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GOVERNANCE AND AUDIT COMMITTEE

Thursday, September 7, 2017

4:00 PM

Conference Room 157

County Government Center

70 West Hedding Street

San Jose, CA

AGENDA

CALL TO ORDER

1. ROLL CALL

2. PUBLIC PRESENTATIONS:

This portion of the agenda is reserved for persons desiring to address the Committee on any matter not on the agenda. Speakers are limited to 2 minutes. The law does not permit Committee action or extended discussion on any item not on the agenda except under special circumstances. If Committee action is requested, the matter can be placed on a subsequent agenda. All statements that require a response will be referred to staff for reply in writing.

3. ORDERS OF THE DAY

CONSENT AGENDA

4. ACTION ITEM - Approve Regular Meeting Minutes of June 1, 2017.

5. ACTION ITEM -Approve amending the FY 2018 Internal Audit Work Plan to define the specific purpose and scope of the “Transaction Monitoring Audit” placeholder project contained therein.

6. ACTION ITEM -Ratify the appointment to the Bicycle & Pedestrian Advisory Committee for the two-year term ending June 30, 2018 of Tom Granvold, representing the City of Santa Clara.

7. ACTION ITEM -Ratify the appointment to the Citizens Advisory Committee of Matthew Quevedo, representing the Silicon Valley Leadership Group, conditional on that organization’s current Citizens Advisory Committee representative being appointed to the 2016 Measure B Citizens’ Oversight Committee.

Santa Clara Valley Transportation Authority Governance and Audit Committee September 7, 2017

8. ACTION ITEM -Approve the appointment to the Committee for Transportation Mobility & Accessibility for the four-year term ending December 31, 2020 of Tricia Kokes, representing Seniors/Individuals with Disabilities.

9. INFORMATION ITEM -Review and receive the Internal Audit Program's Audit Dashboard on the status of implementation of recommendations issued by the Office of the Auditor General.

10. INFORMATION ITEM -Receive and review the Auditor General's Ethics Hotline Quarterly Summary Report.

REGULAR AGENDA

11. ACTION ITEM -Recommend Board approval of individuals to serve on the 2016 Measure B Citizens' Oversight Committee, per the recommendation of the Evaluation Subcommittee.

12. ACTION ITEM -Review and receive the Auditor General's report on the Inventory Management and Costing Assessment.

13. INFORMATION ITEM -Receive an update from Auditor General Office staff on the status of projects contained in the current Internal Audit Work Plan.

14. INFORMATION ITEM -Review and receive the scope of work for Annual Financial Audit Services for Fiscal Year 2017.

15. ACTION ITEM -Adopt the Interagency Agreements Policy.

16. INFORMATION ITEM - Review General Manager and General Counsel performance evaluation process. (Verbal Report)

OTHER ITEMS

17. Items of Concern and Referral to Administration.

18. Review Committee Work Plan. (Fernandez)

19. Committee Staff Report. (Fernandez)

20. Chairperson's Report. (Bruins)

21. Determine Items for the Consent Agenda for future VTA Board of Directors' meetings.

22. ANNOUNCEMENTS

23. ADJOURN

Santa Clara Valley Transportation Authority Governance and Audit Committee September 7, 2017

In accordance with the Americans with Disabilities Act (ADA) and Title VI of the Civil Rights Act of 1964, VTA will make reasonable arrangements to ensure meaningful access to its meetings for persons who have disabilities and for persons with limited English proficiency who need translation and interpretation services. Individuals requiring ADA accommodations should notify the Board Secretary’s Office at least 48-hours prior to the meeting. Individuals requiring language assistance should notify the Board Secretary’s Office at least 72-hours prior to the meeting. The Board Secretary may be contacted at (408) 321-5680 or [email protected] or (408) 321-2330 (TTY only). VTA’s home page is www.vta.org or visit us on www.facebook.com/scvta. (408) 321-2300: 中文 / Español / 日本語 /

한국어 / tiếng Việt / Tagalog.

Disclosure of Campaign Contributions to Board Members (Government Code Section 84308) In accordance with Government Code Section 84308, no VTA Board Member shall accept, solicit, or direct a contribution of more than $250 from any party, or his or her agent, or from any participant, or his or her agent, while a proceeding involving a license, permit, or other entitlement for use is pending before the agency. Any Board Member who has received a contribution within the preceding 12 months in an amount of more than $250 from a party or from any agent or participant shall disclose that fact on the record of the proceeding and shall not make, participate in making, or in any way attempt to use his or her official position to influence the decision. A party to a proceeding before VTA shall disclose on the record of the proceeding any contribution in an amount of more than $250 made within the preceding 12 months by the party, or his or her agent, to any Board Member. No party, or his or her agent, shall make a contribution of more than $250 to any Board Member during the proceeding and for three months following the date a final decision is rendered by the agency in the proceeding. The foregoing statements are limited in their entirety by the provisions of Section 84308 and parties are urged to consult with their own legal counsel regarding the requirements of the law.

All reports for items on the open meeting agenda are available for review in the Board Secretary’s Office, 3331 North First Street, San Jose, California, (408) 321-5680, the Monday, Tuesday, and Wednesday prior to the meeting. This information is available on VTA’s website at http://www.vta.org and also at the meeting.

NOTE: THE BOARD OF DIRECTORS MAY ACCEPT, REJECT OR MODIFY

ANY ACTION RECOMMENDED ON THIS AGENDA.

Governance and Audit Committee

Thursday, June 1, 2017

MINUTES

CALL TO ORDER

The Regular Meeting of the Governance and Audit Committee (“Committee”) was called to order at 4:05 p.m. by Chairperson Bruins in Conference Room 157, County Government Center, 70 West Hedding, San José, California.

1. ROLL CALL

Attendee Name Title Status Jeannie Bruins Chairperson Present Cindy Chavez Member Present Glenn Hendricks Member Present Sam Liccardo Vice Chairperson Absent Teresa O’Neill Member Present

A quorum was present.

2. PUBLIC PRESENTATIONS

There were no Public Presentations.

3. ORDERS OF THE DAY

There were no Orders of the Day.

CONSENT AGENDA

4. Regular Meeting Minutes of May 4, 2017

M/S/C (Chavez/Hendricks) to approve the Regular Meeting Minutes of May 4, 2017. 5. Follow-Up on the Trapeze OPS Pre-Implementation Review

M/S/C (Chavez/Hendricks) to review and receive the Auditor General’s follow-up report on the implementation status of management’s action plans contained in the Trapeze OPS Pre-Implementation Review performed during Fiscal Year 2014.

NOTE: M/S/C MEANS MOTION SECONDED AND CARRIED AND, UNLESS OTHERWISE INDICATED, THE MOTION PASSED UNANIMOUSLY.

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Governance and Audit Committee Minutes Page 2 of 5 June 1, 2017

6. Follow-Up on the Public Safety Process Assessment

M/S/C (Chavez/Hendricks) to review and receive the Auditor General’s follow-up report on the implementation status of management’s action plans contained in the Public Safety Process Assessment performed during Fiscal Year 2014.

RESULT: MOVER: SECONDER: AYES: NOES: ABSENT:

APPROVED – Consent Agenda Items #4 - #6 Cindy Chavez, Member Glenn Hendricks, Member Bruins, Chavez, Hendricks, O’Neill None Liccardo

REGULAR AGENDA

7. Inventory and Assets Held at Outreach

Pat Hagan, Auditor General’s Office, provided an overview, highlighting areas of concern and Auditor General’s recommendations for consideration.

Members of the Committee expressed concern about the security of data stored on computers which have been stored in an offsite storage facility by Outreach & Escort, Inc. (Outreach).

M/S/C (Chavez/Hendricks) to review and receive the Auditor General’s report on the Inventory and Assets held at Outreach.


APPROVED – Agenda Item #7 Cindy Chavez, Member Glenn Hendricks, Member Bruins, Chavez, Hendricks, O’Neill None Liccardo

8. Interagency Agreements Risk Assessment

Mr. Hagan provided an overview of VTA’s interagency agreements and Auditor General’s recommendations.

Public Comment

Roland Lebrun, Interested Citizen, commented on the risks of these contracts to VTA.

Members of the Committee requested the following: 1) interagency agreements be made searchable; 2) future agreements have an executive summary; 3) the policy framework be brought to the Board; and 4) compile data on contract trends.

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M/S/C (Chavez/Hendricks) to review and receive the Auditor General’s report on the Interagency Agreements Risk Assessment. Further, the Committee requested that a policy framework and searchable interagency agreements be included in the action plan.


APPROVED –Agenda Items #8 Cindy Chavez, Member Glenn Hendricks, Member Bruins, Chavez, Hendricks, O’Neill None Liccardo

Agenda Items #9 and #10 were heard together.

9. Follow-Up on the Sheriff’s Office Contract Compliance Internal Audit

10. Follow-Up on the Operator Scheduling Assessment

Bill Eggert, Auditor General, provided an overview of the Sheriff’s Office Contract Compliance Internal Audit and the Operator Scheduling Assessment.

M/S/C (Chavez/Hendricks) to review and receive the Auditor General’s follow-up report on the implementation status of management’s action plans contained in the Sheriff’s Office Contract Compliance Internal Audit performed during Fiscal Year 2013.



M/S/C (Chavez/Hendricks) to review and receive the Auditor General’s follow-up report on the implementation status of management’s action plans contained in the Operator Scheduling Assessment performed during Fiscal Year 2015.



11. Review Status of Internal Audit Work Plan

Mr. Eggert provided an overview, noting that some projects are in progress and an update will be provided at the September meeting.

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On order of Chairperson Bruins and there being no objection, the Committee received an update from Auditor General Office staff on the status of projects contained in the current Internal Audit Work Plan.

12. Applications to Serve on the 2016 Measure B Citizens’ Oversight Committee

Jim Lawson, Government Affairs Director & Executive Policy Advisor, provided an overview, highlighting the following: 1) 21 out of the 46 applications received to serve on the 2016 Measure B Citizens’ Oversight Committee were complete, noting no applications were received in the legal category; 2) members of the Evaluation Subcommittee are submitting their nominees for each position; and 3) it is anticipated that the Evaluation Subcommittee will provide a report at the Board meeting.

On order of Chairperson Bruins and there being no objection, the Committee reviewed and received the applications from individuals seeking to serve on the 2016 Measure B Citizens’ Oversight Committee evaluated by the Board subcommittee.

OTHER ITEMS

13. Items of Concern and Referral to Administration

There were no Items of Concern and Referral to Administration.

14. Review Committee Work Plan

Nuria I. Fernandez, General Manager and CEO, provided a brief overview of the work plan and noted the next Committee meeting is scheduled for September 7, 2017, highlighting key items scheduled for the meeting.

On order of Chairperson Bruins and there being no objection, the Committee reviewed the Committee Work Plan.

15. Committee Staff Report

There was no Committee Staff Report.

16. Chairperson’s Report

There was no Chairperson’s Report.

17. Determine Items for the Consent Agenda for future VTA Board of Directors’ Meetings

CONSENT:

Agenda Item #5., Review and receive the Auditor General’s follow-up report on the implementation status of management’s action plans contained in the Trapeze OPS Pre-Implementation Review performed during Fiscal Year 2014.

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Agenda Item #6., Review and receive the Auditor General’s follow-up report on the implementation status of management’s action plans contained in the Public Safety Process Assessment performed during Fiscal Year 2014.

Agenda Item #7., Review and receive the Auditor General’s report on the Inventory and Assets Held at Outreach.

Agenda Item #8., Review and receive the Auditor General’s report on the Interagency Agreement Risk Assessment.

Agenda Item #9., Review and receive the Auditor General’s follow-up report on the implementation status of management’s action plans contained in the Sheriff’s Office Contract Compliance Internal Audit performed during Fiscal Year 2013.

Agenda Item #10., Review and receive the Auditor General’s follow-up report on the implementation status of management’s action plans contained in the Operator Scheduling Assessment performed during Fiscal Year 2015.

REGULAR:

None

18. ANNOUNCEMENTS

Ms. Fernandez announced VTA will hold a Lesbian, Gay, Bisexual, Transgender, and Queer (LGBTQ) lunchtime event on June 22, 2017, at VTA’s headquarters.

19. ADJOURNMENT

On order of Chairperson Bruins and there being no objection, the Committee was adjourned at 5:00 p.m.

Respectfully submitted,

Thalia Young, Board Assistant VTA Office of the Board Secretary

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Date: September 1, 2017 Current Meeting: September 7, 2017 Board Meeting: N/A

BOARD MEMORANDUM TO: Santa Clara Valley Transportation Authority Governance and Audit Committee

FROM: Auditor General, Bill Eggert SUBJECT: Amend FY 2018 Internal Audit Work Plan to Define a Placeholder Project

Policy-Related Action: No Government Code Section 84308 Applies: No

ACTION ITEM

RECOMMENDATION:

Approve amending the FY 2018 Internal Audit Work Plan to define the specific purpose and scope of the “Transaction Monitoring Audit” placeholder project contained therein.

BACKGROUND:

The Internal Audit Work Plan (“Work Plan”) specifies the projects that the Board of Directors has authorized the Auditor General’s Office to undertake during a given fiscal year. The Board of Directors has delegated certain specialized discretion to the Governance & Audit Committee in support of its responsibilities in overseeing the activities of the Auditor General (AG) function. This includes approving scope modifications and cost adjustments for Work Plan projects, subject to remaining within the overall budget for that Work Plan. It also includes defining the specific purpose and scope for Board-approved placeholder projects. The FY 2018 and FY 2019 Internal Audit Work Plans were approved by the Board in June 2017. The FY 2018 Work Plan contained a placeholder project for a “Transaction Monitoring Audit.” This project did not include a specific objective or scope. Instead, the scope of the project was to be determined at a future time upon further review and consideration by the AG’s Office of the relevant risks. Based on this analysis, the Auditor General would then recommend a specific

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objective and scope for this project for Governance & Audit Committee approval.

DISCUSSION:

Based on further evaluation of relevant risks to VTA, the Auditor General's Office recommends that the placeholder “Transaction Monitoring Audit” project be defined as the “AP Master File Transaction Analysis.” This project would examine risks and search for anomalies related to VTA’s Accounts Payable master file of vendor information. The scope could include, among other considerations: Vendor Demographic Anomalies

o Vendor Address is not mailable or deliverable (per U.S. Post Office records) o Duplicate business addresses o Vacant address

Procurement Anomalies o Multiple or recurring payments below sole-source threshold o Payments to vendors related by common ownership or as affiliates or subsidiaries o Payments to prime vendors who are also subcontractor vendors on separate contracts

Unexpected Relationships o Vendor officer or director name(s) matches employee name o Vendor address or phone number matches employee’s address or phone number o Multiple vendors with matching Tax ID or Federal Employer Identification Number

(FEIN) o Vendor FEIN matches employee Social Security Number

Legal Issues o Federal or State litigation o Liens and judgments o Bankruptcy filings o Uniform Commercial Code filings

Regulatory Filings / Media o Professional business licenses not in good standing o Regulatory or Security & Exchange Commission actions o OSHA actions o Adverse media coverage o Dun & Bradstreet credit ratings

The recommended project and scope can be accomplished within the existing placeholder project budget of 120 hours and $18,000. No additional funds will be required.

ALTERNATIVES:

The Committee could choose to modify the objective or scope of the recommended project, or could direct the Auditor General’s Office to undertake a different

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project.

FISCAL IMPACT:

There is no additional fiscal impact. The scope for the proposed project can be accomplished within the existing placeholder project budget of 120 hours and $18,000.

