Department of Transportation
Office of Inspector General
400 Seventh Street, S.W.
Washington, DC 20590

by email:

November 14, 2002

Re: San Francisco Bay Area-Financial Capacity Policy

Dear Inspector General:

We wrote to your office on July 31, 2002 on issues relating to the application of FTA's Financial Capacity Policy. Not long after, FTA posted on its web site a new Financial Capacity Policy, which was effective January 30, 2002 (FTA C 7008.1A). The new policy, among other things, provides guidance on financial capacity assessment in the development of major capital projects exceeding $1 billion in total cost and on reviewing Transportation Improvement Plans.

This letter provides additional information on the Santa Clara Valley Transportation Authority (VTA) and on one of its proposed transit projects, and on the interim 2003 Transportation Plan (TIP), recently submitted to the federal government for certification by the Metropolitan Planning Organization (MPO) for the San Francisco Bay Area.

The proposed transit project is the construction and operation of a fixed guideway extension of the San Francisco Bay Area Rapid Transit rail line south from Fremont, Alameda County, to San Jose and Santa Clara, both in Santa Clara County. The project is expected to cost over $3 billion, and the operator intends on seeking several hundred million dollars in a grant or grants from FTA.

Two months ago, VTA, the transit operator responsible for financing the proposed rail extension, reported in a press release that FTA had "given the Silicon Valley Rapid Transit Corridor BART expansion project a rating of 'Recommended' and approved the project to enter into preliminary engineering (PE), opening the way for more detailed engineering design work. The project will, when completed, bring BART to Milpitas, San Jose and Santa Clara."

RAFT is concerned that the decisions published by FTA in early September (recommendation of the project and approval to advance to preliminary engineering) by FTA are not in conformance with FTA's Financial Capacity Policy, because VTA is facing significant short-term and long-term financial problems.

On June 6, 2002, nearly three months before FTA published its decisions, VTA adopted its 2002-2003 budget, available at The severity of VTA's financial difficulties are set out in the budget:

"We are proposing a budget that will virtually exhaust our budgetary reserves and incorporates a number of one time solutions to address what is realistically an ongoing structural problem. The one time revenues, federal capital money used for Preventative Maintenance programs and the cost reductions, result in a projected operating deficit of $30.2 million. Without them, the deficit would be $85.4 million. By June 30, 2003, we currently estimate that our reserves will be approximately $7.2 million and our ongoing excess of expenditures over revenue will exceed $5 million each month."

Clearly, VTA was known to be in serious financial difficulty before the FTA decisions were published. Given FTA's Financial Capacity Policy, on what basis could it have issued a "recommend" statement about the project to the Congress and authorize the project to advance to the preliminary engineering phase? Should these decisions stand or be vacated?

The financial problems facing VTA are now known in greater detail, and soon FTA will be reviewing the project again, in the winter of 2003.

Last week, VTA's board of directors took receipt of a report from VTA management dated November 2002 and entitled "Obtaining Sustainable Financial Stability." Page 8 contains the following:

"However, without substantial additional operating revenues, VTA will be unable to continue operations through FY2005, if all other base case assumptions occur as estimated...An immediate need of $146 million (FY2003$) annually is required to continue operations at projected service levels beyond FY2004, followed by an additional annual revenue amount of approximately $21.3 million (FY2003$), which is needed by FY2012."

Page 21 refers to an unfunded liability on January 1, 2002 of $53 million to the Amalgamated Transit Union pension plan.

Page 28 refers to an unfunded balance of $1.6 billion on priority transit projects.

In light of its financial situation, VTA is now preparing to go out to a series of public meetings to discuss service cuts on dozens of bus lines next April. This information is at

Will FTA consider this new information as it moves forward in the next few months with its review of the project and of VTA?

The Financial Capacity Circular states that "there are two basic aspects to financial capacity: (1) the general financial condition of the public transit grantee and its nonfederal funding entities; and (2) the financial capability of the grantee and its nonfederal funding entities. The latter is understood to include an assessment of the grantee's ability to fund current capital projects as well as ongoing operating needs."

The circular continues: "Satisfactory financial condition means that the grantee can pay its current costs from existing revenues," and "Satisfactory financial capability means the grantee's ability to meet its expansion costs in addition to its existing operations from projected revenues."

VTA appears unable to satisfy either the "satisfactory financial condition" test or the "satisfactory financial capability" test. Should not VTA be required to provide further information or propose how the deficiencies will be addressed to satisfy the two basic aspects of financial capacity before the mega-project receives any further approvals from FTA?

Further, RAFT is concerned that this project is also in the interim 2003 Transportation Improvement Program for our metropolitan area, and VTA is to receive $214 million for preliminary engineering on the mega-project this year. Has a review of the financial capacity of VTA, as required under Section 8 of the Financial Capacity Policy, been undertaken as a part of the TIP approval process by FTA?

Lastly, the Transportation Conformity regulations adopted by Bay Area metropolitan agencies and the US EPA require the MPO and the U.S. Department of Transportation to demonstrate that the plan and the proposed interim TIP itself are financially constrained, and not dependent upon a significant new and unknown financing source, as may be needed to complete a fixed guideway mega-project. Has DOT made and fully documented this finding? If so, will it be made available to the public?




M. Kiesling