more efficient in that it wouldn't have to occur so frequently as it does, but also provide flexibility for the districts and/or divisions when they are in need of assistance potentially from a larger consultant who may be near a cap but be the right consultant for a particular project.

Secondly, what we're seeing or what we have heard from our discussions with the various divisions and districts is there is somewhat of a challenge for the project managers right now who are responsible for the oversight and management of consultants. For many it's a new role but it's also a role that they're being required to perform in addition to the normal services that they typically do. So it is something where we see the need for some additional training of those employees to help them better manage consultants and be more efficient in their work as well.

One of the things that we recommend to be considered is potentially having a consultant design section within the Design Department, a group that would focus solely on the oversight of consultant services. This is used by other departments of transportation. We do recognize the challenge that the department wants to make sure that their staff stay trained, that they are up to date with current policies and procedures and they want to perform the work themselves, but we think that potentially this type of department could be staffed or a section within a division could be staffed by volunteers or a rotational program so that it allows a more effective oversight of consultant management as opposed to project managers splitting their time between their own projects and the oversight of consultants as well.

MR. HOUGHTON: Did you all discuss how to incent consultants to complete projects versus stringing them out?

MR. CULLIAN: We recognized from our evaluation that certain consultant contracts, such as the Right of Way Division has consultant contracts where they get paid on a deliverable basis, so they don't get paid unless they complete a task. We certainly recognize that as an operational strength.

MR. HOUGHTON: What about environmental? Somebody had a comment on environmental?

MR. CULLIAN: I would have to check to see if we looked at that issue regarding their scientific contracts. I believe those were also paid on a deliverable basis as well. It was in the area of architect engineering services contracts where I think there still some time and material type of payments as well as potential pay for deliverable.

MR. HOUGHTON: So again, do we have anything that incents these people to finish sooner than later, like we do, Mike, in construction contracts?

MR. CULLIAN: I would have to check to see if there is any.

MR. WILLIAMSON: Well, it's against the law.

MR. HOUGHTON: Is it?

MR. WILLIAMSON: I think so. We've got a few engineers up here. Lonnie, isn't that against the law? Wake up back there, Lonnie.

MR. SIMMONS: Mr. Chairman, I think Mark Marek is here.

MR. WILLIAMSON: Saved by Steve Simmons, Lonnie.

MR. SIMMONS: Mark heads the division that handles our consultant contracting.

MR. MAREK: For the record, Mark Marek, director of the Design Division.

Mr. Chairman, I'm not aware of anything that would allow us to do that on a professional services contract. The regulation for those are pretty tight. I don't think, unless we're allowed, that we could take that step.

MR. WILLIAMSON: I think that engineering monopoly is pretty strong.

MR. HOUGHTON: In other words, they don't want to finish it sooner.

MR. WILLIAMSON: They just don't want us to incent them to finish it sooner, that might cause them to compete.

MR. MAREK: From an incentive perspective. Now, we can put whatever time limit we want in that professional services contract, and if we're willing to pay for it to get them to put the resources in there to finish it at the time period we specify, then certainly we could do that. It would cost us, but not from an incentive perspective.

MR. HOUGHTON: In other words, we pay for their time.

MR. MAREK: Yes, sir, correct.

MR. HOUGHTON: Do we pay these people on an hourly basis? Is it hourly or by project?

MR. MAREK: It can be done either way.

MR. HOUGHTON: Do they put hours in there?

MR. MAREK: Yes, sir.

MR. HOUGHTON: So it's an hourly basis.

MR. MAREK: We can do that.

MR. WILLIAMSON: Plus overhead. Amadeo, were you going to add something to it?

MR. SAENZ: I think Mark covered it.

MR. SIMMONS: Thank you, Mark.

MR. HOUGHTON: Mark, thank you.

MR. CULLIAN: For the record, John Cullian, back at the podium.

One of the other areas that we looked at were providing project managers who are overseeing consultants with the proper tools to help them manage, particularly around costs and schedule. As we talked to the different divisions and district personnel, we saw that many of them had their own tools that they've created or their own spreadsheets to help them in the management process, but we think that there is some value to developing some standard methodologies for managing and tracking costs and schedule for consultants that would allow the project managers to be more effective in their process and also keep a better track of not only schedule but billing issues as well as work authorizations issued to the various consultants under their evergreen contracts.

We think with the volume of consultants that are out there, one of the things that is critical is providing consultants who are new to TxDOT with training around TxDOT policies, procedures and requirements. We think it's important because this will bring efficiency to the management process in hopes of minimizing the amount of time their project manager has to spend with trying to get that consultant up to speed regarding pay applications, regarding quality standards, setting the expectations so that as they start their work with the department, they know what direction they should be going and to where.

Lastly, we think that there should be some semi-annual evaluations conducted of consultants. There is an evaluation process in place. We think it should be something that is done on a regular basis, semi-annually, because we think this will bring some improvement to the selection of consultants. Now, the consultant contracting office within the Design Division is in the process of establishing a web-based evaluation process which we understand will be brought online here, I believe, in August of '07, and that online process will allow access to those evaluations. So we think this is an important thing, we believe it will be helpful in the evaluation process as well as in issuing work authorizations to consultants who have already been selected but potentially are not performing as hoped.

One of the areas that we touched on a little bit that we think is an important thing and an operational strength is getting paid for a deliverable basis, because consultants won't get paid until they complete a task, it incentivizes them, in essence, to get their work done so that they can get paid, as opposed to stretching out the completion of a task. So we saw that as something that's being used in particular in the Right of Way Division as an operational strength.

Next I wanted to touch on the fourth area that we looked at, and an important area　--

MR. WILLIAMSON: Wait a second. When you were going through and looking at the consulting aspect of our business, did you specifically look at the statute that governs our relationship with engineers?

MR. WALLACE: [Inaudible].

MR. WILLIAMSON: So you're familiar with the consultant selection process that we have to live with here in Texas. Any other state have to live with that process?

MR. WALLACE: One of the issues that we saw was the fact that price is generally not a determining factor in evaluating surveying or design contracts. Most states that I've seen, price is never a determining factor but it's generally in the rating process for consultants. So there are some like you that take that out of the equation.

MR. WILLIAMSON: And we take that out because of the law?

MR. WALLACE: The code requires it.

MR. WILLIAMSON: What about the value of what they do, we're not permitted to consider that as well, the value of what gets done?

MR. CULLIAN: I believe the process allows the evaluation of the quality of services that they bring in their performance such that if they're poor performing, in essence, that affects the value that they bring to the department.

MR. WILLIAMSON: So if we were permitted to use price as one consideration, what would be the likely outcome of that? Would some of those greenhouse contracts be less?

MR. CULLIAN: I don't know that the greenhouse contract itself would be less, the greenhouse contract basically sets a cap, if you would, on the amount that can be issued to a particular contract. What it may affect is the cost of work issued under a work authorization.

MR. WILLIAMSON: But you don't recommend that we investigate that as part of our modernization?

MR. CULLIAN: Yes. It's not up here on our summary slide, but I think if you look at the details in our report, we discuss it as an area that should be evaluated and considered as part of the selection process. It's one criteria that should be included within that selection process.

MR. HOUGHTON: Did you call it greenhouse? You said greenhouse process.

MR. WILLIAMSON: Thinking about my house. Sorry. Evergreen.

(General laughter.)

MR. CULLIAN: The fourth area that we looked, as I began to say, is the area of comprehensive development agreements, and we see comprehensive development agreements as a tool to allow TxDOT to address some of their project funding issues that exist. So our objective in looking at comprehensive development agreements was to focus really on the current status of the program as well as look at some potential direction that the program is headed is around issues of staffing and structure.

We also recognize, obviously, that there was a lot of legislative attention in the last session around this area, and that a moratorium has been placed that has put some restrictions on the program. We see that moratorium to potentially provide an opportunity for the department to better develop some of their programmatic approaches to get that further along, as well as providing an opportunity to educate the public regarding the CDA program and what the perceived and actual benefits of the program would be to the Texas public.

As we looked at this, obviously we recognized that TxDOT is leading the way in the United States, when you look at transportation agencies, around the issue of public-private partnerships. There are a number that are in the process, there are obviously other states that are looking at it and considering it, but based on our understanding of the market, Texas is further along in the process of getting positioned for doing these public-private partnerships.

As Peter alluded to earlier, it requires a new way of doing business. It requires a different set of thinking, it's a different business model, a different risk evaluation process, it's a different obviously contracting approach, but we see that the department is making very good strides in getting their hands around those processes and changes to their business model.

We think some of the key things that need to be addressed in this area is an increase in staff involvement. Currently there is a number of individuals throughout the department that are involved, but those same individuals have multiple roles within the department, and as such, their time tends to be pretty well spread among the different tasks that they're being asked to perform, and we see that if the CDA program is going to be a key initiative, as we believe the department sees it to be, that it needs to be adequately staffed to be more efficient and effective going forward.

One of the other issues that we looked at was continuing to develop that programmatic approach, and as I mentioned a few minutes ago, there are a number of things in process. I know the Environmental Division has developed their programmatic document around the CDA program and there are a number of other documents that are in process. We see the moratorium that has been placed on the program as an opportunity to allow the department to further develop those programmatic approaches so that as they come out of the moratorium with a direction on how they're going to proceed, they're in a better position to execute these types of programs.

We think it's important, though, that they define what the measures of success will be from the CDA program. Presently, most of the CDAs that are being pursued are in the procurement stage, so the evaluation of success centers around revenue generation from the CDA procurement, but there should also be some metrics of success developed around the completion, the construction of these projects and the implementation of projects once they're constructed.

As I said earlier, I think the moratorium provides an opportunity for the department to educate the public. We think there is a need to launch a communication strategy to better educate the public as to what the program is and what the benefits the program brings to the constituents of the state of Texas. So we see that as a critical issue that needs to be addressed if the CDA program is to move forward effectively.