Prepared by: Lily Rogers, AG’s Office & Stephen Flynn, Advisory Committee Coordinator Memo No. 6208

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Date: August 17, 2017 Current Meeting: September 7, 2017 Board Meeting: N/A

BOARD MEMORANDUM TO: Santa Clara Valley Transportation Authority Governance and Audit Committee THROUGH: General Manager, Nuria I. Fernandez

FROM: Board Secretary, Elaine Baltao SUBJECT: Ratification of Appointments to the Bicycle & Pedestrian Advisory Committee


ACTION ITEM

RECOMMENDATION:

Ratify the appointment to the Bicycle & Pedestrian Advisory Committee for the two-year term ending June 30, 2018 of Tom Granvold, representing the City of Santa Clara.

BACKGROUND:

The Bicycle & Pedestrian Advisory Committee (BPAC) advises the VTA Board of Directors on planning and funding for bicycle and pedestrian projects and issues. The BPAC consists of 16 voting members, one appointed by each of VTA’s Member Agencies (the 15 cities in the county and the County of Santa Clara), and one non-voting member and alternate appointed by the Silicon Valley Bicycle Coalition (SVBC). The BPAC also serves as the countywide bicycle and pedestrian advisory committee for the County of Santa Clara. The BPAC bylaws specify that the appointment term is two years and that members may be appointed to successive terms. Committee members must live, work or both in Santa Clara County during their term. Voting members of the Committee must also be a representative of the Member Agency’s local bicycle advisory committee or, for Member Agencies without a local bicycle advisory committee, their representative must be an individual who lives or works in the local jurisdiction and is interested in bicycle or pedestrian issues. BPAC members are precluded from representing a Member Agency that is their employer.

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The process to fill BPAC vacancies is that staff notifies the appointing authority of the vacancy or approaching term expiration and provides the current membership requirements. The appointing authority then appoints one member for the designated membership position. For vacancies occurring mid-term, the bylaws specify that they be filled for the remainder of the term by the appointing authority. In both cases, the Governance & Audit Committee must ratify the appointment.

DISCUSSION:

The City of Santa Clara has appointed Tom Granvold as its new representative on the BPAC, replacing Sarah Peters, who resigned due to relocating out-of-state. Mr. Granvold, a City of Santa Clara resident since 2008, has lived in California for over 50 years. He is now retired. During his professional career he held jobs with various technology firms, the last being Oracle, where he retired as a Senior Hardware Engineer. He attended the University of California at Berkeley. He is veteran, having served active duty in the U.S. Army. Mr. Granvold is a member of Santa Clara’s BPAC since 2008, and previously served on Sunnyvale's BPAC for a few years when he lived in that city prior to moving to Santa Clara. He has been an avid cyclist for many years, having commuted daily to work year round from the mid 1990s until he retired a few years ago. Over the years he has participated in a variety of group rides including the California Aids Ride, Cycle Oregon, and Waves to Wine. Since retiring, he does the vast majority of his shopping and errands on bicycle. Civic and community service includes as a volunteer Scout Master and as a judge for a local swim team. He is also a member of the Silicon Valley Bicycle Coalition. Based on his qualifications, expertise and community service, staff recommends that the Board ratify this appointment.

ALTERNATIVES:

The Board could choose to not ratify this appointment and instead request that the appointing authority appoint another representative.

FISCAL IMPACT:

There is no fiscal impact as a result of this action.

Prepared by: Stephen Flynn, Advisory Committee Coordinator Memo No. 6164

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FROM: Board Secretary, Elaine Baltao SUBJECT: Conditional Citizens Advisory Committee Appointment


ACTION ITEM

RECOMMENDATION:

Ratify the appointment to the Citizens Advisory Committee of Matthew Quevedo, representing the Silicon Valley Leadership Group, conditional on that organization’s current Citizens Advisory Committee representative being appointed to the 2016 Measure B Citizens’ Oversight Committee.

BACKGROUND:

The Citizens Advisory Committee (CAC) is a 17-member committee representing the residents of the various city/county groupings of the VTA Board of Directors, as well as specified community stakeholder groups with an interest in transportation. The CAC advises the Board and VTA administration on issues impacting the communities and organizations they represent. It also serves in two other functions: (1) as the ballot-specified Citizens Watchdog Committee for the 2000 Measure A Transit Improvement Program; and (2) as the 2008 Measure D ballot-specified advisory body that reviews and comments on VTA’s comprehensive transit program as part of the countywide transportation plan.

The CAC bylaws require that a committee member must be a resident of Santa Clara County while on the committee and cannot concurrently hold elected public office. Committee members cannot be VTA staff or employed by a city they represent. The committee membership term is indefinite, with CAC members serving until resignation or replacement by their appointing organization or the VTA Board.

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The process to fill CAC vacancies, as defined by the bylaws, is that member agencies, specified business and labor groups, and specified community interests positions nominate representatives for their respective membership positions. For select Community Interests positions, VTA’s Administration & Finance Committee appoints one member per position from nominations submitted by advocacy groups or received at-large. In all cases, the Governance & Audit Committee must ratify the appointment.

DISCUSSION:

The VTA Administrative Code establishes the membership of the CAC. One of the five positions in the Business & Labor section represents and is appointed by the Silicon Valley Leadership Group (SVLG). The SVLG’s current CAC representative, Chris O’Connor, is being recommended for appointment to the 2016 Measure B Citizens’ Oversight Committee (2016 MBCOC). This action is dependent on Mr. O’Connor resigning from the CAC, since the 2016 MBCOC bylaws do not allow members of that committee to concurrently serve on any other VTA board or committee. Mr. O’Connor has committed to resign from the CAC, conditional on being appointed to the 2016 MBCOC. Mr. O’Connor’s appointment will be considered by both the Governance & Audit Committee and the Board of Directors at their September 7, 2017 meetings. The SVLG has conditionally appointed Matthew Quevedo to serve as its representative on the CAC, subject to Mr. O’Connor being appointed to the 2016 MBCOC and therefore resigning from the CAC. Matthew Quevedo is the Senior Associate for Transportation and Housing Policy for the SVLG. In this role he works with both public and private stakeholders throughout the region to shape decision-making related to transportation infrastructure, housing development and related funding initiatives. As a member of the Santa Clara County Yes on Measure B campaign, Mr. Quevedo worked as an Outreach Coordinator to ensure voters were informed of the many benefits of the $6.3 billion transportation sales tax package. Mr. Quevedo's background is in local campaigns, neighborhood associations and non-profit organizations. Prior to joining the SVLG in 2016, he helped organize outreach efforts to residents throughout Santa Clara County on the many benefits provided by Rebuilding Together Silicon Valley and their home rehabilitation programs for low-income home owners. His work on political campaigns whose candidates were focused on mixed use growth, transportation and sustainable housing development. Matthew was born and raised in the City of San Jose and currently lives there. He graduated from San Jose State University (SJSU) with a Bachelor’s degree in Political Science and is in his final year of study at SJSU to earn his Master's Degree in Urban and Regional Planning. In his spare time he currently works with residents of downtown San Jose as the President of the San Jose Downtown Residents Association.

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Based on his qualifications, experience, knowledge of transportation issues and challenges, and extensive community involvement, staff recommends that the Committee ratify the appointment of Mr. Quevedo to the CAC.

ALTERNATIVES:

The Committee could choose to not ratify the conditional appointment, and instead ask the appointing authority to nominate another individual to represent it.

FISCAL IMPACT:



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FROM: Board Secretary, Elaine Baltao SUBJECT: Appointment to the Committee for Transportation Mobility & Accessibility


ACTION ITEM

RECOMMENDATION:

Approve the appointment to the Committee for Transportation Mobility & Accessibility for the four-year term ending December 31, 2020 of Tricia Kokes, representing Seniors/Individuals with Disabilities.

BACKGROUND:

VTA’s five advisory committees provide input, perspective and technical expertise on proposed changes to VTA policy or priorities potentially impacting transit service and transportation projects throughout the county. The Committee for Transportation Mobility & Accessibility (CTMA) advises the Board of Directors on bus and rail system accessibility issues, paratransit service, and transportation accessibility matters in Santa Clara County. The committee has 17 voting and two ex-officio, non-voting members. The voting membership consists of seven seniors/individuals with disabilities, seven representatives of human service organizations serving older adults or persons with disabilities, and three representatives from either category. The CTMA bylaws define that appointments from either membership category are taken from applications received from the community at-large or nominations from the defined human service organizations. Members serve a four-year term that commences on January 1st and are eligible for reappointment to successive terms. Members from the seniors/individuals with disabilities category must reside within the county during their term.

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All CTMA membership applications are evaluated by a panel comprised of: (1) Committee Staff Liaison; (2) Advisory Committee Coordinator; and (3) CTMA Chairperson. The evaluation process includes a review of the candidate’s qualifications, evaluation of the organization’s ability to meaningfully represent and facilitate communication their constituencies, and an interview of the individual or a representative of the candidate organization. Effort are made to ensure all specific regional areas of the county and all major disabilities affecting mobility are represented. The panel then recommends the candidate that, in its collective estimation, would best serve the Committee, Board and community. All membership appointments to the CTMA require approval of the Governance & Audit Committee.

DISCUSSION:

Tricia Kokes has been nominated to represent seniors/individuals with disabilities on the CTMA. Ms. Kokes, who has been disabled since birth and uses a mobility device, is a San José native and life-long resident. She is a regular user of VTA fixed route services, primarily bus, but occasionally utilizes VTA Access Paratransit and light rail. During her work career, she was employed by Barton Security and Sun Micro Devices. Civic and community service includes long and extensive service with the Silicon Valley Independent Living Center (SVILC), a San José-based human services organization committed to self-advocacy, personal empowerment and independent living for individuals with disabilities. Ms. Kokes currently is the president of the SVILC Board of Directors, having served on the board since 2009. In addition, she has volunteered at that organization for over twenty years, lending her services to help other individuals with disabilities to have the knowledge and tools to be able to live independently in the community. Prior to that, many years ago she volunteered at the former Health Library located in downtown San José. To evaluate the candidate, in May 2017 the review panel assessed the candidate’s qualifications and, deeming her qualified, conducted an oral interview. Based on her qualifications, service to the community, ability to facilitate bi-directional communication with her stakeholder group, and interest in transit and transportation issues, it was the panel’s unanimous conclusion that Ms. Kokes would well-serve the CTMA and Board. As such, the panel recommends that she be appointed to the CTMA for the four-year term ending December 31, 2020.

ALTERNATIVES:

The Committee could choose to not ratify the appointment of this individual.

FISCAL IMPACT:



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Date: May 19, 2017 Current Meeting: September 7, 2017 Board Meeting: October 5, 2017


FROM: Chief Financial Officer, Raj Srinath SUBJECT: Update: Follow up on Audit Recommendations Issued by the Office of the

Auditor General as of March 31, 2017

FOR INFORMATION ONLY BACKGROUND:

In 2008, VTA established an independent audit function reporting to the audit committee by utilizing contract auditors to perform independent audit services and serve in the position of the Auditor-General. The Office of the Auditor-General has issued recommendations to strengthen compliance, improve internal control, and promote operational effectiveness and efficiency. In May 2016, VTA Internal Audit Program was established to follow up and report on the status of open audit recommendations and corrective action plans.

DISCUSSION:

The purpose of the audit dashboard report is to provide a status summary of implementation of recommendations. This is a control mechanism established by management to tract and provide reasonable assurance that appropriate and prompt action is provided by management in support of implementing the recommendations. The implementation status was based on compilation of information and documentary evidence from various departments. As of March 31, 2017, the total number of recommendations is 143; of this total, 48 or 34% are not yet due for implementation. Of these 48 not yet due, 37 are not due for implementation until June 2018.

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The status of implementation of the remaining 95 recommendations is summarized by area of responsibilities in the chart below.

Fully Implemented

Substantially Implemented

NotImplemented

Corrective actions are

complex; no further

actions necessary in

support of the

recommendation.

Major actions are complete;

critical elements of the

recommendations have been

implemented.

Only minor actions in

support of the

recommendations have

been performed; major

actions have yet to be

implemented.

Human Resources & Diversity Programs 1

Information Technology 9

Procurement and Contracts 8 1

ATU Pension Bd 3 1

Engineering & Transp Infra Development 14 1

Finance & Budget 14

General Manager 1

Operations 14 1

Paratransit 10

Grants Planning & Programming Dev 2

Public Relations - Community Outreach 4

System & Safety 11

Totals 91 2 2

Percentage 96% 2% 2%

Audit Area

The below graph shows all recommendations to date by area of responsibility, and their status as of March 31, 2017.

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Implementation Statusas of 3/31/17

Fully Sub-stantially

Not Implement Not Due

Fully

Implemented 91

Substantially Implemented 2

Not Implemented 2

Not yet Due 48

Exhibit A provides the detail of the 2 recommendations which are substantially complete. One pertains to the recommendation on the utilization of the SAP pension module or similar application to streamline manual process and simplify workflow. This is expected to be completed by June 2017. The other substantially implemented recommendation involves the use of SAP procurement and contracts module, which is on target to be completed by May 31, 2017.

Exhibit B provides the detail of the two recommendations not completed. The one recommendation not implemented relates to VTA’s effort to obtain written assurance from the City of Milpitas of its commitments under the Measure A agreement. Although VTA received $5.1 million out of the $17 million commitment, no written assurances on the remaining outstanding amount has been received. The other recommendation not completed had an original implementation date of January 2017. The recommendation relates to analyzing the cost-benefit of extending station platforms to accommodate three-car trains at the Vasona Branch line. A preliminary study was done which focused on speed and safety improvements throughout the system. A consulting firm has been retained for the cost-benefit analysis of the station expansion. This study is expected to be complete by September 2018. VTA Internal Audit Program will continue to follow up on these recommendations until they are fully implemented. Prepared By: Meeta Podar, Internal Audit Program Manager Memo No. 6114

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Audit Recommendations that have not been Implemented

During the Period December 31 to March 31, 2017

Exhibit B

Audit Report

Governance &

Audit

Committee

review date

Risk Rating:

High, Medium Recommendation

or Low

Response by Department

Original Target Date

of Implementation

Revised Date of

Implementation

Progress Changes During the Period

Dec 2016 to Mar 2017

2016

Specific

Responsible

Individual

Actions Taken To Date

Other Comments

From To

Not

Implemented

Not

Implemented



Fully

Implemented

Fully Implemented

Operations Operator

Scheduling

Assessment

05/07/15 HIGH We recommend analyzing a cost-benefit of

extending station platforms to accommodate three-

car trains, consistent with the rest of the rail system

thus improving your ability to handle increased

ridership.

VTA management agrees that the current Vasona line infrastructure with two car platforms and two single track segments constrains event day operations as well as daily service. The VTA Planning and Project Development Division has a study underway, the Light Rail Enhancement Project, to review a variety of system design and operational strategies that would improve service, ridership and operating speed. Vasona line improvements are only one of many

enhancements being studied. The study will consider

the cost and benefits of each potential improvement.

Future decisions will be made on which improvements

to pursue for funding and implementation. The study is

targeted for completion by the end of 2016.

1/31/2017 9/30/2018 Not Due

Director of

Planning &

Programming

Per Jim Unites and his team their study done

in 2015 focused on speed and safety

improvements throughout the system, and

placed less focus on specific track and

platform improvements.

They have hired a consulting firm to do a

study on the platform improvements and a

cost-benefit analysis of the station

expansion.

This study is expected to be complete by September

2018.

