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2020-085 TxDOT Audit of Regional Toll Revenue Funded ProjectsDate: October 2, 2020 Report No. 2020-085       INFORMAL STAFF REPORT TO MAYOR AND CITY COUNCIL SUBJECT: This report will discuss the TxDOT audit of the City’s Regional Toll Revenue (RTR) funded projects. BACKGROUND: The purpose of this report is to provide the Mayor and City Council information on the audit findings, management responses, and process improvements made. DISCUSSION: The objective and scope of the audit was to determine whether the City of Denton has effective internal controls in place to ensure Regional Toll Revenue (RTR) funds are managed in accordance with applicable funding agreements and verify whether costs are allowable and adequately supported. The City was notified of the audit at the end of January 2020, and the audit concluded on July 31, 2020. The scope of the audit included current processes and procedures implemented by the City to manage the six RTR funded agreements between TxDOT and the City. The six transportation projects are:  Fiber Optic Trunk Lines  Bonnie Brae  Mayhill Road  North Texas Boulevard  Hickory Creek Road  McKinney Street The audit included four findings with no adverse action against the City. Staff agreed with the findings and has taken steps to resolve each. Ultimately, the audit was a positive experience and will result in improved processes. The full audit report is attached. As a result of the audit, the City created a Grant Management Office to facilitate management and reporting for all grants received by the City of Denton. The Office reports to the Assistant City Manager and includes the positions of Grant Administrator and Grant Analyst. Other process improvements include updating all projects from inception through the current reporting period in the Revenue and Project Tracking System (RAPTS) for NCTCOG. Moving forward the City will provide NCTCOG a monthly summary report and detailed reconciliations of monthly expenditures, city matching requirements, and interest earnings for each project. The City has published desk procedures for project reporting in the RAPTS system. The reporting is now included as part of the City’s month end financial close process. Date: October 2, 2020 Report No. 2020-085       Finance began work on an Administrative Directive for grants in December 2019. A section of this directive covers Suspension and Debarment as recommended in the audit. It gives specific instructions on how to search the Excluded Parties List System (EPLS). These instructions include directions on printing and retaining this information for future audit documentation and compliance. The directive was reviewed by the Legal Department and the Policy Review Committee. Any necessary changes will be implemented by the new Grant Management Office. The Finance Department created a Utility and Capital Improvement Planning Division to monitor all project budgets and prepare the Transportation Improvement Modification Program reports. Any future budget transfer requests will have preapproval from the NCTCOG. All RTR project reporting will be completed by this group moving forward. In addition, this group of analysts will focus on the Utility budgets and City-wide financial capital projects. The group will bring detailed discussions forward to the Boards, Commissions, and City Council regarding bond programs, project funding, execution and completion. ATTACHMENTS: TxDOT Audit Report of Regional Toll Revenue for the City of Denton STAFF CONTACT: Cassandra Ogden, Director of Finance (940)-349-7195 Cassandra.Ogden@cityofdenton.com External Audit Report Audit of Regional Toll Revenue – City of Denton TxDOT Compliance Division Audit of Regional Toll Revenue - City of Denton 1 July 2020 Objective and Scope To determine whether the City of Denton (City) has effective internal controls in place to ensure Regional Toll Revenue (RTR) funds are managed in accordance with applicable funding agreements and verify whether costs are allowable and adequately supported. The scope of this audit included current processes and procedures implemented by the City to manage RTR funds and all RTR agreements between TxDOT and the City. Overall Conclusion The City’s internal controls were not always effective to ensure that RTR funds were managed in accordance with applicable funding agreements. Specifically, TxDOT identified control weaknesses over monthly reporting and project closeout. Expenditures were supported by sufficient documentation and were allowable per TxDOT agreements. However, the City did not have processes in place for performing and maintaining documentation of vendor suspension and debarment verifications prior to contract execution, and for reallocating funds between agreement budget categories. City personnel approve vendor invoices prior to payment, maintain sufficient documentation