Obviously there is a desire, as the CDA program becomes more developed, to staff that as much as possible with internal TxDOT professionals, and we see that there is a need then to recruit individuals from the private sector. That will be somewhat of a challenge given some of the skill sets that are required around the legal area, around the financial area. You're competing with a private sector market, but if the desire is to move to less reliance on consultants in an effort to save money, in order to be adequately staffed, there will need to be some consideration around policies in terms of hiring and bringing those people on.

I think as we looked at the overall CDA program, we saw that there is steering committees in place and eventually there will be project-specific boards as projects move beyond the procurement phase and into the construction phase. We saw these as a leading practice or an operational strength of the department. We felt that these boards will provide some consistency across the program as well as a benefit in terms of the effective management of those CDA projects as they move forward.

Any comments or questions on this section?

MR. WILLIAMSON: I'm primarily focused on the consultant aspect and you answered my question earlier.

MR. HOUGHTON: Mine too.

MR. WILLIAMSON: Members?

(No response.)

MR. CULLIAN: Thank you.

MR. WILLIAMSON: Thank you.

MR. SIMMONS: Peter and John, thank you.

Our next group to come up is going to cover field operations and it's a trio of folks　-- a duo.

MR. DAVIS: My name is Tim Davis. I started off by writing this and was going to say good morning to everyone, and now I'm saying good afternoon, but I thought I was going to have to put good evening on here. I'm going to introduce the topics, the levels of what we did on the project and then turn the detailed findings over to Guy Lembach.

As in the other audits, we started off in phase one, we had approximately 19 risk areas that were originally developed and reviewed during our phase one process, but that boiled down to eleven areas that we spent some additional time and additional scrutiny on.

Our focus, again, was on field operations in the districts. We did very little collaboration or no collaboration with the other audit groups, our other colleagues, or really we didn't spend a lot of time going from the districts up to the divisions, our focus was right down at the field level. What we heard from the districts, the field, was basically what we heard, and I know that I've had some subsequent conversations during some of the reviews of our documents with some division people, and I think what that brought out, if anything, was a communication issue between the districts and the divisions. We'll spend more time on that.

You can read through the different procedures and processes, methodologies and tools that we used. Suffice it to say we got through nine districts and six areas in this period of time that started around January, and spent quite a bit of time interviewing at all levels at the areas and the districts.

The other thing that we did which is not really, quote, scientific, is that we took the findings from those districts and the areas and pretty much extrapolated those to the universe of 25 districts. Not exactly a best practice, by any means, but based on the way the project was set up, it was intended to get a cross-section of metro, urban and rural type of districts, and hopefully we can move the findings from those and sort of apply them to the organization in the aggregate.

As we went through this, we came across, and as I've listened to some of the other presentations, there is definitely a theme, and I'm sure you commissioners are seeing a theme that's developed. The first of the four areas really was a governance issue, and the governance really has to deal with a couple of areas that we highlighted. The first has to deal with this fact that the districts are extremely autonomous, autonomous in the context of there are certain policies and statutes that they follow but they are encouraged to really be autonomous, to run their business as businesses, report in to division and to the commission accordingly.

We understand the need for that, we understand the different geographic differences around the state and geopolitical reasons, and so you'll see a number of recommendations dealing with looking at governance and looking at ways to really consolidate, centralize and share some services that heretofore have been pretty fragmented.

The other piece that we saw had to deal with leading practices, and there are a number of really wonderful leading practices around human resource deployment and training and job rotations, things like that, that really are being done in isolated pockets around the state, and it doesn't really appear to be a formalized system at this point to take those best practices and institutionalize them and roll them out and bring all of the districts sort of into alignment. So you'll see a number of recommendations dealing with that also.

Statutes and policies, we know that those drive behavior, drive business processes. For the most part we've stayed away from statutes, realizing that there is little that we could hope to deal with from a statute standpoint, but from a policy standpoint, we realized that there are a number of policies that are in place that really could be changed by the commissioners and the divisions. So we believe that a policy, for instance, around the use of third parties for consultants and for inspectors, while I know more of that's being done, I understand that some lab work and some other consultant contracts are being used using third parties, we found that, quite honestly, there is industry precedent, there are other pieces of the business around inspection　-- an area that is really short in a resource standpoint　-- that could be subcontracted out, and it is kind of a policy that that's something that isn't necessarily done.

Next area, common theme, recurring theme has to do with technology, and I think you've heard it from the other groups. We're aware of the number of systems, applications. For every application and system that you can count, there are probably two or three other applications that are out there and being used by different districts in different ways. And we believe there's a real opportunity to develop an enterprise-wide system that really could, while it is painful, extremely painful in an implementation, we believe there are benefits, and you'll see a number of recommendations that are relative to technology.

And lastly, again another common theme has to deal with human resources, and it has become apparent to use that especially in the inspection area and a number of areas in the districts, it's very difficult to compete with the private sector in getting people onboard and retaining them. We found that　-- Commissioner Williamson isn't here　-- the thought of setting up a construction division and trying to maintain the resources in a construction division, there are enough difficulties right now and I know that was somewhat tongue in cheek, but it is definitely a serious problem, it's going to become more of a problem.

We also noted that not always are resources shared between districts, there's some of it being done, but we think there's an opportunity to share scarce resources across districts, realizing that there are some geographic and travel issues.

And we're also advocating going back and looking at　-- I used the term zero-based from an accounting perspective　-- going back and really re-challenging the human resource complement that exists in the districts and the areas and look at that based on the demand, how much business is being done, because what we see in some cases is more of an incremental type of resourcing and staffing. So we're hoping that potentially a follow-up study really looks at is this the appropriate head count for all of these districts to accomplish what is currently on their plates and what's projected to be on their plates.

Those are recurring themes. Guy is going to go into some of the detail, and again, I know if you have questions, you'll fire away.

MR. LEMBACH: Good afternoon. My name is Guy Lembach and we're going to start with the project development, and within project development there is Planning, Design, Environmental and Right of Way were the four areas we looked at, and on this slide, we're looking at Planning and these are three risk areas that we identified, and the first being the consistency and effectiveness of schedule, planning and controls.

And what we found, and what we found a lot in all the different areas we looked at was that varying levels of sort of schedule and life cycle planning and controls are being used by different districts, and planning can range from a white board to a fairly detailed type schedule situation. We do know and we have identified as an operational strength that two of the districts are currently developing a critical path management system to help in their planning, to understand the planning life cycle, and we certainly support this and think it's a good idea, and I believe that's actually being done in conjunction with the University of Texas. And so our recommendation, particularly in that area, is to continue development and then implement and get it across all districts.

Another risk area that we identified was the consistency and effectiveness of project budgeting and cost control, and again, this is being done inconsistently. Budgeting is done for all projects, that's certainly happening. Whether projects are being monitored against those budgets appears to be inconsistent, and we think there are some risks there in not understanding where you are within the budget for your project. So we know, and Peter mentioned this earlier, is that the division is developing a total project cost initiative that will affect the development cost and design in Environmental and Right of Way, and when you have this knowledge and you have this information, it just makes budgeting for future projects easier and it makes understanding where you are within the project easier. We think the continued development of that total project cost initiative is something that you should be doing.

Last in Planning is the consistency and the accuracy of construction cost estimates, and I know this was a topic in the last discussion, and what we see is that estimates for projects are updated annually and updated in DCIS, and that annual update is fairly standard in different DOTs that we talked to and that we know. But once you put the new number in DCIS, there's no what was the last number, what was last year's number, so there's no reconciliation between those numbers and there may be a lack of understanding of why the increases occurred or why the change in an estimate occurred, whether it was an increase of scope or whether it was some other factor.

So we think that there is a need to start developing those baseline budgets to keep those budgets and if they're increased on an annual basis, to start reviewing them and reconciling why that's being done. You can also develop metrics around that and that can help in budgeting for future projects.

The next area in the project development life cycle area is design, and in here our report has many detailed findings in different areas but in terms of this, it was sort of the adequacy of consultant design management, and 65 percent of the work that's being done on a dollar basis is now being done by consultants in the project development phase through Environmental, Design and Planning. And there's a shift from sort of being an engineering organization to being more of a project management organization, and with that shift, there are different skills that need to be employed by the people who are managing consultants.

We have seen also that there were some processes and controls that could be in place to help do that, to help manage that, and we think that there is a need to start developing those resource skills, particularly around project management, and then one of the things that we have found in our review was that there was originally some guidance around errors and omissions for consultants, and certainly the perception is that as you go on to more consultants, the quality, the QA/QC of plans has not been what it was in years past when you were doing the primarily engineering. So there was an errors and omissions policy that was in place that's been rescinded and we think there are some with errors and omissions against the consultants, maybe some re-evaluation as though what can be done to implement something around sort of having an errors and omissions policy back.

MR. WILLIAMSON: You said the errors and omissions policy has been rescinded?

MR. LEMBACH: That's our understanding is that there was a policy in place and it has been rescinded, sort of penalizing design consultants for errors and omissions.

MR. WILLIAMSON: Hang on a second. Amadeo, where are you? Tell us about that.

MR. SAENZ: For the record, Amadeo Saenz, assistant executive director for Engineering Operations.

The policy on errors and omissions is still in place, we still hold the consultants accountable for their work and they're responsible for addressing and correcting all at their cost. What we have put in is a procedure that we would follow on how we would go towards trying to recoup some additional costs that we would see say during the construction phase, and during the legislative session there were some additional changes in law and which we're now going back and trying to make our process basically fit with the law when it was put in place.

MR. HOUGHTON: Do we require an insurance policy to do business with us?