Engineering and Transportation Infrastructure Development BART SV

Interagency

Agreement

Assessment

11/06/14 HIGH We recommend that VTA obtain written assurances

and clarifications from the City of Milpitas

regarding its commitments under the MA

considering the circumstances of the conflicting

agreement.

VTA agrees. VTA and the City of Milpitas management are coordinating resolution of this issue and are developing the pertinent clarifications regarding the City’s commitments under an amendment to the Master Agreement. Although a firm deadline cannot be established due to the complexity of this issue and because the two parties still need to reach an amended agreement and obtain City Council approval, VTA has already initiated the process of obtaining written assurances and clarifications from the City of Milpitas and anticipates the process will be completed by the end of February

2015.

02/28/15 Dependent on

city's collaborative

effort

Director of Engr &

Transp Infra Dev

(BART Silicon

Valley)

VTA met with the City of Milpitas on July 1,

2015 to coordinate the pertinent

clarifications regarding the City’s

commitments under an amendment to the

Master Agreement. On July 15, 2015, VTA

proposed amended terms for payment based

on the discussions at July 1 Meeting.

(Reference document P0728-C640-LTR-

000001)Although VTA and City staff

continue to meet and coordinate project

implementation matters, VTA has not

received a formal response to the proposed

amendment.

VTA continues to invoice the City for

reimbursement, and is preparing another

request for written assurances and

clarifications from the City of Milpitas

regarding its commitments under the Master

agreement.

This matter is now with the Office of the

General Counsel.

The City of Milpitas has been slow to respond to requests

for payment, or to requests for amended terms for

payment. As of April 30, 2017 VTA has invoiced the

City approximately $14.5 million of the total Authorized

Fund Agreement amount of $17M. VTA received two

payments totaling $5.1M, one in December 2016 for

$3.6M, and one in March 2017 for $1.5M. It is unclear if

further payments will be made.

Failure to properly comply with the agreement increases

the risk that the City may not have adequate funds to

reimburse VTA for the Eastern Segment. Without the

City and VTA reaching agreement, financial exposure to

VTA could potentially reach $11.9M.

9.a

Audit Recommendations that have been Substantially Implemented

During the Period December 31 to March 31, 2017

Exhibit A

Audit Report

Governance &

Audit

Committee

review date

Risk Rating:

High, Medium Recommendation

or Low

Response by Department

Original Target Date

of Implementation

Revised Date of

Implementation

Progress Changes During the Period

Dec 2016 to Mar 2017

2016

Specific

Responsible

Individual

Actions Taken To Date

Other

Comments

From To

Not

Implemented

Not

Implemented



Fully

Implemented

Fully Implemented

ATU Pension ATU Pension

Plan

Compliance

Audit

8/28/14 HIGH Management to explore fully implementing and

using the SAP Pension module or similar

application that fully integrates with SAP.

Utilizing the SAP system to its fullest capabilities

would streamline the manual processes, automate

controls, reduce paperwork and simplify workflow.

This would also allow all documents to be located

electronically in one place and easily accessed,

searched, tracked and reported upon. Additionally,

if VTA management elects to implement the SAP

Pension module, relevant training should be

provided to all users to help maximize system

usability, employee satisfaction with the new

process and return on investment.

VTA management concurs with the recommendation.

VTA will immediately begin evaluation to determine

the business needs of the VTA/ATU Pension Plan

administration process. Following completion of an

SAP enhancement (Pack 6) scheduled for completion

by December 2014 and depending on the results of the

business needs evaluation, VTA will implement either

SAP functionality or another available technology

solution, whichever best meets the business needs.

Although a firm date cannot be determined at this time,

implementation of the technology solution is estimated

for early 2015.

3/31/2015 6/30/2017

Chief Information

Officer

Following update provided by Gary Miskell on

09/06/16:After further analysis in the last week of

August 2016 with Maria Chavez and Jon Maier

the group needs information out of 4 different

data sources (pre 1995 Microfiche, BW data

warehouse, SAP 4.6, and the production SAP),

consolidated into a single data base and a few

custom reports written. To further refine the

requirement, build the data mart, extract the data

and build the reports, estimated completion date is

6/30/17

.While VTA has fully implemented the

digitization of Pension Records to a backed-up,

secure share file - IT is in the design phase of

automating employee records, including Pension

Records, in Sharepoint which is scheduled to be

deployed by 6/30/17

- Critical Pension Plan documents are stored onsite

with no backup of key data and/or documents.

Documents may be misplaced or damaged, and

confidential retiree personally identifiable

information (PII) may be more easily compromised.

- Due to current SAP limitations, necessary Pension

Plan information may not be captured accurately or

timely (i.e. contingent annuitant information).

Procurement & Contracting Process Assessment Procurement &

Contracting

Process

Assessment

05/01/2014 HIGH We strongly recommend Management explore fully

implementing and using the SAP procurement and

contracts module. This would allow all documents

to be online and easily accessible, tracked and

reported upon, which would help remediate current

communication gaps. Utilizing the system to its full

capabilities would streamline the process, reduce

paperwork, allow for online signatures/approvals,

simplify workflow and reduce procurement

turnaround time.

Management concurs. To implement this

recommendation, staff will take the following steps: (1)

Identify functions within the SAP procurement and

contracting modules that have not been implemented,

yet are necessary to completely automate the date

tracking and reporting functionality; (2) In support of

this, staff has initiated development of the prototype

workflow process and status reporting functionality in

SAP. The first reports using this process will be

produced by the close of April 2014; and (3) Initiate the

process to procure the services of a third-party

contractor to expedite the automation of the

procurement and contracting process. Staff will report

on the timeline for full implementation at the next

(August 28, 2014) Audit Committee meeting.

Workflow process: 4/28/2014 Report

on timeline for full implement- action:

8/28/14

05/30/17

Chief Information

Technology,

Manager of

Procurement,

Contracts & Matls,

Substantially completed with on-going process

improvements (based on AG report). Because of the

large undertaking involved with this

recommendation, the PCMM group divided this

into short and long term goals. To date, PCMM has

made substantial progress with the short term items.

The long-term item can be classified as ongoing

process improvement. Documented the

procurement business process from document

creation to PO / Contract approval. Developed an

SAP, K2 interactive forms and sharepoint record

center solution. SAP process, screens and workflow

are being tested with an early August 2016 release.

The interactive custom forms are 85% complete

with testing to start in August of 2016. Storage of

all electronic document will be done in Sharepoint

which is also in test.As of 9/23/2016 - VTA decided

that additional features and functionality be

included to the procurement solution. There are also

improvements to the integration between SAP, K2

interactive forms, and Sharepointe to allow for a

system that better supports the business processes.

The workflow project is on track and will be

completed by the end of this week.

Testing was completed early May 2017,training is

underway and will go live the last week of May

2017.

-The process is, at times, prohibitively delayed,

jeopardizing critical deadlines.- Project documents

are in several places & not organized; documents

may be misplaced or lost.- Buyer/Status of project is

unknown, or not readily available.- No formal

reporting of metrics; limited or no capability to

quickly gather needed data.

9.b


BOARD MEMORANDUM TO: Santa Clara Valley Transportation Authority Governance and Audit Committee FROM: Auditor General, Bill Eggert SUBJECT: VTA Ethics Hotline Program Quarterly Report

FOR INFORMATION ONLY

BACKGROUND:

The VTA Ethics Hotline is a means for VTA staff and those doing business with VTA to anonymously report suspected unethical behavior such as fraud, waste, abuse, theft, misconduct or any violation of company policy, law or regulation. Launched in February 2015, this 24/7 hotline initially is available only to VTA staff, consultants, and vendors/suppliers. Individuals submitting reports are protected from any retribution by state law and VTA policy. The Ethics Hotline is hosted by a third-party provider, Ethical Advocate, to maintain independence and confidentiality to the extent provided by law. Reports are evaluated, investigated or referred by the Auditor General’s Office, an independent CPA firm reporting directly to the VTA Board of Directors. As part of its duties, the Auditor General’s Office provides high-level summary reports on Hotline usage and results. These reports are provided to the Governance & Audit Committee quarterly, coinciding with the meetings that focus primarily on audit activities, and a yearly report is provided to the Board following the close of the fiscal year.

DISCUSSION:

Attached is the summary report on Ethics Hotline usage from April through June 2017. It contains metrics on Hotline usage including the number of reports received, type of concerns reported, and disposition of the allegations during the subject period. It also includes fiscal year-to-date and trend information. Prepared By: Stephen Flynn, Advisory Committee Coordinator Memo No. 5475

10

VTA Ethics HotlineActivity Summary: 04/01/17 through 06/30/17

1

Method of

Submission

Number

of Reports

Website 1

Phone call 0

Other 0

Total 1

Current Period

ActivityNumber

Fraud 0

Waste or Inefficiency 0

Ethics/Policy Violation 0

Employee

Conduct/Abuse1

Theft 0

Customer Service 0

Non-VTA Issues 0

Total 1

One Year Report Submission 2016/2017

2 2

1 1 1

Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17

Total 1-30 days 31-60 days 60+ days

3

3 0 0

44 30 8 12

Total 50

Aging (Inception through

Current Period)

Preliminary Assessment

Investigation

Completed

10.a

Date: September 1, 2017 Current Meeting: September 7, 2017 Board Meeting: September 7, 2017


FROM: Board Secretary, Elaine Baltao SUBJECT: Appointment to the 2016 Measure B Citizens' Oversight Committee


ACTION ITEM

RECOMMENDATION:

Recommend Board approval of individuals to serve on the 2016 Measure B Citizens' Oversight Committee, per the recommendation of the Evaluation Subcommittee.

BACKGROUND:

On November 8, 2016 Santa Clara County voters approved Measure B that enacted a thirty year half-cent sales tax for transit and transportation improvements. The 2016 Measure B (“Measure B”) ballot specified that “an independent citizens’ oversight committee shall be appointed to ensure that the funds are being expended consistent with the approved Program.” The ballot also listed the specific duties and responsibilities of the citizens’ oversight committee. At its June 1, 2017 meeting, the Board amended the VTA Administrative Code to establish the 2016 Measure B Citizens’ Oversight Committee (“2016 MBCOC”) and approved the bylaws for that committee. The bylaws incorporated the membership criteria previously established by the Board to assist the Committee in its responsibility of evaluating 2016 Measure B revenues and project expenditures to determine compliance with the commitments made to voters in the ballot.

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The key membership provisions specified in the bylaws are: (A) Eight (8) voting positions from defined areas of expertise and with required experience:

1. A retired federal or state judge or administrative law judge or an individual with experience as a mediator or arbitrator.

2. A professional from the field of municipal/public finance with a minimum of four years relevant experience.

3. A professional with a minimum of four years of experience in management and administration of financial policies, performance measurement and reviews.

4. A professional with demonstrated experience of four years or more in the management of large scale construction projects.

5. A regional community organization representative with at least one year of decision making experience.

6. A regional business organization representative with at least one year of decision making experience.

7. A professional with four years of experience in organized labor. 8. A professional with a minimum of four years of experience in educational

administration at the high school or college level

(B) Members must be registered voters of Santa Clara County

(C) Members cannot hold elected or appointed office or be VTA or Member Agency staff.

(D) Term is four (4) years, and members are limited to two (2) consecutive terms. Half the initial terms will be for two (2) years to establish a staggered appointment cycle.

The 2016 MBCOC bylaws specify that a subcommittee of Board members appointed by the Board Chairperson is responsible for evaluating all applications to determine which applicants possess the required qualifications. After determining all eligible candidate, the subcommittee then recommends to the Governance & Audit Committee its top candidate for each of the eight membership positions. It is then the responsibility of the Governance & Audit Committee to the recommended a candidate for each position for Board approval. At the May 2017 Board meeting, Chairperson Jeannie Bruins announced that she had appointed Board members Larry Carr and Cindy Chavez, Board Vice Chairperson Sam Liccardo, and herself to the Evaluation Subcommittee.

DISCUSSION:

The Evaluation Subcommittee reviewed and evaluated the 46 application received to serve on the 2016 MBCOC. No applications had been received for the Retired Federal/State/ Administrative Law Judge or Mediator/Arbitrator position by then. The Subcommittee determined which candidates possessed the required expertise and experience necessary to be eligible for appointment to the committee. It then ranked the qualified candidates in each category to determine the candidate for each position to be recommended to the Governance & Audit Committee.

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The recommended candidates are:

1. Retired federal/state/administrative law judge or mediator/arbitrator

[No applications received when subcommittee evaluated applications] 2. Municipal/Public Finance Professional

Rose Herrera Rose Herrera has an extensive career in municipal/public finance. She served eight years on the San José City Council representing Council District 8 (Evergreen), including two years as vice mayor. She also served eight years on the VTA Board of Directors and its various committees, including the then Downtown/East Valley Policy Advisory Board and Ad Hoc Financial Recovery Committees. She is a past board member of the Housing and Community Development Advisory Committee and the Santa Clara Valley Habitat Agency. Furthermore, she served on and chaired the League of California Cities Statewide Transportation, Communication, and Public Works Committee. Civic and community service includes with the County Human Relations Commission, organizing community task forces as part of the Si Se Puede Project, and founding Involved Evergreen, a grass-roots organization formed to bring the Evergreen community together and share a sense of community. She has served on the Delinquency Prevention Commission, the California Association of Human Rights Organizations, and the Symphony San Jose Board of Directors. She founded the Norwood Creek Elementary School PTA and is a founding member of the Bay Area Military Women’s Collaborative. Ms. Herrera founded Cinnamon Software, a software manufacturing company, and served as its CEO for the 10 years prior to her election to the city council. Prior to that, she held positions in worldwide software sales and provided consulting services for other high-tech companies, including tech start-ups. In addition, she served in the United States Air Force where she was in the Security and Intelligence Service. Ms. Herrera is a native of San José and a long-time resident of Santa Clara County, having lived there for over 30 years. She earned both her Bachelors and Masters Degrees from Santa Clara University.

3. Professional in management and administration of financial policies, performance

measurement and reviews

Christine Pfendt Ms. Pfendt has an extensive career dealing with management and administration of financial policies, performance measurement and reviews. She currently is a management consultant for Stanford University where she handles high-profile technology, financial, and process improvement projects to resolve business challenges. Prior to that, she worked at Citigate Cunningham, a public relations firms located in Silicon Valley that specializes in Fortune 500 firms, primarily high-tech, where she held increasingly-responsible positions that included Controller, Chief Financial

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Officer, Vice President, and, finally, Chief Executive Officer. She also worked at Ziff Davis Events in various positions, the last being Assistant Worldwide Corporate Controller. In addition, she has worked as an Associate at Deloitte & Touche LLP and as the Accounting Manager for the Stanford Alumni Association. Civic and community service includes as a director on the YMCA of Silicon Valley Board of Directors, where she serves on multiple committees. She also volunteers her time as a student advisor at Stanford, and serves as a Community Services Commissioner for the Town of Los Gatos. She has also served as a volunteer at a large number of Olympic Games, including the most recent ones in Rio de Janeiro, Brazil. Ms. Pfendt, a Santa Clara resident, earned her Bachelor’s Degree from California Polytechnic State University, San Luis Obispo.

