SPECIAL REPORT * The fast-growing rail service is popular with commuters, but audits find . . . Metrolink’s Financial Affairs Not on Track

The contract struck the auditors as excessive. Metrolink, Southern California’s popular commuter railroad service, was paying a company $420,000 a year to provide reports on how the organization uses its automobiles.

Another dubious purchase agreement had the railroad paying 80% of the bill, but only receiving 30% of what it had ordered.

Metrolink, which is run by the Southern California Regional Rail Authority, now operates 107 trains a day serving Los Angeles, Orange, Riverside, San Bernardino and Ventura counties. It has more than 400 miles of track, 45 stations and property worth about $1 billion. It gets high marks from most of the more than 25,000 commuters who board its trains each day.

It received much lower grades during two recent audits, one conducted by Strategic Systems Corp., a management consulting firm based in Milwaukee, the other by a group of transportation officials from the five counties Metrolink serves. Their conclusions were presented to the rail authority last month.

Some of the most troubling of those findings arose when the auditors looked at a sample of the agency’s major contracts. Metrolink’s business procedures were so loose, they said, that millions of dollars were probably being wasted every year.

Together, these comprehensive audits, the first since the railroad began operations six years ago, reveal that Metrolink’s managers have placed at risk a $1-billion commuter service that is heavily subsidized by state and federal tax dollars.

The records show that the bureaucracy running the fast-growing railroad is in disarray, lacking both formal procedures and the basic financial controls to manage Metrolink’s expenditure of its $73-million annual budget.

In fact, the rail authority is raising ticket prices, although auditors contend that at least $10 million a year could be pared from the budget by better management.

“The Southern California Regional Rail Authority must evolve into a new era or risk the reputation it has established as a popular commuter service,” one audit stated. “No longer can the agency continue to operate without effective policies and procedures.”

The findings have already led to repercussions at the rail authority’s headquarters at 7th and Flower streets in downtown Los Angeles. Two weeks ago, the authority board replaced Metrolink executive director, Richard M. Stanger, and put finance director Wanda Hill and marketing director Adrienne Brooks-Taylor on paid leaves.

Board members have sent scores of audit findings and recommendations to committees for study and possible implementation.

Operations Director David Solow, who assumed Stanger’s position on an interim basis, has developed a detailed plan to guide Metrolink through the next 90 days. A week ago, board members also began organizing a national search for a new executive director.

Since the shake-up began, Stanger and authority board members have refused to discuss the situation. Responsibility for all public comment has been handed off to Alex Clifford, a Riverside city councilman who chairs the board.

Clifford downplays the audits that found such widespread deficiencies in Metrolink’s management and business procedures. He will not use the word “problems” when discussing the findings. Instead, he says the audits made “observations” about Metrolink’s administration, some of which the board and rail authority staff may disagree with.

Clifford describes Metrolink as a successful operation that has grown from 2,600 riders a day when it began operations in 1992. Reliance on state and federal dollars to fund the line has been steadily reduced from 60% of its budget to 48%.

The service is extremely popular with riders and highly regarded by most communities, interest groups and elected officials. The agency also has received national acclaim for its reaction to the 1994 Northridge earthquake.

For the most part, commuters who regularly ride Metrolink say the railroad is doing a good job of getting them to their destinations on time despite the deficiencies uncovered by the audits.

“Like everyone else, I don’t like waste, fraud and abuse,” said Bill Carroll, who regularly takes the Santa Clarita line to get to work in downtown Los Angeles. “But as a ground-level grunt riding the train every day, I don’t care if Koko the gorilla is running the railroad, as long as I get to work on time.”

Other commuters disagreed with the rail authority’s decision in May to raise fares 12.5% over four years when audits indicate that substantial amounts of money could be save through better management.

“No one likes fare increases,” said Rodney A. Wycoff, a real estate consultant who takes the Orange County line from Irvine to Los Angeles. “If there is another way to solve their problems, they should take the other way first.”

Until a few months ago, management of the burgeoning Metrolink system never had been thoroughly reviewed. Consequently, Clifford said, the authority board decided to initiate two major audits on its own.

The railroad’s administration was at a critical juncture in its history, shifting from construction and start-up to devoting most of its time to operating the railroad. In addition, the rail authority was separating from Los Angeles County’s Metropolitan Transportation Authority and developing its own organizational identity. It was time, Clifford said, to evaluate the line’s management. “We have done a lot of proactive work to make sure we are moving in the right direction,” he said. “The audits are a prudent thing in our strive to make this an excellent agency.”

The far-reaching reviews criticized the agency’s leaders for the way they have handled such important functions as contracts, billings, employee relations, planning and monitoring the agency’s spending.

Auditors said Metrolink’s fast growth has contributed to the neglect of important management principles. Among other things, they noted that a lack of formal policies and procedures within the agency has created an atmosphere that “is not conducive to operating with sound business practices.”

Of particular significance, both auditing teams concluded that the railroad has no internal audit function to track how it spends its $73-million annual budget.

“This is a serious issue,” the Strategic Systems report stated. “Given the size and scope of its mission and the dollars it manages, the absence of an internal audit function may lead to serious weaknesses in internal controls going undetected for long periods of time.”

Similarly, auditors found that Metrolink’s management does not adequately review its contracts to make sure they are cost-effective. The railroad hires private companies for roughly 90% of its needs, including design, construction, administrative services, engineers and conductors, as well as maintenance of its facilities, track and rolling stock.

Strategic Systems looked at a sample of major contracts and concluded that at least $10 million a year could be saved if Metrolink hired its own employees to do the work. For example, auditors said the railroad could save $2.7 million a year if it hired its own staff to do signal maintenance. Under the current contract, the line is paying 40% more than it should for the services.

By hiring a strategic planner of its own, the audit stated that Metrolink could avoid hiring private consultants at a cost of more than $650,000 a year, which includes fringe benefits, 45% overhead and a standard fee of 10%.

According to Strategic Systems, another $870,000 a year could be saved by eliminating a contract for technical and management support. The audit stated that Metrolink was paying more than twice what it should for the work.

“Operating controls are needed more today as the agency matures,” auditors said. “There is a need to insure a proper rate of return for capital improvements and to compensate for any reduction in state and federal subsidies.”

The team of county transportation officials called into question the railroad’s purchase of 115 automobiles provided to employees and contractors, saying there was no appreciable benefit. Some Metrolink employees, the team noted, had diverted their cars to personal use.

The auto fleet’s operation is monitored under a $420,000-a-year contract with Pro Guard, which helps to provide reports on auto usage. Auditors said the contract appeared “excessive” and recommended that it be reevaluated.

Besides the contracts themselves, Metrolink auditors turned to how they were awarded in the first place. They found inconsistent bid criteria and unclear evaluation formulas.

As a result, auditors said Metrolink has not been able to attract an acceptable number of bidders for most contracts--an indication managers are not getting the most competitive bids.