MR. SAENZ: No, sir. As part of our contract, they're not required to have an errors and omissions policy. Most consultants do have that but we don't require it as part of our contract because we're holding them accountable for the work that they do.

MR. HOUGHTON: But if they don't have the assets to back up their work.

MR. WILLIAMSON: I have to come to the defense of Amadeo. That was a decision made by the previous commission in an effort to stimulate small consultants to come to the table and compete for contracts, something John and Robert and I thought needed to be done.

MR. SIMMONS: I might also add that the errors and omissions process we worked with the design firms when they had a problem was very similar. In fact, the rules are tied to our construction contract claims procedure, and when we changed the contract claims procedure, there was also a conflict that caused problems in that design process, and that's what brought about the legislation, I believe it was by Representative Solomon, that we negotiated out that we'd pull our rules back until we got it straightened out and corrected. So that is the issue this references, we did pull back based on legislation and the problems that we had with our rules, so we're fixing it.

MR. WILLIAMSON: And it may be time to go back to insurance.

MR. HOUGHTON: I think you need to look at some type of benchmark, the onesie-twosie firms, but I'm required to have errors and omissions come hell or high water to do business in my profession.

MR. WILLIAMSON: I understand. The reason we did that was we did a study and found that only large engineering firms were getting all of our work, we weren't spreading any of the work to smaller firms, but those same firms were turning around and subcontracting to the smaller guys and they weren't requiring insurance of them, they were covering themselves through their own insurance.

MR. HOUGHTON: Isn't that one reason why we did the evergreen　-- or the greenhouse contracts, as I call them now?

MR. SAENZ: The evergreen contract was put in place as part　-- evergreen, not greenhouse, or we can call them by the name the chairman doesn't really like, indefinite deliverables　--

MR. WILLIAMSON: It insults my bachelor of arts experience: an indefinite deliverable.

MR. SAENZ: An indefinite deliverable contract, otherwise known as evergreen. But they were put in place to be able to address a lot of times where you needed to design a portion of a project, like design the hydraulic or drainage, or a small project that came up through maybe an emergency. They were never put in place to bring on board for the design of a major project. And that was one of the problems that we were seeing when were at the $5 million mark is that they had $3- or $4- or $5 million evergreen contracts and instead of going out there and trying to procure a consultant for that particular major project, they would just issue that work order to whoever they had online. It does speed up the process but you don't know if you went out there and got the best firm for that particular project, and that was one of the reasons we brought to you, one of the recommendations was to take it back down so that we could, in essence, go back to the original intent of the evergreen contracts was for them to do small projects, emergency type work, or portions of projects.

MR. HOUGHTON: The smaller firms.

MR. SAENZ: And allow opportunity for smaller firms to have those contracts and to kind of provide them the experience level that they needed to get.

MR. HOUGHTON: I've heard back from the industry and especially the smaller firms have benefitted by those evergreens and breaking those up.

MR. SAENZ: It does cause us more work.

MR. HOUGHTON: More oversight.

MR. SAENZ: But what we were trying to accomplish, we wanted to increase our base.

MR. HOUGHTON: We've made more friends.

MR. HOLMES: Amadeo, before you sit down, the lack of errors and omissions type insurance coverage, has that caused us any specific level of problems with some of the smaller contractors?

MR. SAENZ: No, sir. The way we've handled errors and omissions, as we find that there was an error or omission in a consultant contract, we go back to the consultant and that is worked out. They will gladly go back and correct and provide us the redesign at no cost. When we were running into problems is that after the fact that we get into the construction portion of the contract and we run into it as part of construction and a consultant contract really has already expired, or maybe we did keep them on but it's hard to bring them back, and we were trying to see if there was some way that we needed to recoup some of the additional costs that we were borne by that error and omission that we were trying to set up the process.

But most of the time, in fact, all of the time, the consultant will gladly fix the error if it would cause a redesign. Of course, if he doesn't fix the error, we do an evaluation process and he may not be evaluated to his liking.

MR. SIMMONS: Commissioner Holmes, I don't want to lead you to believe that these consultants don't have that insurance, we just don't require it. Most of them do carry that insurance just as their business practice, we just don't require it under our contract.

MR. LEMBACH: The next area within project development is the Environmental area, and the first risk area we found was the development and tracking of schedules during the environmental process, and again, as we had mentioned before, there's varying levels of schedule planning and controls being utilized by the districts around environmental, and the environmental process and the right of way process　-- which we'll talk about a little bit later　-- are really the critical path to getting projects out to letting. These is the area where you experience the most delay or take the longest amount of time to help get to letting.

We do know that in one of these districts that we interviewed that they have created sort of a comprehensive document reviews by the consultants and by internal resources, and we think this is an organizational strength and it's something that, again, could be utilized by more districts. We think that in this area there is a need to implement a more consistent and rigorous process for tracking and verifying project information during the environmental life cycle, including the QA and QC procedures.

Environmental is continued on to slide 9, and this area that we identified was the effectiveness of internal policy and procedures, and in this area　-- and Tim mentioned it before　-- there seems to be a communication issue. We find that the districts are of the opinion that there's inconsistent application or inconsistent interpretation of environmental policies and procedures, and they've been asked to do things or to supply documentation that isn't necessarily required by the regulations.

This is an area where we actually talked to division and division's general response has been that there's a general lack of quality of documents that are coming up from the districts, and we think that this interpretation issue really is just a communication issue between the division and districts. We think that there is enhanced training. We know that there are QA and QC procedures being developed at division for helping this Environmental area and we think that's something that should be done and continue to be developed. We do see that there's a need for improved communication and one of the comments that we got was that there used to be annual sort of meetings between the districts and divisions around environmental and now they're every two years rather than every year, and that the communications between these areas just isn't there right now or it's lacking and it's causing some problems and potentially some delays.

MR. HOUGHTON: Delays are the key. Right?

MR. LEMBACH: Yes.

MR. HOUGHTON: Communication. Did they point out any one district, like San Antonio?

(General talking and laughter.)

MR. LEMBACH: The next area is Right of Way, and again, right of way is another area certainly on the critical path and experience delays, and in some ways it's hard to adequately plan for right of way issues that are going to occur. We have identified that there's a development of tracking of right of way acquisition cost and schedules, and again, just varying levels of tracking is going on and monitoring.

There is, certainly from the district perspective, an idea that they would like more autonomy in this area, particularly on those easier to get parcels. They've identified, in our conversations with them or our interviews, parcels that can cost $1,000 dollars just to buy have to go through $3,000 to go through the process and yet they still have to go through a lengthy process even though it's a relatively low risk parcel, and some potential or at least some evaluation of whether there's more risk that can be taken on by the districts in that area.

MR. WILLIAMSON: Which are you saying: by the districts themselves or by the Right of Way people here in Austin?

MR. LEMBACH: By the districts themselves.

Again, a need to develop a consistent process for verifying and tracking that information, these costs, and once you have this information, this data and you understand where you are within the process, it just makes it easier to understand where your issues are to help mitigate those issues and to move forward and to plan in the future for other projects.

Next is the project delivery area and in that we're going to talk about CDAs, comprehensive development agreements, construction, inspection and maintenance.

MR. WILLIAMSON: Hang on a second. Are there any more questions about these topics? I have a couple. What percent of the right of way costs is related to utility relocations?

MR. LEMBACH: It's a pretty high cost. I know in the body of our report we have the number and we've gotten that number, I can't recall the number right now but I believe it's more than 50 percent.

MR. WILLIAMSON: The report says it's between 50 and 75 percent. So my question would be did your audit and during the process of doing your audit, did you look at the cost of relocation of utilities when the company's property interest is compensable versus when it's not compensable, is there a difference between those cost elements?

MR. LEMBACH: During our audit we didn't distinguish that or do a review on those areas.

MR. WILLIAMSON: Isn't there a big difference, Steve, in the actual cost of those things?

MR. SIMMONS: I'm sorry. What was the question?

MR. WILLIAMSON: Doesn't there tend to be a big variation between when the utility company's property is compensable and when it's not?

MR. SIMMONS: Definitely.

MR. WILLIAMSON: Should we not take a special focused look on that?

MR. SIMMONS: Yes.

MR. SAENZ: Amadeo Saenz. The cost associated and the increases that we have a harder time to get the utilities to move when it's a non-compensable utility versus when it's a compensable utility that they're going to get reimbursed for that adjustment, the big factor there is they don't have to worry about budget, they budget it but they know they're going to get their money right back. It's when the utilities have to move on their own and pay for those costs on their own that we see that we have more delays and have a longer time period for those adjustments to take place.

A lot of times we've heard that we didn't put it in our budget, we don't have that, this is a new project, we didn't know anything about it, even though it's been in the plan for a couple or three years. But it does take a much longer time, thus causing some delays in project development.

We do not track the actual cost of the adjustment when it's not compensable, we don't have that information. We did get some legislation this year that allows us to enter into a prepayment plan where these non-compensable utilities. If the utility company has entered into the prepayment plan, will now become compensable, this will allow us to take the not budgeted portion out of the equation because they're part of the plan and hopefully will allow us to expedite those projects and realize some savings.

MR. WILLIAMSON: Okay, thank you.

MR. LEMBACH: Are there any more questions in this area?

MR. WILLIAMSON: No. If you're going to make recommendations, if you're going to audit us and say this is how you're doing here and here and we recommend this and this, it seems to me that I need for you to say for utilities that are not in your utility insurance pilot and for which the property loss is compensable, you need to do these things, when it's not compensable, we suggest you do these things. And if that third one is secure permission to litigate immediately with the utility and make them reimburse us for the cost of lost time, then that's what we need to hear from you.

MR. LEMBACH: Okay.

MR. WILLIAMSON: Because I recollect all of our districts have been screaming about that pretty regularly now for a few years. Okay, go ahead.