4. Large Scale Construction Project Manager

Ed Tewes Mr. Tewes, had an extensive career in public service that spanned over 45 years. He served as city manager for the cities of Morgan Hill (13 years), Modesto, and Clovis and as interim city manager for the cities of Gilroy and Guadalupe. He served as assistant city manager for Long Beach and also held various positions at the City of Pasadena. He has served as an adjunct faculty as Gavilan College. He currently is retired and consults part-time for CPS HR Consulting. His community involvement and charitable service is also extensive. Select examples include as a life member, board member and past board president of the International City/County Management Association (ICMA), a member of the Joint Task Force on State Government Reform, the Santa Clara County City and County Managers Association, and the American Society for Public Administration. He was also a member and past president of the California Redevelopment Association board of directors and a board member of the Fresno Economic Development Corporation, Public Policy Center for California State University Stanislaus, United Way of Stanislaus County, Workforce Investment Board of Stanislaus County, and Leadership Morgan Hill. Volunteer activities include as a band booster of Sobrato and Live Oak High Schools and Britton Middle School, the Taste of Morgan Hill street festival, and Morgan Hill Earth Day and Community Clean Up. Mr. Tewes, a Morgan Hill resident, earned his undergraduate degree in political science from Claremont Men’s College and his Master’s Degree in Public Administration from the University of Southern California.

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5. Regional Community Organization Representative

Bonnie Packer Ms. Packer has very extensive civic experience including on numerous City of Palo Alto committees such as the Comprehensive Plan Citizens Advisory Committee, Planning and Transportation Committee, and the Comprehensive Plan Housing Elements Update. Her vast service with community and charitable organizations in Palo Alto includes over two decades with the League of Women Voters, including on its board and multiple terms as board president. She has been a member and board chairperson of the Palo Alto Family YMCA and a board member of Palo Alto Housing. She has served on the board of several Palo Alto-area community non-profits, including the Women’s Club, the Kiwanis Club, the Palo Alto Art Center, Palo Alto Community Child Care, Chamber of Commerce, Palo Altans for Government Effectiveness, and the Palo Alto Council of PTAs. In addition, she founded the Palo Verde Neighborhood Association. Ms. Packer, who is retired and resides in Palo Alto, was a Senior Attorney at Pacific Bell. She earned her law degree from Santa Clara University and her undergraduate from Columbia University. Prior to earning her law degree, she worked as a book production editor and copy editor, as well as a teacher for the Peace Corps in Turkey.

6. Regional Business Organization Representative

Christopher O’Connor Mr. O’Connor is Senior Director for Transportation Policy for the Silicon Valley Leadership Group (SVLG). In this capacity he works with both public and private stakeholders throughout the region to shape decision-making related to transportation infrastructure, housing development and related funding initiatives. Has was a key member of the SVLG’s leadership effort on 2016 Measure B. Mr. O’Connor has extensive experience in community relations, intergovernmental affairs and public policy, including serving as a senior consultant for the U.S. State Department and on the staff of a California congressman. Mr. O’Connor, who lives in San José, is a native Northern Californian. He earned a Bachelors and Master’s degree in Government from CSU Sacramento

7. Organized Labor Representative

Edward Von Runnen Mr. Von Runnen, who is now retired, worked for VTA for over 36 years, holding four different positions during his career: Bus Operator, Light Rail Operator, Transit Radio Dispatcher, and Transit Bus Dispatcher. During 15 of those years, he served as an ATU Local 265 labor representative, first as a shop steward and later as an executive board member.

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8. Educational Administration Professional

Jaye Bailey Jaye Bailey has extensive educational administrative experience. She currently is the Vice President for Organizational Development/Chief of Staff at San José State University (SJSU) where she is a member of the SJSU president’s cabinet and serves as principal advisor. Prior to that, she served in the same capacity at Southern Connecticut State University (SCSU). While at SCJU, she held the positions of (1) Associate Vice President for Human Resources and (2) Chief Labor Relations and Employment Officer. Before joining SCSU, she served as both General Counsel and Assistant General Counsel at the Connecticut State Board of Labor Relations. Other professional experience includes as a professional arbitrator/mediator and working as a field attorney for the National Labor Relations Board. Her civic and professional service includes serving on the boards of several organizations, including: Connecticut ACE Women’s Network; Connecticut Labor and Employment Women; Labor and Employment Relations Association, where she also served as vice president; Association of Labor Relations Agencies, where she also served as president and vice president; New England Consortium of State Labor Relations Agencies, where she also served as executive director; and the Connecticut Bar Association, where she was a member and served as chair of its Labor and Employment Law section. Ms. Bailey, a San José resident, earned her law degree from the University of Connecticut and her Bachelor’s degree from the University of Rhode Island.

Consideration of the Governance & Audit Committee’s recommendation on individuals to be appointed to the 2016 MBCOC is scheduled for the Board’s September 7, 2017 meeting. Future applications for the Retired Federal/State/Administrative Law Judge or Mediator/ Arbitrator position will be processed and evaluated by the Evaluation Subcommittee per the established appointment process. The Evaluation Subcommittee’s recommended candidate will then be submitted for Governance & Audit Committee recommendation and Board approval.

ALTERNATIVES:

As defined in 2016 Measure B Citizens’ Oversight bylaws, it is the responsibility of the Governance & Audit Committee to recommend finalist candidates to the Board. Therefore, the Committee can recommend any of the candidates determined by the Subcommittee to possess the required qualifications and thus eligible for appointment.

FISCAL IMPACT:



11

Date: September 1, 2017 Current Meeting: September 7, 2017 Board Meeting: October 5, 2017

BOARD MEMORANDUM TO: Santa Clara Valley Transportation Authority Governance and Audit Committee FROM: Auditor General, Bill Eggert SUBJECT: Inventory Management and Costing Assessment


ACTION ITEM

RECOMMENDATION:

Review and receive the Auditor General's report on the Inventory Management and Costing Assessment.

BACKGROUND:

The Auditor General’s (AG) Risk Assessment Refresh performed in late 2016 identified inventory management as high risk, in part due to the year-end inventory balance increase from $22 million at the end of Fiscal Year (FY) 2015 to $32 million at the close of FY 2016, an increase of 45%. As a result of the potential financial, strategic, and operational risks identified, the AG’s Office recommended, and the Board approved, that certain existing projects in the Board-approved FY17 Internal Audit Work Plan be deferred so an inventory management and costing assessment could be conducted. The AG’s Office completed this resulting project between December 2016 and May 2017 and the attached report is the result of that review. Inventory management is an ongoing, iterative sub-process of supply chain management focused on optimizing stock on hand to meet organizational demands, which include major transit operations and maintenance needs, while minimizing cost to VTA. It is the practice of overseeing and controlling the ordering, storage and disbursement of items that VTA uses to provide service and maintain its infrastructure and assets. The objective of inventory management is to provide uninterrupted service levels at the minimum cost.

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DISCUSSION:

The purpose of the Inventory Management and Costing Assessment was to provide independent outside analysis of VTA’s current inventory management processes, assess the design and operating effectiveness of supporting internal controls, and identify opportunities for process and control improvements, including efficiency gains and/or cost reductions. Based on the work performed, an overall report rating of High was assigned to help management understand our assessment of the overall design of VTA’s inventory management and costing processes. This was based on six primary observations categories, two of which were rated High and the other four rated Medium. We also issued 21 corresponding recommendations for corrective action or potential process improvements. Overall, based on our assessment there appears to be several significant opportunities for improvement relative to VTA’s inventory management processes and controls. Overall, our findings illustrate the opportunity for VTA management to: (1) enhance the strategic value of inventory management; (2) improve collaboration and consistency across divisions to enhance inventory related processes; and (3) implement and effectively promulgate controls to manage risk, measure performance, and promote continuous improvement. Specifically, we observed that VTA’s current inventory management process tends to operate more in a reactive mode that stresses fulfilling inventory requests, as opposed to the more optimal strategic and proactive planning and parts reordering process that focuses on continuous long-term strategic needs and continuous monitoring and evaluation. VTA’s current mode has, at times, resulted in critical parts shortages, inaccurate inventory records, operational inefficiency, and increased financial cost. For the inventory management and related supply chain processes reviewed, we observed that some key controls were in place. However, in a large percentage of cases critical inventory controls were either not established, not adequately documented, or not appropriately promulgated to staff to promote consistency and effectiveness. Management concurs with the risks identified and has committed to implement the recommended mitigation actions. Several have been completed, a large number will be completed by the end of 2017, with a few remaining ones by June 2018. Recommendations for improvement or efficiency opportunities contained in this report are presented for the consideration of VTA management, which is responsible for the effective implementation of any action plans.

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FISCAL IMPACT:

There is no financial impact associated with acceptance of this report.

Prepared by: Lily Rogers, AG's Office & Stephen Flynn, Advisory Committee Coordinator Memo No. 5980 ATTACHMENTS: A--Inventory Management and Costing Assessment (PDF)

12

Inventory Management and Costing Assessment

Auditor General Report No. 2017-05

May 17, 2017

12.a

Inventory Management and Costing Assessment Auditor General Report Issued: May 17, 2017

2

Overall Summary and Review Highlights

The findings identified in our report illustrate the opportunity for VTA management to enhance the strategic value of inventory management by establishing an agency-wide inventory management strategy, collaborating more effectively across divisions to enhance inventory related processes, and controls that manage risk, measure performance, and promote continuous improvement. For the inventory management and related supply chain processes reviewed, we observed that some key controls were in place. In some instances, however, critical inventory controls were either not established or were not adequately documented to promote consistency and effectiveness throughout VTA. This is primarily because VTA has not consistently effected strategic oversight of inventory management and promulgated policies and internal controls that mitigate financial, operational, and strategic risks that could adversely affect VTA achieving its objectives. At times, this has resulted in critical parts shortages, inaccurate inventory records, operational inefficiency, and increased financial risk.

Inventory management operates in a frequently reactive role within the agency that primarily emphasize fulfilling inventory requests, with limited formal proactive planning and parts reordering processes that focus on continuous operations, maintenance, and long-term strategic needs. An overall rating of High was assigned to help management understand our assessment of the overall design of VTA’s inventory management processes. We based our overall rating on our six observations: two rated as High risk and four rated as Medium risk, which are focused on:

Strategic inventory management and ongoing analysis

Proactive parts planning and replenishment

Perpetual inventory records and warehouse logistics

Segregation of duties and asset security

Maintenance work orders and costing

EXECUTIVE SUMMARY

AT

Overall Rating (See Appendix A for definitions)

Report Rating

Number of Observations by Risk Rating

High Medium Low

Inventory Management and Costing

High 2 4 0

Objective and Scope

The primary objectives of this review were to:

Obtain an understanding of VTA’s inventory management and costing processes and controls

Assess the design and operating effectiveness of supporting internal controls

Identify opportunities for process and control improvements, including efficiency gains and/or cost reductions

Additional detail around the scope and work steps completed can be found in Appendix B, with supplemental analyses in Appendices D and E.

Background

Inventory management is an ongoing, iterative sub-process of supply chain management focused on optimizing stock on hand to meet organizational demands, which include major transit operations and maintenance needs, while minimizing cost to VTA. As part of the Auditor General’s (AG) Risk Assessment, inventory management was identified as high risk, partially due to the year-end inventory balance increase from $22 million on June 30, 2015 to $32 million on June 30, 2016, an increase of 45%.

As a result of the potential financial, strategic, and operational risks identified, the AG recommended that certain existing projects in the Board-approved FY17 Internal Audit Work Plan be deferred so an Inventory Management and Costing Assessment could be conducted. The VTA Board approved the request, and the Auditor General’s Office completed this project between October 2016 and January 2017.

The review was performed in accordance with the Standards for Consulting Services issued by the American Institute of Certified Public Accountants. The report is prepared for use by VTA’s Board of Directors, Governance & Audit Committee, and management. Recommendations for improvement are presented for management’s consideration, and management is responsible for the effective implementation of corrective action plans.

We would like to thank those who assisted us throughout this review. Please address questions to Bill Eggert, Auditor General, at [email protected].

12.a

mailto:[email protected]


3

OBSERVATIONS SUMMARY

The following is a summary of observations noted in the areas reviewed.

Definitions of the observation rating scale are included in Appendix A.

Ratings by Observation

Observation Title Rating

1. INVENTORY MANAGEMENT: STRATEGIC ORGANIZATIONAL OVERSIGHT AND ANALYSIS High

2. PARTS PLANNING, REPLENISHMENT, AND INVENTORY OPTIMIZATION High

3. PERPETUAL INVENTORY RECORDS AND WAREHOUSE LOGISTICS Medium

4. COMPONENT REBUILDS AND LABOR COSTING METHODOLOGY Medium

5. SAFEGUARDING OF ASSETS AND SEGREGATION OF DUTIES Medium

6. MAINTENANCE WORK ORDERS AND MONITORING Medium

12.a


4

DETAILED OBSERVATIONS

1. INVENTORY MANAGEMENT: STRATEGIC ORGANIZATIONAL OVERSIGHT AND ANALYSIS

Observation: VTA does not have a defined organizational inventory strategy and adequate policies and procedures to manage inventory risk. Current inventory management monitoring processes are often ad-hoc and do not strategically monitor performance, drive process efficiency, and proactively manage cost.

Recommendation: We recommend that VTA develop a comprehensive inventory management strategy or policy, enhance procedures, and establish formal processes to monitor inventory performance, drive process efficiency, and manage cost.

Management’s Action Plan

Observation Rating: High

1.1 Inventory management is a critical factor to VTA achieving its strategic objectives, and many of VTA’s core operations and maintenance activities are dependent on the availability of parts. However, we found that VTA does not have a formal inventory management strategy that clearly establishes organizational responsibility for inventory, including overall inventory management objectives and the inventory management methodology VTA uses to achieve those goals.

Although VTA has established various inventory management processes and procedures, relevant documentation for critical inventory sub-processes, including inventory accounting, excess and obsolescence, physical inventory verification (i.e. cycle counts), adjustments to inventory, etc., was not clearly defined and effectively communicated agency-wide. In some instances, process documentation provided by management did not reflect current business practices.

Without a comprehensive inventory management strategy and robust procedures that are implemented consistently agency-wide, VTA exposes itself to financial, operational, and strategic risks, including operational inefficiencies that could adversely affect the achievement of VTA objectives.

1.1. In order to enhance the inventory management function at VTA by maximizing value and minimizing risk, we recommend that VTA establish a comprehensive inventory management strategic policy that aligns with VTA’s strategic objectives and provides a framework for operational procedures. In addition, we recommend VTA either update or develop inventory procedures to enhance awareness, operational consistency and compliance across the Agency. Management may consider the following relevant areas when developing a comprehensive policy and supporting procedures:

Organizational responsibility

Inventory performance objectives

Inventory management model(s)

Inventory valuation methodology

Excess and obsolescence

Inventory disposal and write-off

Physical inventory and/or cycle counts (see recommendation 3.1)

Inventory adjustments and authority

Warehouse policies

SAP master data policies

Quality Assurance – Parts Receiving

1.1 Management agrees. VTA will: (1) develop a strategic inventory management policy; and (2) evaluate current inventory management procedures, revise as necessary, and develop new procedures where needed. Procedures currently exist for several of the listed relevant areas.

The process of evaluating of inventory management procedures will be both comprehensive and exhaustive, applying to the approximately 60 current procedures. One goal of this process will be to consolidate and simplify existing procedures to make them more understandable and user-friendly and thus more effective. Another goal will be to emphasize and prioritize strategic inventory planning, management and monitoring, as opposed to the current more reactive state. A third goal will be to create an easy-to-use handbook for both Procurement, Contracts and Materials Management (PCMM) Department staff and its customers.

To accomplish this, management will establish a working group to review and develop procedures. The working group will be comprised of PCMM staff and will include reviews by subject matter experts, external stakeholders and customers. One key objective of this group will be to develop

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work plan for the group that prioritizes which procedures are most critical and thus should be addressed first. Another objective will be to help design an inventory management procedure template that incorporates key criteria, best practices and lessons learned. This template will be utilized in redesigning existing inventory management procedures as well as developing new ones.