to support RTR expenditures, ensure RTR expenditures are within the period of availability and allocate interest to RTR accounts each month based on the City’s internal processes. The City has completed environmental reviews as required by agreements and has met RTR agreement match requirements. Additionally, the City’s Internal Ethics and Compliance Program meets the requirements of Title 43 Texas Administrative Code Part 1 §10.51. Background The RTR program was funded by an upfront comprehensive development agreement (CDA) concession payment and excess toll revenues generated in the Dallas-Fort Worth region. Projects use standard agreement templates developed in partnership between the North Central Texas Council of Government’s (NCTCOG) Metropolitan Planning Organization (MPO) Regional Transportation Council (RTC) and TxDOT at the inception of the program. In 2006, the Texas Transportation Commission approved a memorandum of understanding with the RTC requiring RTC-selected agreements to be financed using RTR funds upon concurrence from the Commission. RTR funding for Texas State Highway 121 and 161 includes an initial deposit of approximately $3.6 billion and $354 million in additional toll revenues. RTR agreements between TxDOT and the City are advance-based. The City is required to keep the awarded amount in an interest-bearing account after receiving the RTR award amount from TxDOT and provide monthly reporting to NCTCOG throughout the agreement. At Audit of Regional Toll Revenue - City of Denton 2 July 2020 the end of the agreement, the City is required to return unexpended funds and interest earned to TxDOT. Since program inception, the City has been awarded seven RTR advance-based agreements totaling $116,891,852 ($141,047,989 including the local match). Results Expenditures Expenditures were supported by sufficient documentation and were allowable per TxDOT agreements. For the three projects tested, expenditures were for approved cost phases, actual expenditures did not exceed the amount budgeted, expenditures were incurred in the correct period of availability, matching requirements were met, and match funds used were allowable. Agreement Closeout The City did not have sufficient controls in place to close out projects in accordance with TxDOT procedures and agreement requirements. For the one closed RTR project (CSJ 0918- 46-243), the City did not perform an audit of costs following project completion as required by article 15 of the agreement. Not completing a closeout audit of costs increases the risk the City may incorrectly calculate unexpended funds and interest earned, resulting in an incorrect amount of funds returned to TxDOT and reduced RTR project funding available. Additionally, the City did not submit the closeout package to TxDOT within 30 days of project completion as required by TxDOT RTR Off-System Closeout Procedures. The project was completed in May 2013, but the City did not submit the closeout package to TxDOT until March 2014. As a result, TxDOT was not notified in a timely manner of the completion of the RTR project. Recommendation: Document and implement controls to ensure RTR project closeout requirements are met within required timeframes. Perform past due audit of costs and timely remit identified excess funds and interest to TxDOT as required by the agreements. Monthly Reporting For all 6 open RTR agreements, the City did not submit all required information in its monthly reports to NCTCOG. The City self-reports RTR project information to the NCTCOG Revenue and Project Tracking System (RAPTS) monthly. The City’s reports to NCTCOG did not consistently include all elements required by the agreements. Per article 22 of the agreements, monthly reports to NCTCOG must include local match expenditures, expenditures by separate agreement phases, interest rate, interest earned for the period, cumulative interest earned, and a status of developing the agreement. Incomplete or inaccurate reporting distorts available program information for decision making and may impact the funding available for future RTR projects. Audit of Regional Toll Revenue - City of Denton 3 July 2020 Specifically, for 2 of 6 open projects, the City did not report invoice information to support expenditures as required. For all 6 projects tested, the City did not report the status of developing the project as required by article 22 of the agreements. • CSJ 0918-46-245 - Bonnie Brae Invoice information and status of developing the project not reported in RAPTS. • CSJ 0918-46-246 – Mayhill Road Invoice information and status of developing the project not reported in RAPTS. • CSJ 0918-46-244 - Fiber Optic Invoice information was entered through December 2019; however, the status of developing the project was not reported in RAPTS. • CSJ 0918-46-298 - McKinney Street Invoice information was entered through December 2019; however, the status