MR. LEMBACH: Again, the next area is project delivery and talking about CDAs.

MR. HOUGHTON: I'm going to go back. Can you quantify the amount of time lost in the environmental assessment phase, based upon what you've identified here?

MR. WILLIAMSON: Did I strike your environmental nerve?

MR. HOUGHTON: Yes, you have.

MR. LEMBACH: We didn't quantify it. We do know that in our discussions that there is a perception and there is certainly the belief that it has increased over the last number of years, the time to get environmental clearance.

MR. HOUGHTON: By 20 percent, by six months, by a year? Is there an average?

MR. LEMBACH: We weren't able　-- I remember asking the question the first time through and we didn't get any data to say that but I'm sure it's out there, I'm sure that there's knowledge out there, but we didn't quantify that or attempt to quantify that.

MR. HOUGHTON: But that seems to be the gatekeeper for these projects is Environmental.

MR. LEMBACH: Environmental and Right of Way are the major gatekeepers for these projects, yes.

Anything else?

MR. HOUGHTON: No, go ahead. I'll turn my mike off.

MR. LEMBACH: Back to project delivery. We're going to start with comprehensive development agreements, and again, we recognize that TxDOT is one of the leaders in this area nationally. Certainly in the districts there is varying understanding of the CDA process. Now, a lot of this has to do with the fact that a lot of districts don't have CDAs, and therefore, may be not be a direct need to have information right away. But we do understand that the internal processes and tools and capabilities　-- and I believe Bob Cooney referenced this a little earlier　-- that some are developed, some are in the process of being developed but they're not fully developed, and therefore, haven't been distributed to the districts and there is a need to do that.

We have seen sort of an occupational strength in an area where when you're doing particularly a design-build project where they are using leading practices in this and collaborating between the different parties, the TxDOT and the non-TxDOT, using paperless-type project management areas like this which are successfully occurring.

We think there is a need to continue to develop these programmatic policies, that there needs to be maybe different management systems for organizational staffing to support the CDAs, considering leveraging CDA leading practices to improve the traditional operations, the design-bid-build, and we do think that there may be an area, because your design-build, as mentioned earlier, are for toll roads only, maybe taking that out of the CDA process and including design-build in the same vein that you do traditional projects as the design-bid-build.

The next area is the construction function. And this was mentioned earlier, particularly around scheduling and the expertise and controls around scheduling being utilized to monitor and plan construction projects across the districts. And again, different districts are at varying degrees of expertise. And we know there's one evergreen contract that's really just around CPM project scheduling services and helping to evaluate them and have the ability, if the skills aren't there today, that you can go to this evergreen contract to get the evaluation and review of CPM schedules.

We think there is a need to improve this skill through training. It's something that becomes very important, the ability to analyze a project at any given time, the ability to understand the effects of a change order and to understand the effects of a delay and plan accordingly are very important, particularly during the construction project.

Another area is the effectiveness of the change order process, and in our review of the process, there are checks and balances in place and that the pricing negotiation improvement process is fairly rigorous, and we think that's an operational strength. We have identified inaccurate coding and that presents a risk of understanding why change orders occur or the potential for root cause. Understanding these root causes can help in lessons learned, and then help later in eliminating these potential risk root causes later.

One of the areas　-- and I know Peter touched on this　-- was the approval limit for projects and that limit, from our understanding, hasn't changed for 20, maybe 30 years, and that there may be a time to re-evaluate, particularly on large projects, maybe on a project-by-project basis. TxDOT is doing more $100 million plus projects. There may be an opportunity to look at those projects and say should we change the approval limit on these projects specifically, not necessarily across the board but on the larger projects, just because the ability to get to a $300,000 change order on a $150 million project is certainly easier than it would be on a $5 million project.

With that there would be probably some controls but in terms of what we understand and we understand that there aren't many of these. I think, on average, one district sees one of these a month, if that, in terms of these large change orders, but because of the policy where contractors really can't start work until the change is approved and the two or three weeks it takes to get these changes approved is a two- or three-week potential delay to the project.

The next area is maintenance, and this is more of an IR issue, that there are multiple systems being used in maintenance, that they're complex, that there's a limited number of users that can access, that the data that's coming out of them　-- or the process of manually entering the data can be competitive in the different systems and certainly prone to human error. We do know there's a compass project that's being deployed to improve the IR systems and has made a number of recommendations, particularly among the number systems and how things could be improved or re-evaluated.

Certainly the need　-- and we'll talk about IR systems later and Tim talked about it before　-- just to evaluate and look at the systems to minimize the potential for human error and to maximize their effectiveness and their use. What we found, in going out to the different districts　-- and Tim did allude to this　-- that you have all these systems but then you have each district using different methods of pulling the data out of the systems and have developed different spreadsheets in different areas in order to do this, and we think there is a way to maybe standardize that and not have as much different data systems being utilized throughout TxDOT.

In terms of inspection, we did find as far as the human resources issue with inspection, there has been difficulty in obtaining and retaining inspectors, and that's created difficulties in prioritizing which do you go to inspect. And when we're talking inspection here, at least in the context of this conversation, we're talking about the people that review and approve the actual work that's being done and approve it for payment.

We know that traditionally TxDOT does not want to use sort of consultant inspection or hasn't used consultant inspection and it seems to be a policy. Now, there are certain exceptions, they do use it for material testing, they do use it for laboratories.

MR. WILLIAMSON: Lavatories?

MR. LEMBACH: Labs, materials laboratories. Sorry.

In our research we found that, and I believe the number is roughly 70 to 80 percent of DOTs are using some kind of consultant inspectors from a consulting engineering inspection firm, and it may be just the time to re-evaluate whether to use that staff or to use consultant inspection. We do understand that you'd have to create sort of standards around quality and management of these consultants and educate these consultants on TxDOT policies and the TxDOT way of doing business.

MR. WILLIAMSON: You say other states do that?

MR. LEMBACH: Yes.

MR. WILLIAMSON: What other states? Just name a few.

MR. LEMBACH: New Jersey Department of Transportation does it, PEN DOT does it, and I can name those two because I was one at PEN DOT and I worked at the New Jersey Department of Transportation and we used consultants, so they're just two right off the bat. And I think in our report we named I think it's roughly 70 to 80 percent are using it.

MR. WILLIAMSON: So a significant enough percentage to make a difference?

MR. LEMBACH: In some cases it's to supplement, purely to supplement the staff and so it's not significant. I don't want to say 50 percent of the staff, typically it's done on a project-by-project basis such that　-- well, in my experience it's done that with the exception of some of the inspection supervisors, everybody on the job is a consultant. Supervisors would be state employees or state supervisors but the inspection forces out in the field are typically inspection forces, and that's the way I've seen it done in my experience. But it could be that you just need one or two more bodies on a specific project and just go out and get a consultant to do it.

MR. WILLIAMSON: Okay, thank you.

MR. LEMBACH: Next area is support operations, and this is human resources, finance and accounting and IR, and human resources has been discussed. Certainly employee recruitment and retention has been an issue, questions about career advancement, we know particularly at the district level they bring in young engineers, young engineers go through, they get their engineering training and they get their professional engineering license, and then after they've been trained in the TxDOT way of doing things, they go out to consultants.

There are training programs out there from a district perspective, and in our interviews, certainly the training was welcomed, they thought it was very good and that they think it should be continued, and we agree. We have seen districts that have implemented mentoring programs, job rotation, on-the-job training to enhance this experience, an with the mentoring hopefully to create a situation where young engineers or employees want to stay with the organization.

Another area is resource allocation, skill sets, and effectiveness of organizational structure. At least in our interviews there's been discussions of the FTE allocation and how that's being done and whether it could be done differently or whether different drivers could be used in that formula. We know that the total number is legislative mandated, but think that there may be an opportunity to look at how the FTE allocations occur in just different areas.

Certainly at the metros we heard it quite a bit, at the urban and the rural we heard it less, but even when it came to certain functions, certain areas like our Right of Way people and we found that in some cases there had been a number of projects, say five or six years ago, when a district had ramped up their Right of Way organization, those projects have since been let and complete and the number of Right of Way people may not be as many as they needed five or six years ago yet there's no sort of reallocation of those sources, and there's limited reallocation in terms of　-- usually it's between neighboring districts　-- do you have additional resources for me to utilize. If Dallas needed people, then they reach out to their surrounding districts, but there's no sort of central place where you could say that we have extra Right of Way or extra resources that could help other people.

MR. HOUGHTON: Like a clearinghouse.

MR. LEMBACH: Yes, like a clearinghouse. And we certainly recognize that some of these issues have geographical limitations, but other areas don't necessarily have that geographical limit.

Certainly from the field perspective there is a feeling, there is a belief that the eleven-to-one staff-to-supervisor ratio limits career advancement, and that's what's been told to us on a number of occasions. We have done some research and understand that there is no necessary correct ratio, that it changes based on the organization. There's also in that eleven-to-one situations where people are responsible for doing 30-40 performance evaluations a year, so there may be an opportunity to go back and look at that and help level that and take some of the load off people in that area.

And then lastly in terms of resource allocation is there is an increase in the consultant work and that was discussed before, and the shift at least that TxDOT is moving from a purely engineering organization to an engineering and project management organization. So our recommendation in this area is to do a statewide review of the management structure, the duties and the responsibilities and evaluate resource staffing and allocations, and then do a skill set evaluation for management consultant work for project management and determine what additional training is needed and start putting that training in place.

The last slide is the last two areas for operations, first being finance and accounting, and in that we found the efficiency of maintaining the accuracy of financial accounting applications, and the processes used to report payroll time and time allocation to specific costs are unrelated and require duplicate entry into the systems and even in the districts are being done at different area offices as opposed to one location.