Responsible Party: Materials and Warranty Manager and Manager of PCMM

Target Date:

10/31/2017 -- developing and implementing the policy.

12/31/2017 -- (1) establishing the procedure review/development working group, and (2) developing the work plan and prioritizing which items should be addressed first.

Due to the number of procedures, the complexity of the subject matter combined with the need to consolidate and integrate procedures where possible, it is estimated that this process will take up to one year to fully complete.

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1.2. Establishing the root cause of the $10 million (45%) inventory increase between June 30, 2015 and June 30, 2016 was a primary objective of our assessment. Materials Management unit staff explained that the approximate $10 million in growth from FY15 to FY16 was a result of 1) stocking of parts inventory in preparation for the Super Bowl held in February 2016 and 2) LRV rehabilitation because of the aging fleet. Operations management further established that $6 million of new materials were acquired between June 30, 2015 and 2016, primarily for the mid-life light rail overhaul program and the newly acquired 4300-series buses for Bus Rapid Transit (BRT). Subsequent to completion of fieldwork, additional explanation was provided by management that indicated parts acquired for additional buses from the 4100, 4200, and 4400 series also contributed to the inventory balance increase. Although management explained the inventory growth for the period of the review, there was limited analysis and understanding of the drivers readily available, nor was it clear who in the agency had responsibility to monitor and analyze this information. VTA management performs various ad-hoc inventory management analyses, but the inventory monitoring processes we observed were not part of a formal process that aligned with defined performance measures and targets. For example, management did not have clearly defined key performance indicators (KPIs) or other metrics for inventory management that

1.2. To effectively manage inventory service, performance levels, and organizational cost, we recommend that VTA evaluate the availability of relevant and reliable data and subsequently develop a formal process to monitor inventory on an ongoing basis that includes established roles and responsibilities for managing performance and implementing corrective actions. We recommend that the process include clearly defined inventory KPIs or other performance metrics that align with the inventory policy in recommendation 1.1. Management may consider the following inventory performance metrics (described in detail in Appendix C), in addition to any others determined to be appropriate:

Percent of total units requested filled on schedule

Number of stockouts per period

Average number of vehicles held out-of-service for parts per day

Average time to fill back orders

Inventory Turnover Rate (ITR)

Months On Hand

Percent Accurate Balances

Percent Absolute Dollar Variance

Inventory balance – key drivers

1.2 Management agrees. As indicated in the

Management Response for Recommendation 1.1, the PCMM Department will be developing or enhancing procedures to strengthen and prioritize strategic inventory planning, management and monitoring. One element of this will be to assess current KPIs and redesign existing or add relevant new ones as needed.

One key element of this process and the related procedure(s) is enhancing collaboration and coordination between the Materials Resource group, the Contracts/Procurement group, and Operations on planning, forecasting and trend analysis, especially regarding forecasting foreseeable parts usage and contract pricing.

Responsible Party: Materials and Warranty

Manager and Manager of PCMM

Target Date: Since assessing relevant KPIs is an

integral step in the enhancing inventory management procedures, it will follow the same completion schedule committed to for

Recommendation 1.1, which is 12/31/2017 for establishing the procedure review/development working group, developing the work plan and prioritizing which items should be addressed first. The procedure review and revision process is projected to take up to one year to fully complete.

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were readily available, including common inventory performance measures that focus on:

Delivery Performance

Backorder/ Stockout Resolution

Inventory Cost / Investment

Inventory Accuracy

As a result, VTA’s current inventory management processes and controls are not adequately designed to manage the process effectively and mitigate related business risk. Establishing appropriate KPIs and other relevant performance metrics that align with Agency objectives is vital to determining the effectiveness and efficiency of the inventory management process and enhancing the strategic value of the inventory management function.

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1.3 We performed additional analytical procedures (illustrated in detail in Appendix D) to better understand the growth in the inventory balance and identify potential anomalies or inventory risks. As part of our analysis we identified 58 parts with a total inventory value of $49,075 had descriptions that included “Obsolete”, “Delete”, “Use”, or “Replace”, which indicated that VTA was potentially carrying obsolete inventory or had inaccurate material master data in SAP. In addition, we identified 33 parts with a total of 1,372 on-hand units that had a calculated unit cost of $0.00 as of June 30, 2016 compared to zero units on June 30, 2015. We confirmed with Materials Management during our review that VTA should not have parts with a $0.00 value, which indicated that the parts we identified in our analysis could have been entered into SAP with incorrect values or VTA was carrying potentially obsolete parts.

1.3 Due to the nature of the analytical findings we identified, we recommend that management perform subsequent analysis to determine if there were any errors, identify the root cause of each identified instance, and develop appropriate remediation plans to correct errors and mitigate future risk.

1.3 Management agrees. The analysis to determine the root cause was performed and the data entries of deleted items within SAP were subsequently corrected.

In addition, as part of the process to evaluate and strengthen inventory management procedures committed to in the Management Response for Recommendation 1.2, we will incorporate appropriate steps to identify, correct or prevent future occurrences into the appropriate procedure(s) and staff will be trained accordingly.

It should be noted that Bus Maintenance has eliminated or drastically reduced the spare parts package offered in the past few bus procurements. Bus Maintenance management has determined that the availability and proximity of parts for our bus fleet makes it unnecessary to “front-end” spare parts to the extent we needed to in the past. Over time, this should greatly reduce the large and costly parts that VTA has traditionally stocked for the 15-year life of a sub-fleet at $0.00 value, which is how VTA has typically entered into inventory parts paid for through the bus purchase project.


Manager

Target Date: Completed in January 2017

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2. PARTS PLANNING, REPLENISHMENT AND INVENTORY OPTIMIZATION

Observation: VTA does not effectively utilize SAP functionality in conjunction with maintenance planning, parts forecasting, and inventory control processes to optimize inventory levels to meet parts demand, while minimizing stock levels and inventory cost.

Recommendation: We recommend that VTA develop a formal, agency-wide parts planning process that is collaborative across divisions, strategic in nature, and is adequately supported by formal procedures and the effective use of SAP, which will promote process consistency and efficiency and minimize risk.


Observation Rating: High

2.1 Maintenance and Operations planning processes take place within the agency with weekly status reports, aging reports, and bi-monthly advisory committee meetings. VTA’s most robust planning processes are in place for contract development and procurement of new fleet acquisitions / capital additions, whereas there was limited evidence of formal, ongoing parts production planning processes for both Bus and LRV Operations. Although the Operations Division develops production and maintenance plans, there is limited collaboration between Operations and Materials Management that results in formal parts requirement forecasts and strategic replenishment plans that adequately consider both the near and long-term agency parts needs.

Without adequate planning and forecasting, VTA may be exposed to increased risk. An example of this was evident when VTA had not adequately planned for mid-life maintenance needs and factored in order lead times to meet VTA’s production schedule. As a result, VTA initiated an emergency procurement for LRV parts that were not adequately planned or budgeted for.

2.1 We recommend that VTA develop a formal parts planning and forecasting process that includes considerations for both Bus and LRV operations and maintenance (i.e. production plan) as well as capital acquisitions (e.g. bus fleet additions, swing units, etc.) on an appropriate horizon based on part lead-time to optimize parts ordering and availability. While we recognize there are staffing limitations, budget constraints, and that significant efforts are required to implement such a process, increased collaboration and formal planning processes will enhance VTA’s ability to achieve operational and financial objectives. In addition, moving from a reactive inventory management function to a more strategic function (illustrated in Appendix E) may drive inventory optimization, process efficiencies, and cost savings.

2.1 Management agrees. We have begun a collaborative effort to develop a more robust long-range Procurement Forecasting Plan (“Plan). The enhanced Plan will take into account the nuances of managing an inventory that includes parts from sole sourced vendors located outside the United State (mostly for light rail) that typically have extraordinarily long lead times.

The effectiveness of developing and maintaining the long-range Plan will be dependent on promoting a collaborative environment between the key participants. One action being implemented to enhance and formalize collaboration and communication opportunities is creation of a standing working group to regularly reviews and provides input on the Plan. This group will be comprised of key staff from Operations, the Materials Resource group, Finance & Budget, and the Contracts/Procurement group. The working group will have co-chairpersons (one customer, one provider).

Responsible Party: A collaborative effort between the Deputy Director of Light Rail Operations, Operations Managers, Materials and Warranty Manager, the Manager of PCMM, and is led by the Deputy Director of Bus Operations.

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Target Date:

10/31/2017 – establish standing working group and complete first meetings

2/28/2018 – complete initial draft of the Plan

2.2 Automatic reordering is disabled for all parts within SAP and, as a result, VTA depends heavily on manual re-ordering processes. Parts replenishment is driven by the utilization of minimum and maximum stock levels in SAP. Currently, when stock levels drop below the set minimum, a “violation” is triggered within SAP and an order quantity is proposed during the material requirements planning (MRP) run. The Material Resource Schedulers (MRS) manually review each violation for VTA’s approximately 80,000 material line items in SAP and perform ad-hoc analyses, evaluating historical usage and other SAP data to determine if an order should be placed for a part.

Operations has the ability to customize SAP material attributes with a manual inventory change request; however, stock lead times are typically set at standard values and not comprehensively managed using consistent methodology that considers historical data, safety stock required, etc.

The current replenishment process, while dependent on SAP data, is both manual and very inefficient. Although there are certain parts that may benefit from manual reordering such as specialized

2.2 We recommend that VTA evaluate its current utilization of SAP and MRP processes and complete the following:

a) An assessment of materials master data points and parameters, including those utilized in material requirements planning, to determine if they are utilized appropriately and consistently. Where discrepancies exist beyond those identified during this review, management should develop a remediation plan to validate information and document procedures for appropriate use. Considerations for procedures may include:

Guidelines to assess material and replenishment parameters, such as minimum, maximum, and safety stock

Use of automatic reordering, including determination if a part is viable and approved by both Materials and Operations management

2.2.a) Management agrees. There is an existing protocol to establish the minimum and maximum inventory levels, economic order points, etc. that will be reviewed and revised as necessary by the working group indicated in the Management Response for Recommendation 2.1. In addition, a formal procedure addressing these items will be reviewed, enhanced or established as needed per the Management Response for Recommendation 1.1.

Regarding automatic reordering, VTA has previously explored its use. It was determined to be viable in certain instances. There is some risk associated with the use of this feature, which is manageable. The determination of whether to utilize automatic reordering includes a review of quantities for each order, a determination of price break points, a review of the utilization history, utilization forecasting and warehouse storing considerations along with other existing factors. Automatic reordering has been determined in specific instances to be beneficial in reducing administrative burden and stock outages. Due to this, VTA will continue to explore other opportunities for increased utilization of this feature.

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parts, parts of high value, or parts that require long lead times, process inefficiencies exist when manual reordering is used for parts that are frequently ordered or predictable. Other factors that adversely impact the replenishment process include:

• Safety stock is not consistently utilized when determining minimum and maximum stock levels

• There is no defined procedure or methodology to determine lot size / reorder quantities, such as Economic Order Quantity (EOQ) to balance the cost of ordering materials against the cost of storage

• Product lead time is not consistently used in the context of formalized, strategic parts forecasts when planning for parts and determining replenishment schedules

Although VTA has taken measures agency-wide to build out SAP functionality, inconsistent use of relevant SAP data points and failure to use system functionality has resulted in process inefficiencies for parts planning and replenishment.

Economic Order Quantity (EOQ) – number of units to add to inventory while concurrently minimizing the total cost of inventory, which includes holding costs, order costs including delivery, and shortage costs

b) Evaluate individuals in the agency with

access to change material master data and assess their access privilege for reasonableness. VTA should explore further restricting use of material master data, and, at minimum, have defined procedures and criteria for maintaining material master data, including when removal of materials is appropriate.

VTA’s core business processes are dependent on the integrity of SAP data. The implementation of these recommendations is the first step in optimizing the Agency’s parts planning and replenishment processes.

Responsible Party: Materials and Warranty Manager

and Manager of PCMM

Target Date: 1/31/2018

2.2.b) Management agrees. VTA will evaluate individuals with access to change material master data and assess their access privilege for reasonableness. VTA will also develop or bolster the defined procedures and criteria for maintaining material master data, including when removal of materials is appropriate.

Responsible Party: Materials and Warranty Manager

and Manager of PCMM


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2.3 A critical component of the overall success of forecasting is the use of different types of material and demand classifications. At the time of the review, VTA did not have a methodology or process in place to distinguish between different types of demand as defined below:

1) Dependent demand – parts requirements are determined by the “customer” (e.g. Maintenance)

2) Independent demand – parts requirements are determined by uncontrollable causes, which can be stable or intermittent

Separate from assessing demand, VTA does not evaluate or utilize alternative replenishment methods for different types of demand to manage stock requirements and carrying costs. Instead, VTA primarily manages its inventory replenishment on an almost ad-hoc, part-by-part basis which results in significant inefficiencies and increased operational and financial risk to the organization.

2.3 We recommend that VTA evaluate and consider implementing, on a phased priority basis, forecasting and parts planning methods for different types of demand within the agency. For example, information from the Transit Cooperative Research Program (TCRP), shown in Appendix F, illustrates how transit agencies may consider demand type, maintenance requirements, and replenishment methods when forecasting.

Although there are inherent demand uncertainties in the transportation industry, segregation of demand types facilitates strategic planning processes that more effectively assess parts requirements while also balancing predictable needs against uncertainty.

2.3 Management agrees. VTA will investigate the feasibility of implementing forecasting and parts planning methods for different types of demand within the agency, taking into consideration the factors listed in the report as well as others. The process will be addressed by the working group indicated in the Management Response for Recommendation 2.1

Responsible Party: Materials and Warranty Manager, Purchasing Manager, Manager of PCMM in collaboration with Operations Managers, Deputy Director of Bus Operations and Deputy Director of Light Rail Operations.


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3. PERPETUAL INVENTORY RECORDS AND WAREHOUSE LOGISTICS

Observation: A lack of a clearly established cycle count policy in conjunction with the physical inventory variances observed by the Auditor General during fieldwork, in combination with the gross value of cycle count variances and recounts performed by VTA throughout the year, indicate that cycle counts may be ineffective and are not adequate to mitigate Agency risk.

Recommendation: VTA should establish agency-wide policies and procedures for cycle counts and SAP master data maintenance; subsequently establish cycle count performance/accuracy targets and develop a monitoring program that includes appropriate metrics to assess operational performance and accuracy of inventory.


Observation Rating: Medium

3.1 VTA does not currently conduct a full physical inventory on an annual basis to reconcile physical inventory to SAP records. Instead, VTA has elected to perform cycle counts on a periodic basis for each material depending on its inventory classification (e.g. Classification “A” materials are counted monthly and Classification “B” materials are counted quarterly). While there is a cycle count process at VTA, there were limited formal policies and processes in place with corresponding metrics to validate cycle count completion and assess the root cause of variances.

VTA did not readily provide a cycle count policy that clearly defined how all parts should be stratified within SAP (e.g. A, B, C, D), other cycle count system configurations, or the specific requirements when performing counts, recounts, posting adjustments, etc. We also confirmed that employees performing the cycle counts had access to SAP data and would look up and document the SAP on-hand quantities prior to performing the cycle count (non-blind count). Although there are reasons for performing non-blind counts, performing cycle counts without on-hand count data reduces risk.