of developing the project was not reported in RAPTS. • CSJ 0918-46-281 - North Texas Boulevard Invoice information was entered through September 2019; however, the status of developing the project was not reported in RAPTS. • CSJ 918-46-290 - Hickory Creek Road Invoice information was entered through July 2019; however, the status of developing the project was not reported in RAPTS. The City requested NCTCOG remove historical RTR project information from RAPTS mid 2019 when the City determined interest earned had not been calculated correctly. The City has reported corrected 2014 through 2018 RTR project information in RAPTS on a quarterly basis and then monthly beginning with January 2019. Recommendation: Document and implement controls to ensure compliance with monthly reporting requirements and ensure all project reporting to NCTCOG is complete and accurate. Suspension and Debarment The City did not retain evidence it performed suspension and debarment verifications prior to contract execution as required by article 26 of the agreements. The City does not have procedures in place to verify vendors are not suspended or debarred prior to contract execution. Not performing suspension and debarment verifications increases the risk that the City may enter into a contract with a prohibited vendor. TxDOT verified the vendors for the RTR projects tested are not currently suspended or debarred. Audit of Regional Toll Revenue - City of Denton 4 July 2020 Recommendation: Document and implement controls that ensure suspension and debarment verifications are performed prior to contract execution and that documentation of suspension and debarment verifications are retained as required. Reallocating Funding between Budget Categories For 1 of 6 open projects, the City did not obtain NCTCOG approval prior to reallocating RTR funding between approved budget categories in accordance with the NCTCOG Transportation Improvement Program (TIP) Modification Policy. Per Attachment A of the agreement, funds are allocated to specific fiscal years within budget categories and approved by the Regional Transportation Commission with concurrence by the Texas Transportation Commission. The City uses an internal budget transfer form to transfer funds or expenditures between job numbers; however, the City was not aware of the requirement to request a TIP modification prior to moving RTR funding between approved budget categories. As a result, $1.7 million in RTR funds was transferred between budget categories without approval from NCTCOG. Specifically: • CSJ 0918-46-245 – Bonnie Brae Road from IH-35E to US 377 $1,734,314 allocated to Construction per the agreement was transferred to Right of Way. Recommendation: Document and implement controls for transferring funds that align with the NCTCOG TIP Modification Policy and ensure NCTCOG approval prior to reallocating funding between approved budget categories. Audit of Regional Toll Revenue - City of Denton 5 July 2020 Appendix I Project Information This audit was conducted for the Dallas District (DAL), TxDOT Administration, and the Chief Audit and Compliance Officer. The audit was included in the fiscal year 2020 Compliance Division work plan and performed by Gail Ates (Engagement Lead), Michael Boehme, and Quinton Crummedyo. Engagement fieldwork was conducted from February 2020 to May 2020. The audit was conducted in accordance with Generally Accepted Government Auditing Standards and in conformance with the International Standards for the Professional Practice of Internal Auditing. Those standards require we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions on our audit objectives. Methodology • Gained an understanding of City’s operating structure. • Interviewed key DAL personnel. • Interviewed key City personnel in the Engineering Department, Capital Improvement Department, Procurement Department, Compliance and Purchasing Department, Finance Department, and Controller’s Office. • Reviewed reports generated from the City’s financial system. • Reviewed City’s Investment Policy, Procurement Procedures, Vendor Banking Procedures, Grant Administration Procedures (draft), Accounts Payable Procedures (draft). • Reviewed the City’s City-wide risk assessment and the City’s internal processes for RTR reporting. • Tested expenditures for sufficient documentation and allowability. Criteria • Funding agreements between TxDOT and the City. • TxDOT RTR Off-System Closeout Procedures • NCTCOG Transportation Improvement (TIP) Program Modification Policy • Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control — Integrated Framework. • Standards for Internal Control in the Federal Government (Green Book). City Policies and Procedures. Audit of Regional Toll Revenue - City of Denton 6 July 2020 Appendix II Audit of Regional Toll Revenue - City of Denton 7 July 2020 Audit of Regional Toll Revenue - City of Denton 8 July 2020