Reports that are generated from this legacy system, because of the need for manual entry, it's been reported there's been timing issues and accuracy issues, and therefore, these reports aren't necessarily relied on in performing evaluations or planning work. And then lastly, some of the current accounting practices lead to inefficiencies related to the processing of vendor invoices.

We think that there is a need to explore implementing a system-wide ERP system that includes capturing payroll and costs and time expended. We think there is certainly an opportunity to start looking at rationalizing and consolidating certain accounting functions and resources, maybe at the district level as opposed to at the area offices, or even regionally, as can be done. And then we recommend that there be completed a mapping of major business processes to identify activities and tasks that can be consolidated, modified or deleted.

The last area is information resources and this has been discussed a number of times and I believe the exit audit discusses it in even more detail as to the efficiency and the effectiveness of the IR systems and there's multiple systems　-- the number that was thrown out before was 200　-- that they're old, they're main frame or legacy-based systems, and just certainly a need to start updating and enhancing these systems to improve productivity, reliability and just the ability to manage your capital program.

And if you have any questions, we'll take them.

MR. WILLIAMSON: Discussion with this gentleman at this point?

MR. HOUGHTON: Not to gloss over it, but the last finance and accounting in writing: Current accounting practices leads to inefficiencies.

MR. LEMBACH: Yes.

MR. HOUGHTON: Is that a systems issue, not talking to each other?

MR. LEMBACH: It seems to be a process system and it probably is the system component to it. For example, what we heard was the field orders are an item and then there's an invoice, so the invoice is sent to the field and things are done at the field, district gets it, district does approving, district sends it to division, division does approving, division goes up to the Comptroller, and then it goes back down through the division, back to the district office to actually have the check sent out. Just type of inefficiency, that type of length of time to get an invoice done.

MR. HOUGHTON: Then it's got to be greater than that. I mean, if we're talking about the following of dollars to projects, accounting for those projects, again, paying the invoices on those projects, those types of things.

MR. LEMBACH: Right. That's sort of the inefficiencies that we found.

MR. HOUGHTON: Steve, do you want to weigh in?

MR. SIMMONS: Well, this was a discussion we had when they made the presentation to the audit oversight committee, and the accounting systems in place, the problem is it's an antiquated system that prevents us from being as efficient as we could possibly be.

MR. HOUGHTON: Why is that, why are we so antiquated?

MR. SIMMONS: Amadeo and I both serve on the Information Resource Council in the department that looks at all our automation stuff, and the problem with our FIMS system　-- which is our financial management system　-- is every one of our systems, whether it's our maintenance management system, our construction management system, it's tied to FIMS, and so to take that one program out and bring it up to efficiency, you have to start pulling everything off and plug into that new system, and it's so big, we've directed the Finance Division to work with ISD is at least put together a strategic plan on how we get there. Right now it's such a big problem, nobody wants to tackle it, and so we're trying to at least get the steps needed that we need to get it done.

MR. HOUGHTON: The longer you put it off, the worse it's going to get.

MR. SIMMONS: Exactly. And a lot of this was dictated from, I guess, the chairman's time from the Comptroller's system coming down and having to interact with the Comptroller too. So there's a lot of moving pieces when it comes to this, but we recognize that there's a lot　-- and he just gave one, the time sheet issues: we input it into a computer program and they print it out and somebody else puts it into the program, and it runs through all the processes. We need to fix it but it's going to take a lot of time and it's going to take a lot of money.

MR. WILLIAMSON: Sounds to me like a software program that a bunch of engineers organized.

MR. SIMMONS: No. I think it was accountants.

MR. HOUGHTON: Bass is not here to protect himself.

MR. SIMMONS: I know, that's why I said that.

(General laughter.)

MR. DAVIS: I understand the magnitude of the financial investment, not including the human resource investment. Colorado recently replaced its system and I know there's been some exchange of information, but their cost was around $25 million for an ERP enterprise-wide that handled accounts payable, receivables, job costs, and so it's a large dollar investment, and that's not even internal costs to get it done. So I think that's one of the things that you all are considering but just to put it into perspective.

MR. SIMMONS: Tim is exactly right. Our VTR issues, we have to pull people off production to be able to develop the program to get it done.

MR. DAVIS: And there's a huge benefit, obviously, but it's just making that initial investment because the payback is over some period of time, but just to give you a perspective.

MR. SIMMONS: But again, we are developing a strategic plan to get it accomplished. I hope James heard that.

MR. WILLIAMSON: Thank you for your presentation.

MR. SIMMONS: Our next presentation on management and support and this will be presented again by Deloitte and Scott Huntsman.

And one of the things I neglected to say early on　-- I always remember things I should have said　-- each one of these had to be a separate individual group that looked at this. This was not because we had three audit functions by Deloitte that they had the same people looking at the three different areas, they had three separate groups. And I think that's why you saw, especially between the last two presentations, that they are very similar things but they came to different conclusions. One said change orders probably need to have less authority and the other one says you probably need to think about doing more. So these were three different groups, and the same thing with Dye Management, that looked at these functions.

Yes, Mr. Bass, do you want to come forward a minute?

MR. BASS: Good afternoon, James Bass, chief financial officer at TxDOT, defender of FIMS and other automated systems. Unfortunately, I was waiting on our inefficient elevator operations and so I missed some of the conversation.

I'll jump back to cover your specific questions, but the timekeeping is an issue for us, the inefficiencies of capturing it, printing it out, re-entering it into a system. One of the difficulties we face and other agencies face is, to my knowledge, the State of Texas is the only entity I'm aware of that actually processes payroll before the fact. What I mean by that is we all who are employed by TxDOT will receive a check on August 1 for the work that we did in July. In order to get that direct deposit or that check in hand on August 1, sometime around July 20 we have to enter information into the Comptroller's system in order to produce that payment.

Unfortunately, we do have some employees who don't have enough leave time and they will not get a full paycheck for the end of that month, and so we have to have a separate process to account for the payroll.

We then have to have a separate process to distribute and allocate the salary costs to the thousands of projects we have going on across the state, and one of the primary reasons we do that is because if an engineer spends time on a specific project, we will receive reimbursement from the Federal Highway Administration.

And so we track for two separate purposes, trying to reconcile those two is difficult, there are inefficiencies in the old system, and one of the things we would dearly love if the entire State of Texas would move to doing payroll after the fact rather than trying to estimate how many hours all of the employees will work and actually processing payroll before the fact.

FIMS is both somewhat of a conundrum. The good news is FIMS operates and functions and we receive $3-plus billion in reimbursements from Federal Highways, we develop our annual financial statements and meet every requirement that we have. In my opinion, the big obstacle or downturn of FIMS is it's a mainframe based system that was developed in the early '80s, implemented in the early '80s, and so it's the extraction of that data by the day-to-day managers in order for them to get that data out and put it to use on a daily basis is the biggest challenge I think that we face with FIMS, as well as all the interconnections it has throughout all the systems.

And so as Mr. Simmons said, the Finance Division and ISD are looking at a couple of different steps. One, a long term solution because it is 20-something years old and no program or software lasts forever, although it's done amazingly well over the past 20 years. That will be a huge undertaking and will, imagine, provide a lot of sticker shock to a number of people of just what the cost and the time line that will be. I would not be surprised if we're talking $100 million plus, having heard what other state DOTs have gone through recently.

In the interim, we're looking at, if there's not a temporary solution for the reporting requirements, to allow the day-to-day managers to pull that data out because we don't simply report the data to get reimbursed by Federal Highways, that's a key when you're talking several billion dollars, but another primary reason to keep it and track it is so that the managers can utilize that day to day in their decision-making, and that, in my opinion, is the primary failing of the current system we have.

I can talk about the voucher processing, one of the customer service issues. As you heard, the districts receive the invoices because we need someone, the contract manager to say yes, we received the goods or service, we actually received that from the vendor or the consultant, they sign off on it. It gets entered into the system and while the State of Texas has a uniform statewide accounting system　-- thanks to someone who shall remain nameless　-- it has to apply to all state agencies so it doesn't have the level of detail that we require within our system in order to get reimbursed and to operate with our federal partner, Federal Highways.

So we're what they call a reporting agency, so every night we send over a summary level of detail from FIMS over to the Comptroller's Office, so rather than having 52 different accounting entities sending information to the Comptroller's Office, it gets consolidated in Finance and then sent back out. When the check gets written and comes back, we do send it back to the districts, and I agree that is an inefficient operation, but the reason I've always been told for that is from the vendor perspective. A lot of times if they get a check or a direct deposit, they have no way of tying that back to which invoice they sent us.

It's kind of like when you send in your utility bill and it says please detach and tear off this slip and send it back, well, in order for us to do that it's either we send the checks back out to the district who have retained those little stubs and they match them up with the check and send them back to the vendor, or the districts have to send those little stubs all here into Austin, we have to then match them up and move forward.

So yes, there needs to be a solution and it could be more efficient, but the balance is that customer service, if you will, relationship that we have with our vendors in order to be good partners with them.

If I've missed any of the pertinent issues.

MR. HOUGHTON: I opened up Pandora's Box and I apologize for doing that.

MR. BASS: You should have known better with me.

MR. HOUGHTON: Should have known better, but my point is not an indictment on anyone or anything, it seems to me that we haven't gotten into the 21st century technology-wise. And if I had to make a recommendation to the chair or to the staff, it would be in our next LAR that we tackle the issue of technology.

MR. BASS: And I think that's what Mr. Simmons was saying, and for that exact purpose, this current review process of a strategic plan for FIMS so we can have a general understanding and a path of where we want to or need to go, what the costs may be, and then go forward to the legislature, and it may take　-- because again, I think it's going to be a considerable significant amount of money, time and resources to do that.

MR. HOUGHTON: Because it's going to take time to put that assessment together and request together to the legislature, I would have to start pretty quick.

