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Audit reveals major concerns about UTA operating procedures

Published: Tuesday, Aug. 26 2014 4:00 p.m. MDT

A TRAX train arrives at Salt Lake Central Station in Salt Lake City on Monday, Aug. 25, 2014.

Ravell Call, Deseret News

SALT LAKE CITY — A review of policies and practices at the state’s largest mass transit agency shows numerous instances of questionable business practices, including a “sweetheart deal” in which a developer was prepaid $10 million for a future project that was eventually constructed by a different developer.

The Performance Audit of the Utah Transit Authority was conducted at the request of Sen. John Valentine, R-Orem, who had expressed concerns about UTA’s plans for transit-oriented development in the Salt Lake and Utah valleys.

Valentine said he was also troubled by the elevated salaries and bonuses of the agency’s “highly compensated” management team and the seeming lack of compliance to transparency requirements in reporting their total annual compensation.

A third issue was whether UTA has been judicious in the use of the tax resources the agency had been given as it purportedly worked to expand bus and rail service.

Valentine said the findings in the audit report would seem to validate his concerns regarding the way the agency operates.

“They advanced $10 million to a developer, and it appeared to be some kind of insider transaction to me,” he said. “That’s why I (asked for) the audit.”

The report found that UTA prepaying developer Draper Holdings for the Draper FrontRunner parking structure was against the agency’s internal policy and practices. Not surprisingly, an independent law firm concluded that agreements with the developer appear to be overly favorable to the developer.

Valentine, who is a tax attorney by trade, said the audit indicates UTA needs to implement some fundamental changes in the way it does business.

“There is some room for change to accomplish what we’ve mandated for them to do,” he said, “but to do it in a way that is transparent.”

UTA submitted a formal response to the report, noting the audit identified recommended improvements in a few areas and that the agency has already implemented all of the recommendations, said Mike Allegra, UTA's general manager.

Allegra acknowledged that the agency has “made some mistakes” over the years.

“Frankly, we’re moving forward, (and) we’ve learned a lot,” he said.

“We’ve already changed our procedures and policies, and we’re looking to better ourselves,” Allegra said. “We have to strengthen our polices and procedures, and that’s what we’re doing.”

Before lawmakers consider giving UTA any more tax increases to fund future transit projects, the agency would need to show marked improvement in all the areas raised in the audit, Valentine said.

He noted that the agency has been audited several times over the past six years, which indicates ongoing concern about the way UTA conducts its business.

“There is a saying in the law, 'res ipsa loquitur' — Latin for "the thing speaks for itself,'" Valentine said. “Three audits since 2008; that’s quite a few audits that have outlined problems UTA has had.”

In addition to the prepayment that blatantly violated UTA policy, auditors also raised questions regarding the Draper FrontRunner parking structure.

UTA did not conduct a cost-benefit analysis to determine why Draper was a superior site for a parking structure compared with other locations on the FrontRunner line, the report stated. This is an important analysis that, had it been done, could have explained UTA’s decisions and rationale, the report noted.

Salt Lake law firm Snell & Wilmer, which specializes in real estate, also raised concerns about the documentation behind UTA’s decisions, questioning whether the agency’s interests were being adequately protected.

To that end, the report also noted that UTA has still not yet received repayment of about $1.7 million in prepaid funds from Draper Holdings.

“The law firm hired by UTA stated that … although the $10 million was for a garage, the developer could not repay that amount when plans to build the garage changed,” auditors wrote. “We question why UTA would spend millions on a parking structure that primarily benefits a private developer without a thorough cost-benefit analysis.”

According to the audit, UTA had the option to cancel the purchase agreement, which would automatically require the developer to return the prepaid $10 million, plus accumulated interest.

In fact, Allegra sent a letter to Draper Holdings terminating the agreement in August 2010, the report stated. According to Snell & Wilmer, the language of the agreement required the developer to repay the $10 million with interest.

The repayment did not occur, and UTA did not enforce the return of the funds. To date, the money is still outstanding.

“Allowing the developer to retain UTA’s funds puts taxpayer dollars at unnecessary risk,” the report stated. “The operating agreement gives the developer broad discretionary power that could be exercised to UTA’s detriment."

Similarly, the law firm concluded that agreements made with developers on the Jordan Valley transit-oriented development were heavily slanted in favor of the developer.

The audit also mentioned the particularly high earnings of UTA executive staff. The agency’s executive team earned 49 percent more in total compensation than the Utah Department of Transportation's nine highest earners, the report noted.

Seven of the agency’s top nine earning executives — all of whom made between $142,236 and $228,558 — received at least $29,918 in bonuses in 2013. Two others received $24,233 and $10,471, respectively.

Regarding compensation, UTA has made three changes with respect to benchmarking and reporting, he said.

UTA is conducting a total compensation survey of comparable transit agencies that will be presented to the board upon completion. Past studies show that UTA executive salaries are at or below the median when compared to its peer agencies, UTA officials said.

Allegra noted that as UTA completed the FrontLines 2015 program, it expanded its incentive program to all 750 administrative employees, not just executive management levels. Incentive awards will be significantly reduced for executives and top managers, he said, and the board of trustees recently amended its policy to require any incentive award greater than $8,000 be reviewed and approved by the board in a public meeting.

In addressing the issue of transparency, the agency has reported and updated all compensation to the transparent.utah.gov website. Previous rules did not require certain pension contributions to be reported to the website, Allegra said. The pension information was updated after UTA became aware of the rule change, he added.

Regarding transit-oriented development, the agency has implemented all five recommendations and “is committed to the highest levels of transparency,” according to a statement from UTA.

The Utah Legislature passed a law during the most recent session giving UTA the authority to increase its efforts in transit-oriented development, acknowledging that the outcomes of the first such projects — Draper and Jordan Valley — were favorable. But the audit recommended improvements to policies and practices, which the UTA board of trustees has already enacted, said Chairman Greg Hughes.

To address concerns of auditors, UTA is creating a transit-oriented development department, separating that function from the office of general counsel, Hughes said.

UTA officials are confident the Draper and Jordan Valley projects will be successful, he added.

Regarding financial conditions, UTA has implemented both recommendations made in the audit. The agency agreed that new projects would require new funding. To that end, UTA will continue to apply for federal and state grants available for transportation projects, Allegra said.

“UTA is not actively pursuing tax increases. Elected officials and taxpayers will ultimately decide when and how much to increase sales tax amounts. UTA has sufficient resources to operate and maintain its existing system,” according to a statement from UTA.

Allegra said the agency has implemented all four recommendations made in the audit regarding passenger data collection and customer focus.

UTA officials say the fare policy and structure have helped the organization achieve its highest ridership ever — more than 44.2 million trips — and increased farebox revenue.

UTA employs a market-based fare philosophy considered a best practice in the transit industry that focuses on charging what the market will bear by providing a variety of fare products designed to appeal to the needs of different rider segments, according to a statement from the transit agency.

UTA is currently conducting a fare policy analysis to better structure fares in order to maximize ridership.

Email: jlee@deseretnews.com, Twitter: JasenLee1

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