In FY 2016, there were 72,354 cycle count entries in SAP, 6,038 of which identified a positive or negative variance– approximately 91.7% accuracy. Of the variances counted, VTA posted a negative variance of approximately $K to the general ledger. The posted

3.1. Due to the combination of observations identified relating to cycle count controls and increased risk, we recommend that VTA:

a) Formally establish a discrete agency-wide cycle count policy and appropriate procedures (see recommendation 1.1.a) that address SAP requirements, physical count requirements, etc.

b) Separate from the agency-level metrics described in recommendation 1.2, we recommend that VTA develop a formal process to monitor warehouse inventory performance that includes established metrics that are focused on the accuracy of perpetual inventory records, including established targets for cycle count results, root cause analysis, and driving continuous process improvement.

By enhancing the overall cycle count process by implementing recommendations 3.1 – 3.2, VTA can move toward accurate inventory records, attaining cost controls, and delivering parts data necessary for effective and efficient operations.

3.1.a) Management agrees. A formal cycle count policy will be established and the associated cycle count procedures will be reviewed and enhanced as necessary. These tasks will be accomplished using the working group being established as described in the Management Response for Recommendation 2.1.


Target Date: 12/31/2017 for: 1) developing and

implementing the policy; (2) establishing the procedure development working group; and (3) developing the work plan for the procedure

development working group.

3.1.b) Management agrees. VTA will develop a formal procedure to monitor warehouse inventory performance, the goal being to drive a continuous process improvement. The procedure will focus on the accuracy of perpetual inventory records, include established targets for cycle count results, and require analysis of any variance found for the root cause.

This procedure, due to the importance of the issue it covers and thus high priority, will be

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variance from cycle counts in FY16 was less than 1% of the total ending inventory balance; however, there were also 2,068 cycle count entries that produced an aggregate initial variance of $5.7 million, all of which VTA subsequently recounted and resolved per the cycle count process.

We also performed a two-way inspection of physical inventory by comparing quantity on hand and in storage bin location records from SAP to the storeroom floor and vice versa. Of the 30 samples inspected from the SAP perpetual record that were compared to the storeroom floor, 30% of the records had either inaccurate on-hand counts or storage bin locations. In some instances, parts on-hand in the perpetual records could not be located. Of the 24 samples inspected on the storeroom floor that were compared to SAP perpetual records, 67% had variances of on-hand count and specific bin locations.

Due to judgmental, non-statistical sampling used during our inspection, the physical inventory sample cannot be applied to the inventory population. However, the discrepancies identified during our physical count in conjunction with the aggregate value of cycle count variances and volume of recounts performed throughout the year, as well as the lack of readily available policies and procedures, indicate that VTA’s cycle counts may not effectively mitigate risk and likely adversely affect part-dependent operations and revenue generating services.

one of the first procedures reviewed and evaluated by the procedure review/ development working group described in the

Management Response for Recommendation 1.1.




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3.2 Bin locations are used to manage the storage and movement of goods and are necessary for performing cycle counts and streamlining warehouse operations. (A storage bin diagram is illustrated in Appendix G, Exhibit 1). VTA currently uses 28,413 bin locations across its six warehouses / storerooms, identified as “plants” in SAP. During our review, we found that system storage attributes within SAP and physical storage attributes in the warehouses were not standardized. In addition, we found multiple instances where the same, discrete bin location was described with multiple, non-standard taxonomies in SAP. Examples of each of these scenarios are illustrated in Appendix G, Exhibit 2.

Although it is not required to have assigned bin locations for all materials, we identified some materials with units on hand and no bin location in SAP. This scenario may be explained by the timing of inventory transactions, but a large number of materials in SAP (64% of total) do not have an assigned/ dedicated bin location in the warehouse and SAP. The relevant risks related to storage and bin master data, and warehouse logistic procedures, may result in operational inefficiencies due to inaccurate records, such as avoidable cycle count recounts, wasted time due to the difficulty of locating inventory per records, and inability to quickly fulfill parts order requests.

3.2 In order to standardize warehouse storage logistics and corresponding storage bin master data within SAP, we recommend that VTA perform a comprehensive review of its SAP storage bin locations and corresponding warehouse processes, which may include the following considerations:

Identification and development of a standardized warehouse and storage bin hierarchy that represents all physical storerooms and warehouses used

Definition of standard taxonomy for storage and bin locations

Elimination of unauthorized or duplicate storage bin locations

Consideration for standard, defined bin locations for specific materials within storerooms

The list above is not exhaustive but represents various ways management should evaluate current processes and considerations that should be incorporated into process enhancements that could drive operational efficiency and consistency, as well as accuracy in cycle counting and financial reporting processes.

3.2 Management agrees. Standardizations related to data entry of the bin location has been initiated. As described in Appendix G, the description of the part varied in abbreviations and the location varied in entry type based on staff at different yards and shifts. For example, the description in SAP may have included a dash by one employee while another employee used a backslash symbol. To ensure consistency within SAP, staff training related to standardization and consistency in data entries is underway. In addition, periodic spot checks will be performed by the Parts Supervisors for the remainder of 2017. Further, the procedure(s) on warehouse processes will be reviewed and updated accordingly to help ensure consistent naming conventions.



Target Date: Underway, with completion by

12/31/2017

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4. COMPONENT REBUILDS AND LABOR COSTING METHODOLOGY

Observation: The component rebuild program does not have adequate agency-wide processes and controls in place to monitor component rebuild costs and ensure accurate recordkeeping for cost accounting and inventory purposes in SAP.

Recommendation: Assess the current component rebuild process and establish appropriate policies and procedures that include a list of approved materials for rebuild and utilization of labor standards for component rebuilds to manage rebuild cost variances.



4.1 VTA performs component rebuilds for high-cost parts in its maintenance program using component cores that are deemed to have no value and are beyond simple repair. To perform these rebuilds, VTA stocks damaged or unusable inventory “component cores” that are typically identified during regular maintenance activities. The component cores are tagged and labeled with a specific part number, serial number, work order, and other details before being returned to a parts room where they are supposed to be added to inventory in SAP at $0.01 and placed in a segregated system storage location for un-serviceable parts. When a component rebuild work order is opened and released in SAP, a task list with pre-determined parts is issued to the mechanic who then performs the rebuild. Upon completion of the rebuild, the mechanic is responsible for recording all labor in SAP and returning the rebuilt part and any unused materials from the rebuild to the parts room. The parts clerk should then settle the rebuild work order and add the rebuilt part to inventory. The component rebuild process is similar between bus and light rail, but we identified the following process and control weaknesses during our fieldwork:

4.1. We recommend that VTA assess its current component rebuild processes and establish policies and procedures that appropriately address:

Strategic buy-build cost analysis for rebuilt materials to ensure that work being insourced is fiscally reasonable

SAP system recordkeeping requirements that are agreed to by Finance and Budget Division staff to ensure appropriateness

Physical storage and scrapping (when necessary) requirements for un-serviceable cores

Requirements for recording movement in SAP

Approved task list (i.e. Bill of Materials) and requirements for returning unused materials to inventory

4.1 Management agrees. VTA will review and enhance its current component rebuild policies and procedures, developing new ones as needed. This process will be accomplished utilizing the working group being established to review and develop inventory management procedures, as described in the Management Response for Recommendation 1.1.

Responsible Party: Materials and Warranty Manager and Manager of PCMM, Operations and Finance & Budget staff as appropriate (for example, Make or Buy Studies for rebuild is a Quality Assurance procedure/function in Operations, whereas materials forecasting for rebuild requires partnership between Materials Management and Operations).

Target Date: 12/ 31/2017

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Inconsistent processes to monitor component rebuild labor and work order status

Unused materials remaining after work order completion are not consistently returned to the parts clerk and returned to inventory

Inaccurate SAP component core on-hand counts records

Cores are not regularly managed to ensure those carried at a cost to VTA are used for standard rebuilds and scrapped when necessary

The inconsistent component rebuild process across the agency in conjunction with inaccurate system records and limited oversight increases the risk of inaccurate financial records, such as inaccurately reported costs and subsequent inventory values when cores are rebuilt and settled to inventory, operational inefficiencies, and preventable carrying costs for stock on hand that has no value.

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4.2 The cost of component rebuilds is largely driven by the labor hours required to complete the rebuild. In the current process, actual hours required to complete the rebuild are input into SAP and used in the unit cost valuation when it is settled back into inventory, and a new weighted average price for the part is calculated. Although VTA’s use of weighted average costing smooths the value of a part over time, there are significant underlying variances in unit costs for rebuild parts that could be affecting the growth in inventory. For example, one component rebuild part type had final unit costs ranging from just under $7,000 to over $175,000. Given the limited oversight of inventory and component rebuilds, these large variances, which could be a result of operational inefficiencies or errors, may go undetected by management.

4.2 We recommend that VTA establish labor standards for each component rebuild and develop a process to monitor labor variances that require investigation for significant variances. Enhanced monitoring will allow management to compare performance against an established standard, have visibility into potential operational issues or errors, and better facilitate planning processes with materials management.

4.2 Management agrees. It will establish or enhance the existing process to monitor and identify labor variances that deviate significantly and repetitively from the established norms so that the root cause of the variance can be investigated. Examples of some changes made to enhance monitoring include configuration changes in SAP as well as implementation at Light Rail of the mid-life component rebuild process (PM04). Responsible Party: Operations.

Target Date: 12/ 31/2017

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5. SAFEGUARDING OF ASSETS AND SEGREGATION OF DUTIES

Observation: Physical security measures and efforts to segregate conflicting duties are not adequate to consistently prevent unauthorized inventory movements and safeguard VTA assets from potential misappropriation.

Recommendation: Physically secure storerooms and warehouses to the greatest extent practical; limit segregation of duties conflicts and prioritize elimination or mitigation of conflict before accepting the risk; develop appropriate asset monitoring processes when necessary.



5.1 The primary factor in safeguarding assets is ensuring there is appropriate physical security of parts and parts warehouses. During our review, we identified the following weaknesses related to physical security that increase the risk of asset misappropriation and inaccurate financial records:

• Parts rooms are not staffed on all shifts, resulting in both unmonitored maintenance access and potentially unauthorized access to the secured parts rooms during non-peak hours and parts being removed from physical inventory and not recorded in SAP.

• On two separate Guadalupe Yard tours, we observed two different parts rooms with a badge-access door left open and unsecure.

• Inventory locations are not consistently defined in both SAP (perpetual inventory records) and the badge-access system (physical access permissions) for storerooms and warehouses.

• Parts are stored in locations other than SAP defined warehouse locations, resulting in potentially inappropriate access.

5.1 To optimize VTA’s physical security of parts rooms and minimize the risk of loss due to unauthorized access, we recommend that VTA: a) Evaluate the current parts room coverage

model and consider reassigning or hiring new staff to avoid gaps in parts room coverage.

b) If warehouses are unattended, Operations must enhance enforcement and accountability of the Vacant Storeroom Policy, including re-training employees if necessary, to ensure all parts taken are recorded accurately.

c) In addition to the assessment of SAP storage and bin locations described in recommendation 3.2, VTA should evaluate and define badge perimeter doors / access points for all parts storerooms, then restrict access to only necessary personnel.

d) Consider the use of consignment inventory, including innovative solutions such as parts vending machines, to minimize VTA’s overall inventory balance.

5.1.a) Management agrees and has completed the staffing assessment. Although additional staffing is required to address current gaps in coverage for all operational shifts, there is not opportunity at the current time to hire additional staff.


Target Date: Completed in June 2017.

5.1.b) Management agrees. It will review, determine the most appropriate action, then implement specific steps to enhance enforcement of the Vacant Storeroom Policy.

Responsible Party: Operations.


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5.1.c) Management agrees. To mitigate unauthorized entry into storerooms, a review of the protocol to obtain parts in instances where the storeroom is not staffed has been conducted. Materials Management, in collaboration with Operations management, reviewed with Safety and Security Division staff a listing of all individuals with access to storerooms and deleted those that were not appropriate or no longer needed. Additionally, the corresponding procedure is being updated to reflect that no additional access privileges will be provided without authorization from the Materials and Warranty Manager.


Manager and Manager of PCMM.

Target Date: Completed

5.1.d) Management agrees. It will review the feasibility of using consignment inventory, including vending machines, to minimize VTA’s overall inventory balance.


Manager and Manager of PCMM.


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5.2 Segregation of duties (SOD) is a fundamental aspect of managing risk of fraud and errors in both financial reporting and physical custody inventory and assets. Properly implemented SOD can help reduce risk by separating the following key responsibilities: 1) custody of assets, 2) authorization or approval of transactions, and 3) recording or reporting of related transactions. VTA uses the SAP Governance, Risk, and Compliance (GRC) tool to identify conflicting system duties by individual transaction type. GRC was re-deployed in October 2016 and currently has 27 users with high-risk conflicting system roles because of their ability to post inventory adjustments. In addition to the conflicts identified in SAP, most of these same individuals also have physical custody of assets, posing a greater risk of asset misappropriation to the agency. Although management has implemented certain mitigating controls that include adjustment limits within SAP, management does not consider asset custody in its analysis, nor does management monitor inventory adjustments to identify any suspicious or unauthorized activity.

5.2. If VTA determines that SOD conflicts cannot be eliminated, we recommend that management consider the following to mitigate risk:

a) Management incorporate the consideration of risk associated with physical custody of assets into its GRC segregation of duties conflict analyses

b) Management develop formalized and appropriate monitoring processes to detect and resolve unauthorized transactions for unmitigated high-risk conflicts

c) Individuals performing cycle counts that also have custody to assets perform counts without knowledge of SAP counts as discussed in recommendation 3.1.b.

5.2 Management agrees. VTA will consider additional methods of mitigating risk associated with inventory cycle counts. For example, parts clerks may be assigned to count inventory at a location other than their assigned warehouse. Another possibility being investigated is having other individuals perform and/or certify the count.




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6. MAINTENANCE WORK ORDERS AND MONITORING

Observation: Maintenance work orders are not clearly defined and consistently utilized across the agency to ensure accurate financial and inventory records in SAP.

Recommendation: Standardize and define all work orders types with clearly established recordkeeping requirements and responsibilities in SAP. Develop monitoring functions to identify high-risk work order anomalies.



6.1 VTA’s primary method for monitoring ongoing maintenance costs is the use of work orders within the Plant Maintenance module of SAP. Work orders are used for different maintenance processes, including vehicle repairs, preventative maintenance, inspections, and component rebuilds. Different types of work orders have unique requirements both outside the system and within SAP. Examples of these varying requirements include:

How parts are issued and assigned to a work order: either a standard materials list or non-standard parts requested for maintenance needs

How labor is recorded to the work order

How and if work orders are settled to inventory Although some procedure documentation exists, it does not clearly define each SAP work order type with procedures that describe when each type should be used and how required information should be recorded in SAP. As a result, we observed some instances where work orders were misclassified. We also observed inconsistent use of work order types across bus and rail maintenance divisions. To help promote consistency in record keeping, the Operations team recently developed new work order types (PM05 and PM06) that distinguish what department originated the work order and require more details within SAP. However, the new work order types had not been consistently adopted across the Operations Division.

6.1 In order to reduce the risk of inaccurate financial records, including Work in Process (WIP) and Bus and Rail Parts inventory balances, we recommend that:

a) VTA clearly define each Plant

Maintenance work order classification type, when each should be used agency-wide, and what data fields are required to be documented within the SAP work order record.

b) Subsequently, VTA should review and

update pertinent work order policies, procedures, and process documentation.

c) VTA should then provide training / re-

training as appropriate and with relevant employees so that expectations and responsibilities are clearly established.