MR. SIMMONS: Exactly.

MR. BASS: It's ongoing now, that review process.

MR. HOUGHTON: Thank you, James.

MR. SIMMONS: And Judy is in the back, she's nodding her head what James says.

MR. HOUGHTON: So it's okay?

MR. SIMMONS: We're going to get there. But I think in James's defense, everything is being done in accordance with acceptable accounting principles and everything like that, so I don't want anybody to get that we have an inefficient accounting system.

MR. HOUGHTON: No, that wasn't the purpose, it's efficiencies.

MR. BASS: Like I said, it's good news, bad news: it's meeting the reporting requirements, it's not the most efficient, and getting the reporting is the biggest downfall, I think, currently.

MR. HOUGHTON: You guys do a marvelous job.

MR. BASS: Thank you.

MR. WILLIAMSON: How much weight have you lost?

MR. BASS: Forty pounds.

MR. WILLIAMSON: You look great.

MR. BASS: From worrying about FIMS.

(General laughter.)

MR. WILLIAMSON: Thank you, James.

MR. SIMMONS: Sorry, Scott, to interrupt, but you're back on. This is, again, Scott Huntsman that's going to talk about the management and support operations.

MR. HUNTSMAN: Thank you and good afternoon. I'm Scott Huntsman and I'm a director with Deloitte Consulting in our Houston office, and I directed the assessment over the management and support functions for this review.

If you look on page 3 of your presentation handout, the initial phase of the project in the management and support function looked at nine various areas within the headquarters operations of TxDOT, and you can see those listed there: outreach, purchasing, governance, human resources, et cetera. As we finalized the risk assessment, it was clear that there were high risk areas that needed further review in the areas of governance, human resources, finance and information technology, largely stemming from the new CDA environment in which the agency was beginning to operate in is why those were categorized as high risk.

The next slide, page 4, you can see a little more detail underneath each one of these four areas and I'm going to talk about them in more detail throughout the response, but these were the areas in which we developed a detailed work plan and budget. Yes, sir?

MR. WILLIAMSON: Our page numbers are different from your page numbers so we're being thrown off.

MR. HUNTSMAN: I'm sorry. I was looking at the numbers on the bottom, I apologize.

MR. WILLIAMSON: Okay, go ahead.

MR. HUNTSMAN: So as we finalized our work plan and our budget, these were the areas and the detailed areas in each of these four high risk areas that we looked at in detail.

So if you look on slide 5, we basically, as a result of the detailed assessment, came to realize that there were really three overriding things of the areas we looked at, and those had to do with: risk management, and when we talk about risk management, we're talking about an enterprise-wide view; people, and again it's an enterprise-wide view of the people; and technology, and we just talked some facets of the technology regarding the financial information management system.

From a risk standpoint, given that the headquarters operation in this agency basically develops policies which the rest of the divisions and the field operations operate within, I think it's important to manage your risk from an enterprise-wide fashion. We oftentimes are seeing, and more often now than not, in the private sector and even in our governmental clients, we're seeing chief risk officers assigned to certain organizations where it's needed. It's something that maybe this organization might need to consider in time, probably not something right now, it could be maybe a portion of someone's time right now, but as CDAs and these types of contracts that involve multiple facets, the risks to the organizations are going to increase phenomenally and you will need someone that addresses risk on a full-time basis.

In addition, we're going to talk a little bit about the role of Internal Audit and the role of Internal Audit helping to mitigate risk going forward.

In the area of people, 25 percent of the workforce at TxDOT has 20 or more years, by 2011, one-third of the workforce will be eligible to retire, 71 percent of the workforce is over 40 years of age. So those are obviously problems and issues not unique to TxDOT, they're nationwide in many organizations, but it's certainly something you can't ignore.

In addition, given the changes and the dynamics of the changes that are occurring within your movement to more of a CDA environment and the different types of contract letting that occurs there, the management of talent and your recruiting efforts and in your training efforts are going to be significant as to how you strategically think going forward. So that's another area that we comment on.

Then in the area of technology, it's just no longer a support function any longer, you cannot just operate the boxes and keep them running and be an effective IT function any longer in this world. And so our recommendation is really enhancing ISD's role, bringing them to a seat at the table, thinking more strategically about how technology better enables operations to make you more effective and efficient, giving management the types of reports and data that it needs to make sound decisions and to do the things that are necessary.

So with that, slide six, we took a couple of the largest findings and recommendations out of our report in each of the four different areas, so we're going to talk about them one at a time. Slide six has to do with Internal Audit, and let me start by saying you have a phenomenal Internal Audit group, they do an exceptional job of helping to manage risk, looking for issues and identifying areas where operations can be improved, and so we commend that operation for their performance.

With the onslaught of the CDA environment, we believe that it would be to TxDOT's advantage to bring them in earlier to help mitigate some of the risks and the understanding behind those extensive projects and the contract letting that goes on with them. As we talked to senior management in the agency, it was an important facet and an important aspect for them to see Internal Audit at the table as these contracts and other big projects are being discussed. And then too, it also prepares your internal auditors, it's sort of an education process. As they begin to understand the business behind the CDAs, they can better audit them and they can better help you to mitigate your risks going forward.

So our recommendation here is that you look and evaluate the role of Internal Audit as it pertains to their role and their seat at the table. The Institute of Internal Audit supports internal audit shops taking on this type of role, and in fact, our private sector work at many of our clients, we've done quite a bit of Sarbanes Oxley work and we're seeing many of the internal audit shops being brought to the forefront of some of these decisions even in the private sector.

Slide seven, this is where we talk about an enterprise-wide risk management program, and this is where we recommend that TxDOT consider developing such a program, especially given the environment with the comprehensive development agreements. Probably within the next ten years, the agency should probably consider a chief risk officer position. As I mentioned earlier, it may not be something that's needed at this time, however, it's probably important to understand how these types of agreements are going to impact the risks of the organization.

As an example, Deloitte itself, over the last six years, has taken an internal look at our own risks of doing business. Many events, as you may recall, have occurred within our profession that have caused many of the firms to rethink how they go about business and assessing risk, and we have many individuals inside our firm that do nothing but assess opportunities, review contracts and proposals and requests for proposals, understanding the terms and conditions around those agreements, and help us, the partners and directors of the firm, better understand and mitigate the risks that we get into.

And I think that's something that as you become more complex and more complicated in your business dealings, it's going to be an important facet of yours as well. Obviously, the breadth and depth of how that program is executed is certainly up to you, but it's something that I think you should consider.

Next slide, slide eight, in the area of finance we were very impressed with the Finance organization at TxDOT. We were very impressed with the people, we were very impressed with the leadership and the processes, and what we saw there were very strong. In my 23 years of doing business in consulting to public sector organizations, I'd have to say it's one of the best we've seen, given the mission of this organization.

But we did have a couple of comments, given that they do such a fine job and their staff is well trained, and as these CDAs become more nationally accepted and as these large firms start to see what's being done inside these types of organizations, those skill sets are going to become very much in demand in the private sector.

And so what we're proposing and what we're recommending here is: one, that there be some sort of a knowledge transfer plan inside of TxDOT so that people here can be trained on what their responsibilities and duties are as these new, evolving changes take place and as your business model changes over time which it will do as these CDA agreements become more prevalent. And so as they begin to develop that, you'll develop that in-house and be less reliant on outside vendors and consultants.

On the next slide, one other area that is certainly going to happen at some point in time is that the compensation within TxDOT is going to not keep pace with the private sector where these individuals that have these skill sets can most likely be hired and potentially paid multiples of what they're making here. So we're not saying that everybody in the Finance Division or within TxDOT needs a pay raise, what we're saying is that it's something you need to manage over time because the last thing you want to do is train your resources, invest in your resources, and then become a revolving door for the private sector, at least as much as you can avoid it.

Slide ten, information technology. Based on our review and interviews that we conducted, traditionally the ISD function and the assets, the systems themselves are being traditionally viewed as just a support function and not really strategic in nature. TxDOT does produce a strategic technology plan every year, DIR requires that. It was, to us, not used strategically to manage operations or to determine how much improvements can be made, how much better could our processes be enabled through better uses of technology, more of a compliance process with DIR.

So what we're recommending here is that ISD, again, be given a seat at the table early in the process, that they be challenged with the responsibility to better enable processes and systems throughout the organization, and we'll talk a little bit about this on the next page, because what we did find　-- and let's just go to slide eleven　-- is that out in some of the districts there are some good systems out there that have been little unique programs that have been developed and they're used one-off and they're developed in silos, and in some cases, they actually provide quite a bit of value back to those district offices.

For example, the one example on the page is the Amarillo District has developed a system that captures damage data, so if a guard rail or some other damage is reported there, they capture that and then as they get reimbursed for it, they are able to track and manage those things. That's not used in many other, certainly not all but it's not widely shared. There seemed to be a number of systems like that that were being developed that add value that probably need to be monitored centrally because you want to make sure that you're securing the data, that you're keeping that data secure and confidential in some cases, and that you're not ruining the security and the data throughout the organization.

So what we're recommending here in the area of information technology in this particular slide is that simplifying current guidelines for publishing information and developing these programs out into the areas should be managed by ISD centrally.

The next slide, slide twelve, looking into human resources. Again, human resources, traditionally speaking, here at TxDOT was very impressive, did a very good job of traditional HR functions. Again, what we're recommending in the long and short of it is more strategic thinking, the development of an HR strategy would be a good starting point, development of a talent management program that continually assesses what are the needs of our programs, what talents and skills are in the market, what kinds of recruiting do we need to put in place in order to attract and retain those individuals, what kinds of benefits and payroll-compensation plans are necessary in order to bring those into TxDOT and keep them in place.

Currently the human resource organization has a legislatively mandated 1-to-85 ratio, meaning you can only have a one HR resource for every 85 TxDOT employees. The fact that you meet that, we consider that to be pretty aggressive and we don't find that kind of ratio being met in some very well managed private sector clients. So that is an aggressive ratio, you're actually at 1-to-88, so you could actually bring it down by hiring a few more HR resources if you need to, and bring that more into line and maybe use some of those resources to help with some strategy and other program talent management type activities.

And I've already addressed slide 13, and slide 13 really has to do with talent management, recruiting and training. But one other thing that we were asked to address at the presentation when we made the presentation to the audit oversight committee was they were surprised that we didn't address the overall organization structure of TxDOT, and so we did go back and look at that.

I'm on slide 14 right now. If you look at how TxDOT is currently structured, you're basically geographically based. There's obviously some strengths and weaknesses associated with that kind of organization structure, and I'm talking agency-wide. Certainly here at headquarters you're certainly division focused and you have the division heads that operate within Finance, HR and the various other divisions here at central. But enterprise-wide, you're geography based. Certainly the division directors and the division sort of structure give you a single point of contact, you certainly have a high local market awareness, it's easier for customers to interface, so there's many strengths associated with the structure that you have.

Weaknesses is oftentimes higher cost to have such a structure, less sharing of resources and methods and products and services, and your products and services tend to vary from district to district and office to office, and whether that's a weakness or not, it can be.

So when we looked at answering the question, slide 16, do we need to reorganize, I think we say no, you don't need to reorganize, you may consider realigning some functions, you may consider realigning certain back office functions that could enable you to maybe be more cost-effective and efficient, and certainly that would require some deeper dive into doing that.

One example of how the consolidation of such a back office function and the use of technology, you do have an HR online system in place right now. Currently, though, the processes that are able to be processed online are very limited, and we just think that, for example, a 20 percent increase in efficiency and effectiveness could probably be accomplished if full online capabilities were brought about that would allow people to actually do performance evaluations and other things online without having to fill out forms and be more of a paper trail. And there's many more other examples that we could go into there.

Realignment does also allow some level of standardization that could occur which does hit the challenge of the weakness associated with varying degrees of services and products being produced one place or another. It should improve consistent communication with employees, and it certainly would help increase the effectiveness of human capital programs.

One of the things that we did notice on the HR online, for example, you're allowed to get instructions on how to complete a performance evaluation but then you have to download and fill out the form manually and then turn the form in manually, so the online aspect is really just instructional based.

So our recommendation there, if you look on slide 15, really the perspective around any organization redesign that you might go through would be to certainly balance what you're trying to achieve. Certainly if you're not imbalanced right now and you're not out of whack there's no real need to think about slicing and dicing it up dramatically, but we think that potentially if you just took two side-by-side district offices and were able to consolidate accounts payable, receivables or back office functions, and you were to do that statewide, there could be some significant cost savings, there could be some efficiencies. It's probably not a one-to-one reduction in resources　-- in other words, one office probably couldn't just take over for another office　-- so you'd have to look at the manpower and what the resourcing would need to be based on the workload requirements associated with it.

So the point here is you want to balance what you're trying to achieve with what your organization structure looks like. It's not always a democratic process, it's not always simple, and certainly some people may not want to get rid of those local office clerks, managers, et cetera that they certainly probably rely on heavily now for information and other things, and it would take time to get them used to maybe calling to get that information versus walking down the hall to get that information. And there is no perfect design, and then the degree of change would vary depending on the objectives and what you wanted to accomplish.

So we're not recommending that you completely reorganize. We think that there may be some advantages to re-looking at some of your back office functions in your district offices.

So with that in mind, on the last slide, conclusion. Questions?

MR. WILLIAMSON: Fred, Ted?

(No response.)

MR. WILLIAMSON: Speaking about the realignment, not a reorganization but you used the word realignment, what analysis did you put together to analyze the overall structure and not just the geographic nature of the structure? In other words, did you say this is what these guys do and it's organized geographically and maybe we ought to reorganize it this way, as opposed to saying this is your organizational structure to accomplish something that I don't think you want to accomplish, but this is not the best overall organizational structure to accomplish what it is you say you want to accomplish? Did you look at it from that aspect, or is it your view that that is what this is?

MR. HUNTSMAN: Well, if I'm understanding the question, we did go to several of the field offices, we did not just look at headquarters, and so we did have some understanding of what took place in the field offices, so it was not just a guess at looking at the fact that we know you're geographic based and whatnot. Nevertheless, in terms of drawing this conclusion of realignment, it probably did lean more towards just experience and what we've seen in other clients situations and in the market that geographically based organizations that have a large number of field offices, field operations, with redundancies in staff and support services, oftentimes the way to minimize costs and create efficiencies is to go ahead and consolidate some of those where it makes sense. And so that's, I think, how we drew the conclusion that realignment would probably be best served right now.

And based upon the information that we received from within our firm from our transportation experts, there is no other state that is just fully centralized, every state is decentralized in its structure, they all have field offices, they all deploy their resources.

MR. WILLIAMSON: Well, to my point. I raised it earlier in the presentation and you might not have been around because I raised it actually with the wrong guys. You said something that with all of our leadership corps here, we want to be sure that they don't think you repeated back to me that which I'm trying to accomplish. We're not interested in centralizing the department's entrepreneurship. The question I'm asking is to what extent should we be thinking about an organizational restructuring, as opposed to a realignment, that takes into account there are planners in our world that are not necessarily our employees and there are financial competitors in our world that certainly aren't employees that our right now districts, our geographic lines by definition have to work with or direct.

So when I'm seeing organizational realignment, I'm thinking that that's a matter of maybe moving the account to world headquarters and maybe raising some sort of designed regional level, a realignment of responsibility, and what I'm really looking for is somebody to sit down and look at the entire transportation structure that we have to live within to say you guys need to reorganize your approach. If you're going to allow the public sector to build toll roads, that's going to be your main financial mechanism　-- and the truth is it is going to be our main financial mechanism for the next 50 years　-- then you need organizational boundaries of your tolled systems match your planning systems to match your state transportation system or not. That's what I'm getting at.

MR. HUNTSMAN: I think we agree with what you just said. I'm going to let Melanie Meador, a senior manager in our human capital practice and she was instrumental in helping develop this organization response.

MS. MEADOR: And first to let you know, the actual report that we submitted originally really focused on organizational realignment looking at just the CDA process. So when the question came up of what about the whole organization, looking at things that we have in our experience and then taking the data that we knew both from this section of the report as well as talking to the field operations folks, there wasn't anything in there that had a red flag that said this is completely different than anything else that we're seeing and the typical response in organizational design.

So the recommendations that we have right now really is if you were going to look at total organizational, everything is up for grabs, let's just look at this, we're not saying we're going to do anything, we're just going to assess how we're doing in this environment, it is in your best interest to have very specific clarity around the strategy for the next 20, 25, 50 years, whatever the appropriate time frame is, what your specific organizational objectives are, and you already have a mission statement as well.

So you have a strategy, you have those mission statements in the five objectives that you have, so you have the foundation for that. Now it would be the time to drill down on what does that really mean to this organization and the future of the organization and then assess that against the capabilities of your workforce and how do you get there then. Because what this boils down to is how do you use your resources in the best way, and human capital is one of those resources and the organization certainly impacts how the individuals within the organization how productive they are, what freedom do they have to be entrepreneurial, how do they know to react to different situations.

And so the answer to your question is really another question which is what is the capability of your organization and where do you want to be in 50 years.

MR. WILLIAMSON: We want to be without congestion and with pure air, no deaths on our roads with every job in the United States of America flowing straight to our state and our transportation system in good shape.

MS. MEADOR: So then the next question is do you have the capabilities to get there within your workforce, and right now you don't have the data at a granular enough level to say yes or no to that. So that's why the next step of this is really to look at what is the organizational capability that you have today.

MR. WILLIAMSON: So I think I've got the leaders to do that, I just have to define how to align them up correctly.

MS. MEADOR: Right, and looking at the issues that you guys are facing in the future, TxDOT is facing in the future financially as well as in the talent management field. You have to have people to be able to fill key roles beyond the leadership level. That's the question is who are those people. Anecdotally, you can out and talk to the field people and they'll tell you it's these positions are critical to my operation but I might get a slightly different answer from different districts and you need to assess those key positions against an aggregate view of the department.

MR. WILLIAMSON: Go ahead.

MR. UNDERWOOD: Question, you made a comment about the IT, the technology or whatnot, you're saying that something like Amarillo had a process in which they were able to analyze but other offices didn't have that. What you're saying is that different districts may have certain ways of doing things that are better or have been able to do certain things that others don't which means that we're not sharing that information among all of us. Is that correct?

MR. HUNTSMAN: Correct.

MR. UNDERWOOD: I don't want to put words in your mouth now.

MR. HUNTSMAN: That is correct, and the other concern around that is, though, that as systems are being developed there's not a system development life cycle and a standard for managing those projects to make sure that the proper security and integrity around the data that's needed for those systems is secure and that those systems, as they maybe use internet-based capabilities and other things, that the data for the agency are not just being put out there for anybody and everybody to see.

MR. UNDERWOOD: Well, the reason why I'm asking that, one of the things when I was going through nominations was that the legislature wanted more transparency, they wanted to know more what's going on with TxDOT, they don't feel like they have any control over it or whatnot. Is that part of it is because we don't talk well among ourselves and that's why we have a problem getting that information to the powers that be, whether they be legislature or whatnot?

MR. HUNTSMAN: I think that's one way of putting it. I think people in the field are doing the best they can with the resources they have and they're trying to manage what they do on a day-to-day basis, and they may come up with a technology that enables them to be more efficient and effective and just don't realize maybe that what's being utilized in the Panhandle might help Houston or San Antonio or the Valley. So yes, maybe communication could be improved, but I think people are just trying to do the best they can.