6.1.a) Management agrees. Changes will be implemented to clearly define Plant Maintenance work order classification types along with proper usage. Additional changes will be made to more clearly define what data fields are required to be completed within the SAP work order.

Responsible Party: Operations, with assistance of

Information Technology


6.1.b) Management agrees. Affected work order policies, procedures and/or work instructions will updated accordingly to reflect these changes.

Responsible Party: Deputy Director of Light Rail

Operations and Deputy Director of Bus Operations


6.1.c) Management agrees. Corresponding training on the changes will be provided to affected employees to ensure effective implementation.

Responsible Party: Deputy Director of Light Rail

Operations and Deputy Director of Bus Operations


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6. MAINTENANCE WORK ORDERS AND MONITORING

Observation: Maintenance work orders are not clearly defined and consistently utilized across the agency to ensure accurate financial and inventory records in SAP.

Recommendation: Standardize and define all work orders types with clearly established recordkeeping requirements and responsibilities in SAP. Develop monitoring functions to identify high-risk work order anomalies.


6.2 An analysis of work orders in progress within SAP as of November 30, 2016 illustrated that there were 2,653 work orders in progress, with total material and labor costs applied of $3.6 million. Of those, 1,151 were in progress greater than 90 days with associated applied direct costs of $1.8 million (see detail in Appendix H). We noted that work orders in progress greater than 90 days might be justified by regular business practice (i.e. the long lead times for acquiring LRV parts); however, an expected quantity of work orders in progress cannot be accurately determined without overall, formalized work order standards. Although some processes exist to monitor work orders in progress, most notably of the bus maintenance scheduling, they are not adequate to identify potentially duplicated work orders or those that have aged beyond a reasonable period vs. accurately closed in the system.

6.2 We recommend that VTA develop a formal process to monitor work orders in progress, including aging, so that management can identify potential risks or issues relating to duplicate work orders or work orders that are aging beyond a reasonable period. Management may also consider the following when developing the work order monitoring process:

Work order turn-around-time standards or other benchmark for monitoring

Root cause analysis for aging (e.g. down for parts, mechanic not available, etc.) to help drive operational improvements.

SAP standards for tracking and monitoring work orders

6.2 Management agrees. An existing process will be modified and augmented to monitor work orders in progress, including aging.

Responsible Party: Deputy Director of Light Rail Operations and Deputy Director of Bus Operations, with assistance from Information Technology.


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APPENDIX A—RATING DEFINITIONS

Observation Risk Rating Definitions

Report Rating Definitions

Rating Definition Rating Explanation

Low

Process improvements exist but are not an immediate priority for VTA. Taking advantage of these opportunities would be considered best practice for VTA.

Low

Adequate internal controls are in place and operating effectively. Few, if any, improvements in the internal control structure are required. Observation should be limited to only low risk observations identified or moderate observations which are not pervasive in nature.

Medium

Process improvement opportunities exist to help VTA meet or improve its goals, meet or improve its internal control structure, and further protect its brand or public perception. This opportunity should be considered in the near term.

Medium

Certain internal controls are either:

Not in place or are not operating effectively, which in the aggregate, represent a significant lack of control in one or more of the areas within the scope of the review.

Several moderate control weaknesses in one process, or a combination of high and moderate weaknesses which collectively are not pervasive.

High

Significant process improvement opportunities exist to help VTA meet or improve its goals, meet or improve its internal control structure, and further protect its brand or public perception. This opportunity should be addressed immediately.

High

Fundamental internal controls are not in place or operating effectively for substantial areas within the scope of the review. Systemic business risks exist which have the potential to create situations that could significantly impact the control environment.

Significant/several control weaknesses (breakdown) in the overall control environment in the part of the business or the process being reviewed.

Significant non-compliance with laws and regulations.

High risk observations which are pervasive in nature.

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APPENDIX B — SCOPE, WORK PLAN AND BACKGROUND

APPENDIX C — EXAMPLE INVENTORY PERFORMANCE MEASURES AND INDUSTRY BENCHMARKS

FIELDWORK DATES: October 31, 2016 to January 20, 2017

WORK STEPS COMPLETED: The following steps were taken to complete our analysis and deliver a report with recommendations:

Kickoff meeting and preliminary documentation review

Walkthroughs and interviews with key personnel from Bus Operations and Maintenance, Light Rail Vehicle Operations and Maintenance, Materials

Management, Finance and Accounting, Operations Reporting, and Information Technology groups

Documentation of processes and controls

Design and operating effectiveness testing of key controls in the following key areas:

Policies and procedures

System access and segregation of duties

Work order costing and monitoring

Forecasting and demand planning

Inventory movement, including sample inventory counts

Inventory analysis and monitoring for the period July 1, 2014 to June 30, 2016

Cycle counting

Material Requirements Planning (MRP) capacity planning

Identification of recommendations and opportunities for improvement

SCOPE AND KEY RISK AREAS

Examine the policies, processes, and controls in place around VTA’s Inventory Management and Costing. The review focused on the following risk

areas:

Inventory job costing methodology

Forecasting and demand planning

Parts resupply and utilization metrics

Supply chain management, inventory movement, and inventory optimization

Inventory analysis and monitoring

Expense analytical review, budget variances, and inventory balances

SAP functionality and automation, materials maintenance and plant maintenance modules

Segregation of duties

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APPENDIX C — EXAMPLE INVENTORY PERFORMANCE MEASURES AND INDUSTRY BENCHMARKS

Example Delivery Performance Measures

% of total requested units filled on schedule =

Example:

Total units issued / Total units requested

15 units issued / 20 units requested = 75% filled on schedule

Number of stockouts per period =

Example:

New zero balances/ Time period

5 zero balances / Month = 5 stockouts per month

% of unfilled orders due to lack of material =

Example:

Number of orders requested / Number of orders unfilled

9 orders requested / 90 orders unfilled = 10% unfilled orders

% of user requested line items filled from inventory =

Example:

Number of line items filled / Number of line items requested

72 line items filled / 78 line items requested = 92% item requests filled

Average number of vehicles held out-of-service for parts per day =

Example:

Number of vehicles held / Number of service days

15 vehicles held / 20 service days = .75 vehicles per day

% of maintenance hours lost while waiting for parts =

Example:

Nonproductive mechanic hours / Available mechanic hours

14 nonproductive hours/192 available hours = 7% maintenance hours lost

Example Back Order (Stockout) Resolution Performance Measures

Number of days out of stock =

Example:

Date received – Date of stockout

June 20-July 7 = 13 days

Average time to fill back orders =

Example:

Total number of days to fill all back orders / Total number of back orders

432 Days / 65 back orders = 6.65 days per back order

Example Inventory Investment Measures

Inventory Investment =

Example:

(Units On Hand) x (Average Price)

(7000 units on hand) x ($156.30 average price) = $1,094,100 inventory investment

Inventory Turnover Rate (ITR) =

Example:

Annual Usage Dollars / Total Inventory Dollars

$208,000 usage dollars / $1,094,100 total inventory dollars = 0.19 ITR

Months On Hand =

Example:

Total Inventory Dollars / Average Monthly Usage Dollars

$1,094,100 total inventory dollars /$18,000 average monthly usage = 60.783 months on hand

Example Inventory Accuracy Measures

% Accurate Balances =

Example:

[Number of items (that is, part numbers) that match / Total number of items counted] x 100

[478 items that match / 550 items counted] x 100 = 86.9% accurate balance

% Absolute Dollar Variance =

Example:

{∑ absolute (computer value – value of actual counts) / Total computer value of items counted} x 100

{absolute [($75 computer value - $65 value of actual count) + ($100 - $115)] / ($175 Total computer value)} x 100

= 14.29% absolute dollar variance

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APPENDIX C — EXAMPLE INVENTORY PERFORMANCE MEASURES AND INDUSTRY BENCHMARKS, CONTINUED

Performance Indicator Mean Max Min

Bus inventory turnover 1.74 7.36 0.13

Rail inventory turnover 0.71 1.43 0.29

Stockout % of SKUs 1.52% 20.0% .013%

Bus inventory $/vehicle $5,027 $15,384 $281

Rail inventory $/vehicle $37,498 $139,286 $6,785

% Items out of balance 7.83% 60% .005%

Bus % fill rate 89.0% 100% 10%

Rail % fill rate 86.1% 100% 40%

Bus % obsolete items 9.2% 60% .01%

Rail % obsolete items 6.1% 20% 1%

Bus days to fill back order 16.4 90 1

Rail days to fill back order 25.3 56 1

Inventory $ per person $217,980 $1,300,000 $32,418

Person $/Inventory $ $0.31 $1.05 $0.05

Transactions per person 181.8 798 5

Source: Revised Inventory Management Desk Guide

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APPENDIX D — INVENTORY ANALYSIS AND EXHIBITS

Exhibit 1: Excess and Obsolescence Analysis:

We identified the following relating to parts on hand as of June 30, 2016:

o 8,336 Materials (60% of Material line items in FY16) had the exact same number of units on hand at June 30, 2015

AND June 30, 2016, with no indication analysis had been performed to identify obsolete parts

o 58 Materials had descriptions that included “Obsolete”, “Delete”, “Use”, “Replace”, or other words that indicated

potential parts for disposal, obsolescence, or other material issue (see table below for examples)

Total inventory value of $49,075 for the combined 324 on-hand units

Excess and Obsolescence Analysis SAP Inventory as of June 30, 2016

SAP Material Number

SAP Material Description Units on Hand Total SAP Inventory Value

Calculated Unit Cost at June 30, 2016

106101 OBSOLETE REPLACED BY 410015 3 $10,637.04 $3,545.68

407511 DELETED REPLACED BY 409440 5 $7,199.96 $1,439.99

122202 DELETED REPLACED BY 408653 6 $7,873.38 $1,312.23

106931 DELETE - THROTTLE ASM ISM FC92 8 $10,089.28 $1,261.16

409466 DELETED - USE MATERIAL # 410310 1 $1,026.89 $1,026.89

407665 DELETED REPLACED BY 409403 1 $851.68 $851.68

Other materials 300 $11,397.20 $37.99 (average)

TOTAL 324 $49,075 $ 151.47 (average)

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APPENDIX D — INVENTORY ANALYSIS AND EXHIBITS, CONTINUED

Exhibit 2: Inventory Balance Trend Analysis

Between the period June 30, 2014 - June 30, 2016:

o “Total Inventory” Balance increased 58% by $11.8 million

o Combined “Rail & Bus Parts” inventory balance increased 61% by $11.6 million

o “WIP – Calculated WIP on Work Order” inventory balance increased 115% by $535k

o “Fuel” and “Other” inventory balances substantially decreased by $300k

June 2014 Sep 2014 Dec 2014 Mar 2015 Jun 2015 Sep 2015 Dec 2015 Mar 2016 Jun 2016

Other Inventory $78,133 $72,178 $70,858 $77,504 $77,727 $75,918 $75,435 $71,647 $59,873

Fuel $471,955 $408,271 $329,698 $244,974 $247,675 $211,408 $176,305 $182,211 $189,538

WIP-Calculated WIP on Work Order $463,416 $650,307 $465,282 $837,800 $898,026 $624,151 $1,097,691 $1,248,452 $998,318

Rail & Bus Parts $19,181,038 $19,387,776 $20,112,887 $20,384,307 $20,846,943 $21,838,288 $25,726,735 $27,879,922 $30,792,090

Total Inventory $20,272,675 $20,518,532 $20,978,725 $21,544,586 $22,070,371 $22,749,764 $27,076,165 $29,382,232 $32,039,819

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000Quarterly Inventory Account Balance June 30, 2014 - June 30, 2016

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APPENDIX D — INVENTORY ANALYSIS AND EXHIBITS, CONTINUED

Exhibit 3: Inventory Balance Trend Analysis – Continued

Between the period June 30, 2015 - June 30, 2016, we identified the following drivers to inventory growth:

o 770 “New” Materials with quantity in stock in FY 2016 but no units on hand in FY 2015, which include:

11,711 total units as of June 30, 2016

Combined total inventory value of $5.95 million – a significant driver in year-to-year growth

Large-quantity acquisitions

Year-to-Year Inventory Material Analysis SAP Inventory as of June 30, 2016

SAP Material Number

SAP Material Description Total units on hand at

June 30, 2016

Total units on hand at

June 30, 2015

Total SAP Inventory Value at

June 30, 2016

Calculated Unit Cost at June 30, 2016

408730 FIRING BOARDS ONIX INVERTER - PSI 947 - $2,019,456.17 $2,132.48

111229 APSE INSTALLATION 7 - $1,819,258.79 $259,894.11

111907 GATE DRIVE CONTROLLER for APSE IGBT 96 - $146,577.60 $1,526.85

122603 Track Brake Suspension Rebuild Kit 574 - $144,524.71 $251.79

105577 BEARING JOURNAL use 111486 152 - $137,647.26 $905.57

111525 SHOCK ABSORBER AND LEVER ASM PT 95 - $110,421.82 $1,162.33

Other materials 9840 - $592,279.69 $60.19 (average)

TOTAL 11,711 - $5,954,641.47 $508.47

33 Materials with a calculated unit cost of $0.00 and combined on-hand count of 1,372 units as of June 30, 2016 compared to

2015 when no Materials in SAP had a unit cost of $0.00; examples include:

Inventory with $0.00 Calculated Unit Cost SAP Inventory as of June 30, 2016

SAP Material Number

SAP Material Description Total units on hand at June 30, 2016

Calculated unit cost at June 30, 2016

117463 RIVET PIANO HINGE (SCB 355) GG10-22 247 $0.00

118951 MIRROR ASM EXTERNAL L/H ZEB1 23 $0.00

57018 DECAL "EMERGENCY DOOR" TRILINGUAL 601 $0.00

115161 WEB GUIDE BELT 3 PT ERGO SEAT GG20-22 14 $0.00

Other materials 487 $0.00

TOTAL 1372 $0.00

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APPENDIX D — INVENTORY ANALYSIS AND EXHIBITS, CONTINUED Exhibit 4: Parts Issued Expense Analysis

Between the period July 1 2014 - June 30, 2016, we identified the following:

o “Parts Issued” expense peaked in January 2016, coinciding with Super Bowl preparation at $3.2 million or 12.6% of the

ending balance for “Rail & Bus Parts” Inventory;

o “Parts Issued” expense was lowest in June 2016 at $1.6 million, 5.2 % of total Rail & Bus Parts Inventory for the period

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

-

5,000,000.00

10,000,000.00

15,000,000.00

20,000,000.00

25,000,000.00

30,000,000.00

35,000,000.00

Parts Issued Expense vs. Bus and Rail Part Inventory Balance

Rail & Bus Parts Inventory Balance Monthly Parts Issued Expense Parts Issued Expense / Parts Inventory (%)

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APPENDIX E — PROGRESSION OF INVENTORY FUNCTIONS

APPENDIX F — REPLENISHMENT METHODS ACCORDING TO DEMAND

Demand Type Maintenance Requirements Replenishment Method(s)

Stable Independent Demand Unscheduled Maintenance

(Forecasted Requirements)

Fixed Period

Intermittent Independent Demand Unscheduled Maintenance

(Forecasted Requirements)

Min/Max Reorder Point

Economic Order Quantity /Two-Bin System

Dependent Demand Capital Projects

Planned Maintenance

(Calculated Requirements)

Fixed Schedule

Fixed Order

Savings

Contribution

Inventory Management’s Role Broadens

Reactive Role

Receive inventory requests

Fill inventory

requests

Proactive Role

Project Inventory requirements

Plan for fluctuations in supply

Strategic Role

Work with customers to plan for future

requirements

Progression of Inventory Functions



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APPENDIX G — SAP STORAGE LOGISTICS

APPENDIX F — SAP STORAGE LOGISTICS

Exhibit 1: Example SAP Warehouse and Bin Location Diagram:

Source: SAP

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APPENDIX G — SAP STORAGE LOGISTICS, CONTINUED

Exhibit 2: SAP Logistics and Storage Analysis

SAP is VTA’s enterprise resource planning (ERP) system that is utilized for end-to-end supply chain management, which

consists of multiple sub-processes. Within the system, the materials management (MM) module is primarily utilized for

inventory management purposes. As of the date of our sample inventory counts (December 15, 2016), we identified the

following:

VTA has set up six distinct “Plants” for the purposes of defining inventory store rooms/ warehouses within SAP; a summary of

the number of Materials, Bin Locations, and total stock units on hand as of December 15, 2016 when we performed a sample

Inventory observation included:

Summary of Inventory Storage Logistics SAP Inventory detail as of December 15, 2016*

Plant Total Material Line Items at Plant

Total Number of Storage Bins at Plant

Total Units of Stock on Hand

Plant 1: Cerone Main Distribution Center 23,055 9,561 186,870

Plant 2: Cerone Minor Storeroom 15,303 2,853 12,857

Plant 3: Chaboya Part Storeroom 15,312 3,755 19,296

Plant 4: North Division Storeroom 15,068 4,724 27,419

Plant 5: Light Rail Main Warehouse 8,026 5,775 190,602

Plant 6: Way, Power, & Signal Storeroom 2,886 1,745 34,203

VTA TOTAL 79,650 28,413 471,247 Note*: This data was extracted at a point in time from an SAP data table without inventory values; as such, this data could not be reconciled to the General Ledger; however, we analyzed the data for reasonableness with no issues.