MR. UNDERWOOD: Oh, I know that, I didn't mean it that way. What I meant was could we be better at it by having a more common system with our IT type of deal.

MR. HUNTSMAN: Yes.

MR. UNDERWOOD: That's what I was building up to. So which would make it easier for these districts to be able to know what was going on in another district what somebody developed that they could share among themselves which we don't know unless we see each other once a month or once a quarter or once a year.

MR. HUNTSMAN: Right, very much so. An integrated financial management software that has operations and other data, bolt-on type systems, asset management and other things, contract management aspects would certainly be an enhancement to what you have and would probably better enable management to make better decisions going forward.

MR. UNDERWOOD: And for the commission also, for us to be able to get information to whoever wants the information. Isn't that right? We could track it a lot easier.

MR. HUNTSMAN: Correct.

MR. HOUGHTON: Is that the consistent theme? What was the one most thing in the analysis that was a consistent theme that kept reoccurring, in your analysis, if there's a consistent theme?

MR. HUNTSMAN: As it pertains to the management and support?

MR. HOUGHTON: Across the board.

MR. HUNTSMAN: It's technology as an enabler to make this organization better.

MR. HOUGHTON: That's a consistent theme.

MR. HUNTSMAN: Consistent across the board.

MR. HOUGHTON: So the realignment that the chairman just recently talked about wasn't the consistent theme?

MR. HUNTSMAN: It wasn't necessarily consistent but it needs to be addressed.

MR. HOUGHTON: That was something that reoccurred, but if you had to rank them?

MR. HUNTSMAN: If I had to rank them, technology is number one.

MR. HOUGHTON: Transfer technology information, bringing us into the 21st century.

MR. HUNTSMAN: People management and talent management.

MR. HOUGHTON: People management. That falls in HR?

MR. HUNTSMAN: Yes, sir. So you look at IT, HR, and then really the overriding other theme was risk management, as we think that's going to become more crucial as you go forward, but IT is going to enable that to be better.

MR. WILLIAMSON: The IT problem is a little difficult in that every dollar that somebody says we need to spend on computers get taken out of construction.

MR. HOUGHTON: I understand.

MR. WILLIAMSON: And the men and women who are responsible for making that decision are not persuaded that that needs to be done just yet, so we need to do a better job of persuading them in '09 that that needs to be done, and perhaps we can with the assistance of this independent audit.

MR. UNDERWOOD: Mr. Chairman, I would embellish on this one more time. Would you agree that not only are we in the business now of handling construction of building projects but also of handling information?

MR. HUNTSMAN: Yes.

MR. UNDERWOOD: Because so many times the mind set out in the field is that we're in the business of building a road or a bridge or whatnot or a crossing, but we're also in handling information now. That's another part of our business that's not really been addressed by staff　-- not our staff, but I'm just saying that we haven't addressed it here at the commission level.

MR. WILLIAMSON: Maybe we need to be selling that information.

MR. UNDERWOOD: I'm not averse to that. Anything that will help us build more roads.

MR. SIMMONS: Commissioner Houghton, if I could make an observation, having sat with the audit oversight committee, I would have to say the overreaching thing we have to consider, in a way it does fall into the reorganization　--

MR. HOUGHTON: Realignment or reorganization, or are they one and the same?

MR. WILLIAMSON: They're not one and the same.

MR. SIMMONS: They're not one and the same.

MR. HOUGHTON: Well, to one person it's reorganization, to one it's realignment.

MR. SIMMONS: What I kept hearing through most of these things is our human resources element in regards to the CDA process. We're getting more and more into this, the skills needed for this process, whether it's finance, negotiation, oversight, whatever like that is where we are truly lacking in the department, and as long as the legislature is going to keep us, we have to look for new areas how to reinforce that particular area of the department, and it may be trimming back in other areas, reorganizing/realignment.

MR. HOUGHTON: I noticed, Mr. Chairman, that in the analysis by Deloitte and Dye that the commission wasn't evaluated.

MR. WILLIAMSON: They figured the legislature had enough of us for a while. We needed to be rested.

(General laughter.)

MR. SIMMONS: Scott, what university did you graduate from?

MR. HUNTSMAN: University of Houston.

MR. SIMMONS: Oh, I'll be darned.

MR. WILLIAMSON: The what?

MR. HUNTSMAN: The University of Houston.

MR. WILLIAMSON: Have they got a university there?

MR. UNDERWOOD: Mr. Chairman, I want to be on record, I do not want take money away from construction for IT but I do believe that we need to figure out ways of coming up with more money out of IT.

MR. HOUGHTON: We'll earn it out of Travel, they're the ones that are making money, apparently, according to this analysis.

MR. WILLIAMSON: I've got it. We'll authorize Doris to borrow $100 million through the Travel Division, develop the new computer system and charge a toll to the rest of the system every time it's used, and she can take that money and put it into magazines.

MR. HOUGHTON: And maps. We need to start selling our maps.

(General laughter.)

MR. SIMMONS: Scott, thank you.

Commissioners, that is our presentation. I kind of want to summarize a little bit. I know it's late in the day, but the audit oversight committee needs a little bit of direction from you for where to go from here.

I think what you heard from the five audit groups is they were given the independence to come into our organization and based on their expertise in these areas, define areas of high risk that they think they needed to go into, and that's the product you're seeing is their evaluation of the highest risks that they see the department is going to be experiencing. That doesn't mean that this is the end product.

I know the chairman directed one of our groups　-- and I saw Owen taking notes　-- to do a little bit more, and I think that's the question we've got: Are there any other areas of the department or any other issues that you want us to specifically look at at this time, or is there some other areas within these five auditable areas that you want us to look at?

MR. WILLIAMSON: Well, first of all, you probably took notes on some of the things we quizzed about and from that you'll develop some ideas as expressed by commission members. Second, we're going to want to take this document　-- which, I say again, we saw for the first time today　-- look at it and perhaps communicate to you where you can communicate to the audit committee additional things.

Third, when we started out on this process, we understand the legislature requires that we do a certain level of this but we wanted to go further than that because we believe　-- don't take offense　-- we believe people in your world coming and looking at organizations like ours and you're going to reach roughly the same conclusions. We think that the Sunset Commission, with whom we're going to be having a lot of interaction in the next year and a half, would have come up with much the same in the way of this is how you need to do your business that you've come up with.

We believe by doing it the way we've done it we're perhaps a year ahead of the curve in getting ready for that because we would like our Sunset Commission experience this time to be certainly less combative than the last legislative session was and perhaps become a model for how sunsets should work between a major agency and the legislature. So we've got to take their observations to heart and figure out which ones we want to start acting on.

Does that answer your question?

MR. SIMMONS: Yes, sir. And I guess to go a little bit further, we are in the process of working with the five audit groups to finalize these reports, and we can either hold off on those with some specific issues that you come up with after the fact.

MR. WILLIAMSON: That's what we need to do　-- not long but enough time to explore those things.

MR. SIMMONS: Okay.

MR. WILLIAMSON: Do you have anything you want to share with us? What have we missed, Owen?

MR. WHITWORTH: Well, from my perspective, five teams, a lot of talented folks, I think they did just what you said, they've come up with the same answers that another professional would, but they covered a lot of ground and I think it's an excellent point of leverage and I hope the Sunset process will really use it because the breadth of it is pretty tremendous.

MR. WILLIAMSON: Well, I'm pretty impressed with the overall scope. As reflected in my questions, I had some curiosities about some stuff, but I think we're pretty close to having a road map to where we need to go right quick.

Anything from the other two?

MR. JORGE: The only thing I would like to add is that we were very careful not to influence any of their findings or recommendations. Our point of view was provide direction as to where we thought the audits needed to go, but everything you heard today is strictly an independent finding and recommendation that they made, and I think that adds a lot of value to the audits.

MR. WILLIAMSON: I would think that's what the commission and hopefully the legislature wanted as a product is an independent, not involved in the emotion of what we all have gone through the last year or so, but an independent observation.

MR. SIMMONS: In closing, I do want to again thank the audit oversight committee because they put in a lot of time reviewing all these reports and making comments and everything. Specifically, again I want to recognize Donna for the outstanding work she did in getting these contracts up and the professionalism of our audit group.

MR. WILLIAMSON: And James Bass for hustling down here and answering all the questions.

MR. SIMMONS: James Bass for listening in on the microphone.

So with that, that's all we have, sir.

MR. WILLIAMSON: Do we have other business, Steve?

MR. SIMMONS: No, sir. I assumed you finished your executive session.

MR. WILLIAMSON: Well, we were going to go back and argue over you a little bit, but other than that.

Mr. Jackson, have I done everything legally?

MR. JACKSON: Yes, you have.

MR. WILLIAMSON: Do I have a motion?

MR. HOUGHTON: So moved.

MR. UNDERWOOD: Second.

MR. WILLIAMSON: A motion and a second to adjourn. All those in favor of the motion, signify by saying aye.

(A chorus of ayes.)

MR. WILLIAMSON: All opposed, no.

(No response.)

MR. WILLIAMSON: Motion carries. We stand adjourned at 4:25 p.m.

(Whereupon, at 4:25 p.m., the meeting was concluded.)

C E R T I F I C A T E

MEETING OF: Texas Transportation Commission
LOCATION: Austin, Texas
DATE: July 18, 2007

I do hereby certify that the foregoing pages, numbers 1 through 271 inclusive, are the true, accurate, and complete transcript prepared from the verbal recording made by electronic recording by Penny Bynum before the Texas Department of Transportation.

Nancy King 7/30/2007
(Transcriber) (Date)

On the Record Reporting, Inc.
3307 Northland, Suite 315
Austin, Texas 78731

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