During our review, we identified the following pertaining to the use of SAP logistics and Materials Management:

o 51,237 Materials without an assigned/dedicated bin location, some with stock units on hand

o Inconsistent, unclear, and duplicate storage locations – examples of bin locations include:

TRL BARN TRLLY BARN TROLLEYBRN TROLLYBARN

WALL 11/13 WALL-11/13 WALL-11-13 WALL-12-13

36-R-07-10 36-R-08 36-R-09 36-R-10

01-BELT WL 01-BELT/WL 01-BELT-FL 01-BELT-WL

BLDGK REAR BLDGKINSID BLKCAB-B8 BLKCAB-B-8

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APPENDIX H — MAINTENANCE WORK ORDER ANALYSIS

In-Process Maintenance Work Orders As of November 30, 2016

Work Order Type Total Number of Work Orders in Process

Cumulative Costs Applied to the Work Order

(Direct Labor and Materials) Bus (excludes rebuild work orders)

1832 $1,058,805

Light Rail (excludes rebuild work orders) 538 $652,745

Rebuild Work Orders (Bus and Light Rail)

283 $1,921,740

TOTAL 2653 $3,633,290

Work Orders In-Process Greater than 90 Days As of November 30, 2016

Work Order Type Total Number of Work Orders in Process Greater

than 90 Days

Cumulative Costs Applied to the Work Order

(Direct Labor and Materials)

Bus (excludes rebuild work orders)

711 $313,856

Light Rail (excludes rebuild work orders) 329 $428,074

Rebuild Work Orders (Bus and Light Rail)

110 $1,046,954

TOTAL 1151 $1,788,884

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REFERENCES

Transit Cooperative Research Program Sponsored by the Federal Transit Administration Research Results Digest October 2000: Revised Inventory Management Desk Guide, Number 40. (October 2000). Retrieved February 01, 2017, from http://www.tcrponline.org/PDFDocuments/TCRP_RRD_40.pdf

Untitled illustration of SAP Bin Location. (n.d.). Retrieved February 2, 2017, from https://help.sap.com/saphelp_sbo900/helpdata/EN/ad/4f233a7b864c7cbe2b57ad09246adb/content.htm

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Date: May 25, 2017 Current Meeting: September 7, 2017 Board Meeting: N/A

BOARD MEMORANDUM TO: Santa Clara Valley Transportation Authority Governance and Audit Committee FROM: Auditor General, Bill Eggert SUBJECT: Review Status of Internal Audit Work Plan


VTA’s Auditor General is responsible for developing and recommending the annual Internal Audit Work Plan, assigning and managing the resources required to conduct each internal audit or project, and providing project results and progress reports to the Governance & Audit Committee. To keep members informed, the Auditor General's Office provides at each Governance & Audit Committee meeting a report on the current status of the Internal Audit Work Plan and its component projects. This includes an update on the projects currently underway as well as the projected order and estimated completion schedule of the remaining projects.

Prepared By: Lily Rogers, AG's Office & Stephen Flynn, Advisory Committee Coordinator Memo No. 1896

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Internal Audit Work Plan Status Report

1

Project / Activity

Governance & Audit Committee Meeting

FY17 FY18

Mar2017

May 2017

June 2017

Sep 2017

Nov2017

Feb2018

Inventory Management and Costing Assessment

BART Silicon Valley Extension Contractor Compliance IA

Records Management Program Assessment

RTI Project CAD / AVL Replacement

Special Events and Stadiums

Transaction Monitoring Audit* (pending scope approval)

Annual Risk Assessment Refresh

Comprehensive IT Risk Assessment

Paratransit Operations Transition

Joint Development

Note: the timelines reflected above are estimates and may be subject to change due to scheduling constraints and/or Board requests.

Report Complete

In progress

In progress

Scheduled

Ongoing

Planned

Planned

Planned

Planned

Scheduled

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Internal Audit Work Plan Status Report – Completed Projects

2

Project / Activity

Board Meeting

FY17 FY18

Oct2016

Dec 2016

Jan 2017

Mar2017

June 2017

Aug2017

Follow up: Timekeeping and Payroll Process Review

Follow up: Investment Program Controls Internal Audit

IT Development and Project Management Assessment

AG Recommended FY18 & FY19 Internal Audit Work Plans

Investment Controls (every two years per Board Policy)

Inventory and Assets Held at Outreach

Interagency Agreements Risk Assessment

Follow Up: Trapeze Ops Pre-Implementation Review

Follow Up: Public Safety Process Assessment

Follow Up: Sheriff’s Office Contract Compliance IA

Follow Up: Sheriff’s Office Contract Compliance IA

Note: the projects above are considered completed when the Auditor General’s report is noted on the meeting agenda and accepted by the full Board. Completed reports are available on the VTA website under the Board meeting agenda.

Completed

Completed

Completed

Completed

Completed

Completed

Completed

Completed

Completed

Completed

Completed

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Date: July 11, 2017 Current Meeting: September 7, 2017 Board Meeting: October 5, 2017


FROM: Chief Financial Officer, Raj Srinath SUBJECT: Scope of work for Annual Financial Audit Services for Fiscal Year 2017


BACKGROUND:

Pursuant to state law and the Administrative Code of the Santa Clara Valley Transportation Authority (VTA), Vavrinek, Trine, Day & Company, LLP (VTD), has been retained as the independent Certified Public Accountant, to conduct the audit of VTA financial statements for Fiscal Year 2017. The scope of VTD’s services includes the following:

Conduct the financial statement audit and render an opinion on the: VTA General-purpose Financial Statements VTA - Amalgamated Transit Union (ATU) Pension Plan VTA Schedule of Expenditures of Federal Awards (Single Audit) Other Post Employment Benefit Report

Perform internal control assessment over financial reporting based on the audit of the financial statements

Perform compliance audit with requirement of the Transportation Development Act

Perform agreed-upon procedures with regard to the data reported in the VTA’s Annual National Transit Database (NTD)

Perform grant-required audits

DISCUSSION:

VTD has performed the audit of VTA’s financial statements for Fiscal Years 2006 through 2016. They have conducted their audit in accordance with auditing standards generally accepted in the

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United States of America and the standards applicable to financial audits contained in the Government Auditing Standards, issued by the Comptroller-General of the United States.

Presented below are VTD’s timeline and deliverables relating to the Fiscal Year 2017 audit engagement:

April 2017

Internal control assessment and testing Cash receipts and disbursements sample testing Payroll sample testing Preliminary evaluation of the Schedule Expenditure of Federal Awards Preliminary survey of procedures relative to development of VTA’s Indirect Cost

Allocation Plan

August to October 2017 Performance of audit field work

November 2017 Presentation of the 2017 Comprehensive Annual Financial Report, VTA-ATU

Pension Plan Report and the Other Post Employment Benefit Report to the Audit Committee on November 2, 2017

Prepared By: Grace S. Ragni, Fiscal Resources Manager Memo No. 6105

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Date: September 1, 2017 Current Meeting: September 7, 2017 Board Meeting: October 5, 2017


FROM: Chief of Staff, Angelique Gaeta SUBJECT: Interagency Agreements Policy

Policy-Related Action: Yes Government Code Section 84308 Applies: No

ACTION ITEM

RECOMMENDATION:

Adopt the Interagency Agreements Policy.

BACKGROUND:

The VTA Auditor General’s (AG) Office presented its Interagency Agreements Risk Assessment at the June 2017 Governance & Audit Committee meeting. This assessment defined interagency agreement (IA) as any agreement between VTA and another public agency. The AG Office’s report stated that the use of interagency agreements is a critical and effective business tool for VTA to manage its complex and diverse business operations. However, each of the approximately 150 agreements that currently exist is unique and can expose VTA to a combination of various risks, including: strategic, financial, reputational, compliance, and operational, that could adversely affect VTA in achieving its objectives. One key theme identified by the AG’s Office was that VTA does not comprehensively, consistently or uniformly evaluate on an agency-wide basis potential agreements for risks or prospective value to the organization. According to the AG’s Office, VTA also does not consistently or uniformly monitor the agreements through completion and closeout. Among the related recommendations from the AG’s Office was that VTA establish or enhance a formal procedure to include a framework of specific criteria to be used to effectively develop, negotiate terms, monitor and report performance of all IAs. This criteria will be used to evaluate, among other factors, the feasibility of the potential IA in regards to it aligning with VTA’s policies and strategic vision, its financial and operational impacts, and assessing the VTA departmental responsibility and capability for managing and monitoring the IA.

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A related key recommendation was for VTA to develop an appropriate policy governing IAs to formally define and impart the organization’s strategic vision and indicated level of importance for the effective development and management of IAs. When reviewed by the Governance & Audit Committee, the Committee specifically requested that the policy be approved by the Board of Directors to formalize the Board’s direct statement on the importance of effective IA development and management to achieving VTA’s strategic vision and goals. DISCUSSION:

Policy Submitted for Board consideration is the recommended Interagency Agreement Policy (Attachment A) developed to address the AG Office’s recommendation. The purpose of the policy is to define and impart the Board’s vision, goals, and prioritization for the standardized development and management of all IAs to protect VTA’s interests. The detailed instructions and steps needed to develop, manage, monitor and report on IAs will be contained in the corresponding IA procedure that will be developed, as discussed later in this memo. To guide development of both the policy and procedure, a working group of key VTA users, project managers, subject matter experts, legal counsel, and other knowledgeable participants was assembled. The working group provided significant input and review of the draft policy. Next Steps The working group will continue to meet for several months to develop the parameters and specific actions for the draft procedure. It will be a lengthy process given the complexity of the subject combined with the need for the procedure to be very detailed in order to take into account VTA’s numerous and varied responsibilities and business functions (examples include regional transportation services, construction, utility and operating easements, shared facilities, maintenance agreements, BART service, etc.). The procedure is being developed as a guideline with checklists of specific items required to be actively considered and evaluated during development of all new IAs. Examples of the items to be considered include:

Relevance to VTA's strategic objectives Cost-benefit analysis and value to VTA Financial and non-monetary commitments Risk assessment and mitigation strategies VTA ongoing operational responsibilities and capabilities Partner organization capabilities Conflict resolution and escalation Term length, exit clause and audit provisions

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In addition, as requested by the Governance & Audit Committee, the procedure will also require/ ensure that all future IAs:

Contain a brief summary describing the agreement’s specific purpose and key provisions, such as term duration

Include parameters to ensure searchability of the document for key terms/phrases Contain reporting, monitoring and trend analysis requirements to be performed by VTA

staff once the IA is executed

Completion of the procedure and approval by the GM/CEO is targeted for the first quarter of 2018. Training would begin soon thereafter, with full implementation targeted for the start of FY 2019 (July 2018).

ALTERNATIVES:

The Board could choose to modify any of the policy’s provisions or reject the policy in entirety.

FISCAL IMPACT:

There is no direct fiscal impact associated with the recommended action.

Prepared by: Stephen Flynn, Advisory Committee Coordinator Memo No. 6179 ATTACHMENTS: A--Draft IA Policy (PDF)

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POLICY Document Number:

Interagency Agreements Version Number: 01

Date: MM/DD/YYYY

Original Date: MM/DD/YYYY

Revision Date:

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1. Purpose:

The purpose of this Policy is to promote standardized and comprehensive preparation, processing, coordination, execution, administration, and closeout of all Interagency Agreements (IAs) to protect VTA’s interests.

2. Scope:

This Policy applies to all IAs where VTA is a party.

3. Responsibilities:

General Manager/CEO (or his/her designee) will:

(1) Draft and obtain Santa Clara Valley Transportation Authority (VTA) Board of Directors (Board) approval of this Policy.

(2) Develop, implement and monitor procedures for IAs to be used by any VTA department, division, employee, consultant, contractor and/or agent.

(3) Ensure agency understanding and compliance with this Policy and corresponding procedures.

General Counsel (or his/her designee) will:

Review all IAs prior to execution by VTA.

4. Policy

It is the policy of VTA that:

a. IAs will only be entered into where there is clear benefit to the organization or the public.

b. IAs will integrate and adhere to all applicable existing VTA policies and procedures.

c. IAs will be created, managed, monitored, retained and reported following established specific procedures. These procedures will provide guidance for evaluating and negotiating potential agreement terms as well as managing, monitoring, and reporting on executed IAs. Key procedural guidance will include, but not be limited to:

(1) Cost-benefit analysis and value to VTA; (2) Risk assessment and methodology and risk mitigation strategies; (3) Relevance of terms to VTA's strategic objectives; (4) Evaluation of financial and non-monetary commitments; (5) Drafting of terms, including: term length; audit provisions and exit clauses;

conflict resolution and escalation; and (6) Monitoring and compliance of IAs.

15.a

POLICY Document Number:

Interagency Agreements Version Number: 01

Date: MM/DD/YYYY

Original Date: MM/DD/YYYY

Revision Date:

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d. The General Manager or his/her designee has the authority to execute IAs in accordance with the limits set forth in VTA’s Administrative Code or other Board action. IAs exceeding the prescribed limits must be approved by the Board.

e. Status of Major IAs will be reported to the Governance & Audit Committee on a periodic basis.

5. Definitions:

5.1 “Interagency Agreements” are contracts between VTA and one or more public agencies.

5.2 “Public Agency” is any state office, department, divisions, bureau, board and

commission, a school district, a municipal corporation, a local agency, a county, a city, a district, a public authority and any other political subdivision or public corporation in the State.

5.3 “Major IAs” are IAs that required Board approval prior to execution or have a term

length of 10 years or longer.

6. Summary of Changes:

MM/DD/YYYY adoption by Board of Directors and initial release of this policy.

7. Approval Information:

Prepared by Reviewed by Approved by

Stephen Flynn Advisory Committee Coordinator

Nuria I. Fernández General Manager/CEO

VTA Board of Directors

Date Approved:

15.a

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